Volatility came back into the crude oil market with a vengeance as ongoing fears over the breakup of OPEC# pact along with the Coronavirus fears led to renewed liquidation pressure. The market which opened at 33.75 on Sunday evening quickly succumbed to selling pressure as equity markets cratered and reached the circuit breaker levels quickly. Ideas that the surprise Fed announcement of a cut in Fed Target rates would do little to support economic activity amidst the Coronavirus fears took values down to a low of 28.10 basis April before recovering in line with scattered support and bargain hunting buying emerging in equity markets. Recognition that the Administration purchases of Crude oil totaling as much as 77 mb might do little to change the underlying supply demand fundamentals for shale producers remained in the background. Instead, fears emerged that the Democratic controlled House might be averse to funding the purchases at the expense of other industries who might need funding more.
Even more important is the appearance both Saudi Arabia and Russia are intent about getting prices down to levels that will shut off shale oil production in the US. The expanding production in Saudi Arabia and the implication of lower prices for budget deficits and economic activity in many countries along with the prospect consumer expenditures will not expand quickly as people stay home continues to pose uncertainty over the potential for a global surplus. Ideas it will reach at least 1.3 mb/d over the next 6 months and possibly more could make the surplus the largest it has been ever. Adding to the concern was the cancellation of an OPEC and non-OPEC Technical meeting that had been planned for Wednesday suggesting that a compromise solution is far from being worked out. This has recently been reflected in the discounting of Brent to WTI as competition between Russian and Saudi cargoes heats up in Europe. The horrendous timing of this production war when global demand is likely to contract substantially due to the COVID-19 spread has left the market wondering where to turn next. The news flow continues to suggest that things will likely get worse before they get better. If the battle between Saudi Arabia and Russia intensifies instead of coming to some sort of agreement on limiting production, we could see an extended period where prices flounder and continually test new lows, with the 20.00 area a psychological target if producers go to war.
The market continued to attract modest selling in sympathy with the outside markets as the contraction in economic activity continues to undercut values and limit buying interest. Nevertheless, given the decline in values along with the moderately positive fundamentals that include weather indicating minor demand increases, production continuing to slow and LNG flows continuing to improve support to values on dips continue to be evident. The recent resilience we have seen indicates that a low may be in as belief that production, which is already showing signs of retraction, will suffer further in the wake of the crude oil situation. Prices likely will remain somewhat range bound near term as the global issues run their course, with the 2.00 level offering solid resistance that could be a confirming sign of a bottom if violated. On the downside 1.75 should hold support.
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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