The petroleum complex continue to pause near the 40.00 level as participants assess the impact of the OPEC agreement amid signs that demand is improving but inventories remain at burdensome levels. Unexpected increases in US inventories encouraged selling but failed to attract much follow-through as support emerged below the 38.00 level basis July WTI. Spreads in crude and the gasoline were generally stable while distillate benefitted from a draw in jet kero.
In Asia reports suggest a ramping up in refining of cheap crude oil contracted over the past few months. Refinery utilization in Asia is expected to rise to 75.5 percent in the third quarter from 72.4 percent in the second quarter and reach 82.2 percent in the fourth. For India, operating rates are expected to reach 85 percent in June from 80 percent in May and as low as 39 percent in April. The easing of lockdowns is reviving global consumption. Whether this will be enough to erode the high level of inventories remains to be seen and will be contingent on maintaining global production restraint. The EIA is looking for OECD stocks to fall from 580 mb to 540 mb by the end of June. The EIA expects global stocks will fall by 3 mb/d in the 2nd half after rising 9.4 mb/d in the 1st half. Additionally they expect the market will rebalance in 18 months.
The EIA forecast appears overoptimistic. While some sectors of the economy appear to be stabilizing, we still suspect the fallout and on travel, discretionary spending and commuting will still be pronounced and undercut demand far more than currently priced in. In addition, the potential that OPEC's current production cuts might be scaled back in July by 2 mb/d poses concerns. Whether other producers are following their quotas given large budget deficits also will be watched closely.
Today’s DOE report showed little to suggest that a more optimistic stock situation is at hand. Crude stocks built by 7.9 mb. Excluding the SPR, commercial stocks rose by 5.7 mb with total stocks of crude and products rising by 9.7 mb. In products, stocks of gasoline rose by .9 mb while distillate rose 1.6. Gasoline disappearance totaled 7.9 mb compared to 9.9 last year, a decline of 20 percent, while distillate disappearance was 3.3 mb, 25 percent below a year ago. Refinery utilization at 73.1 percent remains low compared to 93.2 percent last year suggesting the demand for refinery inputs remains weak as margins continue to be depressed.
Prices ended the session slightly higher despite spiking down to a new contract low at 1.674 basis July. The move occurred soon after the re-open last night, when news and volume was thin. It appeared to be initiated by either a trading error or an algorithm, or possibly both, as volume spiked with stops elected when the old low at 1.742 was taken out. Activity returned to normal soon after the episode and prices recovered most of the move within minutes. Weather offered mixed signals with day-ahead forecasts losing Cooling Degree Days while the two week revisions pointed to increased demand mostly coming from week two. Production has remained steadily above 88 bcf/d for over two weeks, although the expectation is for output to continue its downward trend in the near future due to fading rig counts. With today likely marking the low for the July with just over two weeks to expiration, look for prices to stage some recovery action with 1.90 likely the upside limit.
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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