The petroleum complex traded sharply higher, with crude registering gains of over 1.00 per barrel. Reports of drug breakthroughs for combatting the coronavirus along with an oversold condition touched off short covering and bargain hunting. In the background were ongoing meetings of the OPEC Technical Committee. In addition, Libyan shipments continue to be disrupted.
Despite the reports, doubts as to whether a cure has been found along with questions on how quickly it can be maufactured will likely continue to pose downside risks to the market. The movement into contango of the nearby months suggests a market that is worried over potential surpluses. Although the meeting of OPEC Ministers late next week will address cutting supplies in line with demand, the question will likely arise as to whether it will be enough. Reports that Chinese demand for crude oil and products has fallen as much as 20 percent, or close to 3 mb/d, due to extensive travel restrictions and factory activity stalling in China continue to be cause for concern. Current demand projections are being revised downward on a global basis by 300 to 500 tb/d.
The DOE report indicated a build in crude oil stocks that was larger than expected at 3.4 mb, but the market appeared to be unmoved given the modest decline in total stocks of .9 mb/d. In addition, the falloff in domestic production from 13 mb/d to 12.9 attracted modest buying interest. In products, gasoline stocks fell by .1 mb compared to expectations of 2.1 mb increase, and distillate stocks fell 1.5 mb compared to a an expected decline of .1 mb. Of concern are the declines in domestic disappearance which in gasoline is running off 3.3 percent while distillate has fallen over 10 percent from last year’s levels. To a large extent the cracks appear to have reflected the decline in demand, and we would suspect that better buying interest in products and particularly gasoline will help improve margins as crude lags on global demand concerns. Near term a recovery in crude toward the 54-55 level cannot be ruled out especially if Saudi Arabia initiates further cuts in their domestic production in order to attempt balancing out the market into the second quarter.
Prices continued to flag on light volume, with the market putting an inside day on the charts as it awaits direction. Another downward revision in demand expectations on the 15 day forecast helped push prices close to 5 cents lower intraday before ending the session off by just over a penny at 1.861. The weather is holding sway on the complex, despite production continuing to show signs of slowing, with today’s dry output estimated at 92.8 bcf, down .8 from yesterday. The ability to hold above the 1.80 area over the last few sessions is cause for some hope, but we would still not be surprised by another leg down to test the 1.75 area near term. With indications of a potential colder pattern at the end of the month, any recovery likely targets the chart gap at 1.977 basis March from mid-January. Tomorrow’s EIA report is estimated to show a 129 bcf draw from stocks compared to the 5 year average at 143.
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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