The petroleum complex traded on the defensive with values declining by over 75 cents per barrel in crude and close to 2 cents in gasoline and diesel. Profit taking ahead of the holiday weekend along with news that China was imposing new national security legislation on Hong Kong raised concern that tensions might build over trade with the US. However given the recent criticism by the Trump Administration toward China along with restrictions imposed on Huawei, it appears the tensions between the US and China have been discounted. The lack of economic targets unnerved Chinese markets and led to downside pressure on many commodities, suggesting the Chinese government is taking stock of their current situation. Having recently built up stockpiles of crude as well as other commodities over the past couple of months, the lack of an economic target might slow these stockpile purchases as the Chinese assess where they stand economically.
With the Memorial Day weekend ahead it seems appropriate to assess the supply-demand considerations for gasoline. The recovery in demand has corresponded to the dramatic rise in crude prices. The opening of the economy has helped raise optimism that a more normal demand pattern will emerge. How long the recovery will persist will need to be considered given that Memorial Day typically marks a high point for demand, however the losses during the spring suggests this will not be the same as prior years. Whether the easing of lockdown restrictions leads to widespread auto travel during the summer, despite the challenges with the underlying economy, will be watched closely as it relates to the gasoline crack and flat prices as well.
Expected support in the 1.90 area basis July did not hold up as the market put in an intraday low at 1.832 yesterday as well as today. Buying interest finally emerged late in the session as prices finished the week at 1.881. Demand concerns continue to be the factor limiting prices as cancellations of US LNG cargos to Asia grow, with estimates of as many as 45 cancellations for July. Exports to Mexico are trending lower as well, with demand there weak along with much of the globe. The warm temperatures expected over the Memorial Day weekend precipitated some short covering and forced the market to begin to consider the demand risks of a possible warm summer. Production downticked again today to 87.3 bcf/d from 87.4 yesterday, and the Baker Hughes report showed a loss of another 21 rigs, all oil directed as gas rigs were unchanged. The market is within striking distance of the contract lows near 1.80, and it would not be surprising to see that level tested near term, but we expect another fairly rapid bounce to a retest of the 2.00 level as production contracts and economic restarts begin to improve demand expectations.
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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