The petroleum complex traded firm with values in July WTI reaching a high of 33.10. June crude, which expires tomorrow, moved into backwardation as concerns over storage at Cushing eased dramatically into its expiration. Ideas that the easing of lock-downs would favorably impact demand at a time when production has been constrained sharply by agreed cuts by OPEC+ and low prices discouraging production by non-OPEC producers has taken values well beyond our anticipated range to the upside. Belief that the market is reaching a more balanced state continues to be professed, but we remain doubtful that it will be enough to take values much beyond the 35.00 level. At that point some producers might begin to rethink plans to shut in production given the costs and continued optimism that a vaccine will be available next year to combat the virus.
With additional cuts being made by OPEC in May, ideas the market is moving into balance remains contingent on a number of considerations. Foremost will be whether the relaxation of lock-down measures continue and if so does a more normal pace of economic activity ensue. Will other economic shocks occur in credit markets tied to other sectors of the economy and how quickly will employment levels turn up? With respect to production, a key issue will be whether the high level of compliance with the current OPEC+ agreement can be sustained and for how long. Additional outliers are how individual countries will deal with mounting budget deficits due to low oil prices and how much impact the flattening of the forward curve and strengthening prices will have on prevailing destocking, production and future output levels. Product stocks and particularly distillates are at high levels with European stock levels now brimming. 2 oil margins are under pressure subsequently which should restrain production at distillation units.
With the June WTI crude expiring tomorrow, the demand for inventory will likely be debated and further rally attempts should begin to find resistance. Just as the June contract established a low immediately following the May expiration, we would not be surprised to see a renewed decline in values once the June contract expires tomorrow. With stocks at 90 days of forward demand, any sign that they are not being absorbed will force a downward adjustment in prices to move unwanted inventory from current levels and limit costs from afloat storage.
Expectations for the DOE report Wednesday are for stocks of crude building by 1 mb, distillate rising 1.3 mb and gasoline stocks declining by 2.1 mb. Refinery utilization is expected at 68.7 percent compared to 67.9 percent the previous week. .
Prices surged to the upside today and retested the 2.00 level basis July before settling 13 cents higher at 1.959. Overnight support emanated from sharply lower weekend production as Saturday and Sunday came in at 87.0 and 86.6 bcf/d respectively. The dropoff continued today with early estimates at 87.1. As the day session got under way this morning prices had another leg higher as news of positive early results of a coronavirus vaccine from Moderna sent stocks sharply higher and energies saw spillover euphoria. Weather was neutral while exports to Mexico were off .2 bcf from Friday and LNG flows stood at 6 bcf, also slightly below Friday's readings, which offered some resistance to the move. Early estimates for this week’s storage are for a build of 87 bcf, in line with the 5 year average. With rig counts continuing to contract last week, it appears that the trend in production will continue, although the strength to crude oil will need to be watched as it could slow the pace of rig losses. With the quick move away from the 1.80 area and hope building for a return of some portions of the economy, that level is beginning to look like a longer term low. With a late session recoil from the 2.00 level it now looks like solid near term resistance with support at 1.90 on any retrenchment after the sudden move higher.
Charts Courtesy of DTN Prophet X
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