The petroleum complex managed to continue the rebound that started early in the week, with the March crude trading above 52.00 for much of the session and settling above there for the first time in February. Trade seems to be placing a lot of hope on varying signs of improvement, as some businesses in China have indicated that they are returning to work, and on belief that OPEC+ will ultimately come to an agreement to further rein in production in the face of expected demand losses due to the coronavirus. Stimulus efforts by the Chinese Central Bank have also added underlying support.
The coronavirus and its ultimate effects on energy demand remains the markets main concern. The IEA estimated yesterday that global oil demand will decrease by 435 b/d in the first quarter, with US Energy Secretary Brouillette suggesting that the effects of that level of losses on the overall market would be marginal. With prices falling 20% in the wake of the outbreak, current estimates of demand destruction do suggest that the downside may have been overdone. There are still a number of wildcards on the table, as Russia has yet to commit to additional output cuts urged by OPEC, and trust in reports out of China has proven to be ill-advised in the past. Until more concrete signs that the spread of the virus has peaked we expect the 54.00 area to hold up resistance to any follow through of current strength.
Prices traded on both sides of unchanged today, with early selling linked to weather reports that again revised demand lower and on poor Asian LNG pricing. The March probed below the 1.80 level before working higher for much of the remainder of the session to settle up by just over a penny at 1.837. Yesterday’s storage report showed a 115 bcf drawdown from stocks, which was above estimates of 110. The release produced some underlying buying interest, as it continued a string of draws exceeding estimates which may be indicative of usage increases that the prognosticators have not caught up with.
Production continues to signal slowing, and the Baker Hughes rig count this afternoon showed a decrease of 2 rigs, putting the total count at 110, which is down 84 from last year and continues to point toward slowing output. Trade will likely be cautious as the fallout from the coronavirus outbreak remains uncertain. Although we are still within striking distance of the lows near 1.75 and the weather is not threatening a demand spike, we expect the recent strength to follow through near term to fill the gap on the charts above 1.977 basis March.
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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