The petroleum complex strengthened sharply throughout the session as good buying interest developed in response to positive economic data in China along with reports that Russia was planning to lower oil output in September. Some buying was also linked to the change in leadership at Saudi Aramco, with a new chairman being named as a replacement for Khalid al-Falih who will remain as Saudi oil minister. Ideas that the Saudi’s, who have revived plans for an IPO of Saudi Aramco shares in 2020-2021, will strive to keep oil prices up to maximize revenue from the share sale aided sentiment. Reports that Saudi Arabia and Russia might participate in joint projects also helped encourage ideas that a more coordinated effort between the two could develop. The product markets, and particularly diesel, participated in the rally as reports circulated of strong differentials for diesel in Asia.
The market will likely focus on the API and DOE report which were delayed due to the Labor Day holiday. The report is expected to show a decline in crude inventories of 2.6 mb while distillate is expected to be up by .5 mb and gasoline stocks are expected to have fallen by 1.6 mb. Although the decline in crude inventories remains 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.
Today’s recovery puts the market back within striking distance of resistance 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 crude oil market. In addition reports that China, India and Russia are developing closer ties with Iran and seeking legitimate trade ties might raise the possibility that a coordinated effort might be made to import Iranian oil outside the US sanctions. On a flat price basis we still see the potential for further downside vulnerability to the 47-48 range basis October WTI as the trade dispute drags on and competition for market share develops and US production expands.
Values strengthened on ideas that above normal temperatures in the Southeast and Texas will offset the below normal readings in the Midwest and Northeast. Additional support continues to be provided by 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 domestic growth in petrochemical use due to capacity expansion occurs. Nevertheless the markets recovery from the recent lows looks to be overextended and better resistance near 2.45-2.46 should emerge. Expectations for this week’s EIA report are for an injection of 79 bcf compared to 64 a year ago and 66 bcf on the five year average, which should limit upside movement if realized.
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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