Energy Brief September 6

by Archer Financial Services | Sep 06, 2019
by Steve Platt and Mike McElroy

Price Overview

Demand concerns reasserted themselves and helped provide modest pressure on crude values early while ULSD and gasoline registered modest gains. Early weakness to crude appeared to reflect fears that the global slowdown and impact from the Chinese and US trade dispute will limit demand. The discouraging demand trend was outlined in a report by BP which suggested that demand this year would grow by less than 1 mb/d, an increase of less than 1 percent. This would be the slowest consumption growth since 2014 and before that 2012 when oil prices were over $100 per barrel. With values at close to half these levels currently, the slow growth continues to be disheartening to the market. Given global economic growth is expected to reach levels not seen since the recession in 2008/2009, the below trend growth in demand raises questions over whether the actions by OPEC have been enough to support prices raising fears of further downside vulnerability to values.  

The market’s recovery late likely reflected the Baker Hughes rig count which continue to decline falling 4 in the latest week as investment continues to decline reflecting a weak longer term price outlook. In addition some caution was also evident ahead of the Joint OPEC and non-OPEC monitoring committee meeting scheduled for September 12. Although no solid policy decisions are likely to be made, the level of compliance along with prospective output levels will be discussed. Despite Russian output being above agreed upon levels, the Oil Minister has indicated they are planning to comply with the agreement. With summer ending in the Western Hemisphere and Saudi demand throttling back as their needs for cooling decline, the market will be looking for assurances of compliance with the current agreement given the demand concerns.  In the background will remain ideas that the Saudis, 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. How closely Russia and Saudi Arabia work to support prices through production restraint will continue to be watched closely.  

Yesterday’s DOE report was generally taken in stride. Although the drawdown in crude inventories was larger than expected at 4.8 mb; the markets failure to sustain the strength following the report appears to reflect demand concerns amidst high production levels and export levels in the US. Nevertheless the steady draw in US crude stock levels remains a source of support.       

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.

Crude Oil Futures Market

Natural Gas

Prices attracted good support on prospects that gas flows to LNG export plants will increase in two weeks along with a further pick up in US exports to Mexico. Despite the more favorable demand the market looks to be overbought as higher injections into storage and modest temps restrains movement on the upside. Early expectations for the EIA report next week suggest an injection of 82 bcf compared to 68 a year ago and 73 bcf for the five year average.  Following the penetration of the 2.46 level today renewed selling should develop near the 2.50 area basis October next week with support likely near the 2.33 level on pullbacks.    

Natural Gas

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.