The petroleum complex failed to follow-through on strong early gains linked to optimism the US-Sino trade deal was still intact despite recent comments that it could be derailed by the Trump Administration, and on hopes that demand will recover as stay at home orders in many states end. Additional support was linked to an increase in Official Selling Prices by Saudi Arabia to Asian buyers for June shipments which was generally unexpected. Some optimism was also tied to forecasts that US and Canadian crude production will fall by over 1.7 mb, or just under 10 percent, in 2020. Baker Hughes rig counts were reported down 34 to a record low of 374. Nevertheless the gains were pared throughout the session from 1.40 higher in July crude early to around .70 per barrel higher toward the close. The inter-market spreads also weakened as excess supply and storage concerns tended to weigh on the nearby crude relative to the deferred months.
Product markets were mixed with gasoline steady while ULSD was higher, reflecting unwinding of bear spreads recently seen against both gasoline and crude oil. Ideas that the shutting in of heavy crude production and pick up in gasoline demand will lead to a shift in the crude slate to the production of gasoline and away from heavier oils might have helped uncover support to diesel following its recent weakness. Spread action in gasoline to ULSD (heating oil) will undoubtedly be linked to how quickly usage picks up in gasoline. The recent strength in gasoline over ULSD has now reached levels not seen since February, and we would look for better resistance to develop as was evident today.
We see the high this week in the July WTI crude contract of 27.98 as likely marking an intermediate top for the market. Although hopes will build of an imminent pickup in demand as driving increases, we doubt it will be enough to offset the surplus supply situation anytime soon. Whether a pickup in gasoline demand into summer will be strong enough to offset global supply pressures and recent inventory builds will be a key determinant of the level of price weakness which could extend down toward the 20.00 level for the July crude.
Weakness continued in the natural gas as trendline support was tested and prices ended the day off 7 cents at 1.823 basis June. The spike higher early in the week appeared overdone as it was precipitated by an Enbridge pipeline explosion in Kentucky and ran its course quickly, with Tuesday's gains given back by Wednesday afternoon. Additonal weakness was attributed to a rebound in production, as lower 48 output has crept above 90 bcf over the last 3 days. Another issue moving into the spotlight is the continued erosion of Asian LNG prices, as demand destruction due to COVID-19 fallout has come into focus. Signs of this are beginning to surface as multible US cargos have been cancelled and LNG flows contract, with nominations indicated at 7.2 bcf today, down nearly 1.5 bcf/d from averages seen in February. Baker Hughes reported oil rigs off 33 and gas rigs down 1 this afternoon, which did not impress trade as prices slipped further after the release. The inability of the June contract to hold above 2.00 at mid week likely marks its last attempt. With the poor close today we will need to see buying surface early next week to avoid a violation of trendline support which could lead to a retest of the 1.70 level.
Charts Courtesy of DTN Prophet X
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