The petroleum complex traded firm with gasoline leading the way higher. The strength to values reflected ongoing uncertainty over refinery operations, particularly at Citgo, where US sanctions are preventing payments for crude to Venezuela’s state-owned oil company PDVSA. The shipments are subsequently being held back at Venezuelan ports. The disruption has led to strength in gasoline both on a flat price basis and on the crack, whose value had recently fallen sharply due to tepid demand and high inventories. The May gasoline crack stands at 13.50 after reaching a contract low of $12.78 per barrel yesterday. Further strength to the crack might emerge given the recent oversold condition along with the impact on refinery throughput for Citgo due to reduced crude shipments. The potential for their US refinery operations to be affected as long as the sanctions remain in force, along with the potential that Venezuelan shipments that had been destined to the US will eventually move out to other destinations such as India and China, should help uncover further strength to the crack.
Crude and the overall complex also appeared to attract some support from the favorable jobs report and some optimism that a trade deal between the USA and China will eventually be hammered out. In addition to the economic considerations, support was generated by the prospect that OPEC oil output had declined in December. According to Reuters, OPEC production fell by 890 tbd tbd with Persian Gulf producers accounting for the largest cuts and Saudi Arabia pumping 350 tb/d less. Despite the deep cuts by Persian Gulf producers, overall compliance with the agrrement was 70 percent.
Despite the strength today we remain doubtful the concerns over Venezuela will persist. The possibility of regime change is real, and even if it is slow to come about the oil currently supplied to the US could be rerouted through other origins such as Russia and China, displacing other crude streams. US inventory levels currently appear adequate and with other origins anxious to fill the void, supply availabilty looks adequate despite the sanctions. Subsequently we look for resistance to build as participants monitor the success of the OPEC agreement along with the progress of the trade talks with China and its economic prospects. In addition further expansion in US production remains likely as good oil company profits in the most recent quarter provide the incentive for continued capital investement.
With the polar vortex having run its course, it is still hard to believe that the play was to sell into the cold. Further weakness today pushed prices down to levels not seen since July as forcasts continue to trend warmer through the first half of February. Yesterday’s 173 bcf decrease in stocks offered little help, and the large withdrawal from this week, which is estimated to come in at 242 bcf when released next Thursday, has seemingly been passed over as we look forward to mild temperatures as winter winds to a close and we creep closer to the end of withdrawal season. At these levels we should see some increased demand from coal switching, but trade has been little concerned with that as prices continue to trend lower. Look for a test of the 2.65-2.70 area basis March before support from the switching takes hold.
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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