The petroleum complex attracted scattered selling as Russia indicated it needed more time for a decision on whether to join any additional oil output cut by OPEC. The Technical panel that met the past few days reportedly suggested provisionally cutting output by 600 tb/d . The OPEC+ group had already agreed to deepen cuts by 500 tb/d at the beginning of the year to 1.7 mb/d due to flagging demand and expanding output by Non-OPEC producers. The additional cut of 600 tb/d was proposed as a direct response to the coronavirus in China where both economic activity and oil demand is likely to be adversely affected. The Russian Oil Minister has made the argument that demand might not fall by the 300-500 tb/d suggested and instead believes that demand might fall by only 150-200 tb/d. In addition, on the supply side cuts in Libyan output due to civil unrest is also posing uncertainty on the supply side.
Although there is nothing definitive regarding the Russian position, the posturing and comments do suggest the Russians appear to be reluctant to participate in further cuts and are instead putting pressure on the Saudis to once again absorb the lion share of any cutback in output by OPEC+. Talk that refinery maintenance might be accelerated in Saudi Arabia could allow output levels to be reduced in line with the recommendation of the Technical Committee but the ability of Saudi Arabia to absorb additional cuts and support the market in future quarters will certainly be raised by market participants. Concerns over lost market share by the Saudis will remain in the background given the combined impact of an increasing budget deficit and weak oil price.
For next week, OPEC will likely continue to be the focus. It looks like an Emergency Meeting by OPEC might not be held as had been indicated earlier this week. Instead OPEC+ might opt to wait and see whether the underlying supply demand situation dictates such a move. With the Ministerial Meeting scheduled for early March, they likely will defer a decision until then. In the absence of a decision, the uncertainty will likely insert caution into trade near the 50.00 area given the markets oversold condition. We still maintain that if anything, the gasoline should outperform crude as refinery maintenance ahead of the summer supports values while reduced exports of crude from the US might be impacted by the coronavirus.
Prices traded in a steady fashion with underlying support emanating from colder weather for the western half of the US. Nevertheless, the market remained cautious on indications the cold will remain west and on prospects that LNG exports to China are falling sharply due to the coronavirus and on warmer than normal weather in key consuming areas. Some forecasts suggest that due to the virus, growth in LNG imports will be unchanged during the first quarter. Reduction in the production of LNG in the US as a result of the global supply glut is likely to develop. Expectation for next week’s EIA report is for a draw of 103 bcf compared to the five year average of 131 and last year’s draw of 101. 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.
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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