The petroleum complex traded on the defensive with early selling developing on ongoing concerns over economic prospects. More aggressive selling developed at late morning, as attention shifted to the supply side and OPEC production levels. Reports that OPEC oil output had risen in August for the first month this year encouraged renewed selling interest with values weakening to as low as 54.34 off $2.11 basis Oct WTI before attracting pre-weekend short covering and bargain hunting buying. Although the survey suggests that Saudi Arabia continues to restrain output well above their mandated level producing 9.63 mb versus their quota of 10.311 mb , higher supply from Nigeria and Iraq totaling 140 tb caused concern that the agreement might be starting to fray as some producers are pressured due to economic and domestic political consideration to increase production. For the 11 OPEC countries governed by quotas, production totaled 25.645 mb compared to 25.528 mb. For those producers exempted from the quota, Iran, Nigeria and Venezuela; production totaled 3.96 mb against 4.0 mb in July.
Although the decline in inventories remain a background influence, we do not see it as a significant bullish influence as in year’s past. Recognition that the inventory numbers reflect a sharp decline in import levels along with higher exports as US production expands suggests a change in oil dynamics that is not constructive. Hurricane Dorian also does not look like it will be a threat to US offshore production or refining facilities in the Gulf.
Overall, the markets inability to sustain the upside momentum apparent at midweek suggests considerable resistance overhead near the 57.00 area basis October crude. With little sign the US-China trade dispute is moving toward resolution, concerns over the global economy will remain a headwind to the market particularly given the recent imposition of a 5 percent tariff by the Chinese on US crude imports. The policy change could soften demand on the US Gulf for physical barrels, where demand has already been limited due to the surplus supply situation in world markets. On a flat price basis the potential for further downside vulnerability to the 47-48 range basis October WTI exists as the trade dispute drags on. If a resolution is reached, we see a rally of modest proportions given the overriding fundamentals which still suggest a burdensome situation despite OPEC cutbacks in 2020.
Cool temps forecast over the next two weeks in the Mid-West impacting cooling demand and high production levels helped pose modest pressure on values following the gains registered this week. Ideas that stocks will continue to build up to more normal storage levels ahead of winter also helped dull interest. Overall, we still see the potential for downside pressure as demand falls off and production remains high. Hurricane Dorian is not likely to affect production facilities in the Gulf and did not appear to be a consideration in today’s price movement. We still suspect that downside movement in values will be limited on ideas that the low prices for natural gas will help increase usage, which relative to the level of stocks should lead to a tighter supply situation, particularly if the domestic growth in petrochemical use due to capacity expansion occurs. Early expectation for next week’s EIA report are for an injection of 79 compared to 64 a year ago and 66 bcf on the five year average. Near term moderate weather conditions should impede demand but longer term the market likely will develop a base of support near the 2.10 level basis October on setbacks, as attention begins to turn to potential winter risks, better petrochemical demand on capacity expansion, and the resumption of more normal exports to Mexico.
Charts Courtesy of DTN Prophet X
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options ADMIS position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to. The authors of this piece currently maintain positions in the commodities mentioned within this report. Charts Courtesy of DTN Prophet X, EIA.
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