Our comments from May 24th of last week remain unchanged. We continue to believe that forces other than the economic slowdown are at work, leading to weakness in crude values. Instead, mounting concerns over US production and growing market share is starting to influence OPEC and particularly Russia.
These considerations were apparent in comments by the Russian Deputy Minister Siluhanov, who emphasized that there were many arguments for and against a new agreement, and any decisions to promote price stability and predictability. Nevertheless, problems exist that have made attaining these goals in any Russian deal with OPEC more difficult. The action has resulted in an encouragement of US shale production and an increase in market share. With the US expansion continuing into next year the competition by all members of OPEC will be even more aggressive, helping undercut the power of OPEC and other producers to control output and therefore prices.
How this plays out as we approach the full Ministerial Meeting of OPEC on June 25-26 remains to be seen. The recent bearishness suggests something larger is at work. At some point the situation in Iran and Venezuela will likely reverse, leaving the market to contend with the aftermath and prices that might be unsustainably high given the prevailing supply and demand trends and increased production capacity.
Given the price action of the past few days, recovery rallies are likely to be limited to the 60.50-61.00 level. Put strategies should be looked at to protect against potential downside price exposure in WTI which could be considerable in the long term.
After testing the lows yesterday the market found solid buying interest that saw the July contract settle up 4 cents at 2.624 today. Slightly increased demand expectations coupled with a dip in production provided most of the impetus for the rebound, with the looming increase in LNG export capacity providing background support. The market will continue to look for signs of potential demand spikes to offset the robust production trend as we move out of the shoulder season, and we tend to believe that the lows are in for the summer contract months. Tomorrow’s injection is currently pegged at 100 bcf compared to the 5 year average at 97.
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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