The petroleum complex ended slightly higher on the day, recovering from large losses overnight linked to fears the trade dispute between China and the US might be revived along with ongoing signs of weak manufacturing data in Asia. The strength to values was associated with ideas that the storage concerns might have been priced in given the potential pickup in demand as we move into late May. Some economies have begun to open up which has helped encourage renewed speculative buying interest. The more bullish bias continued to be reflected in the most recent CFTC Commitment of Traders Report which showed hedge funds added to their long positions last week, putting them at the highest net long position in over 1 and ½ years. In the background remain forecasts that prices will likely recover strongly in 2021 as demand begins to recover and production drops sharply in response to the reduced levels of capital investment in producing wells and on the sharp drop in drilling rigs.
Despite the more optimistic tone there are still a variety of barriers. Although demand has stabilized for gasoline and might even show some improvement, the changes in driving patterns as more people work from home will not change back quickly. Instead it will likely be a slow slog. In addition, an economic recovery approaching pre-pandemic levels will not take place quickly. Hits to consumer spending will likely be great, suggesting that other areas of the economy will need to take up the slack. It is doubtful that government spending, which has already ballooned, nor capital investment will quickly fill the void and with other sectors of the economy including housing, commercial real estate and agriculture remaining weak, the ability of the federal government to address these issues quickly remains in doubt, particularly ahead of the election. Chinese and Indian economic activity will be key guideposts for how quickly the global economy recovers. Although some stabilization to these economies from depressed levels is evident it still does not appear broad based. Subsequently we see the recent recovery in values as suspect particularly to levels much above 23.50 basis July.
Attention will remain focused on the storage situation and how quickly US production shrinks and demand grows into the summer. With many states beginning to open up and people looking to get out but still social distance, driving will likely pick up and be a popular pastime, providing continued support to the gasoline crack. The OPEC production cuts that went into effect on Friday might also provide underlying support, but questions remain over whether they are enough given the global demand concerns.
The DOE report will be watched closely for demand trends in gasoline, export and inventory levels for crude oil, and refinery utilization. Genscape estimated a 1.8 mb build in inventories at Cushing, which helped underpin values given that this would be the smallest increase in these inventories since mid-May. In this week’s DOE report crude stocks are expected to build by 8.1 mb, distillate stocks by 3 mb and gasoline is expected to rise by .3 mb. Refinery runs are expected to increase by .6 to 69.6 percent.
Prices started the week with a firm tone as the active June contract tested above the 2.00 area again before settling 1.993. A continuation of the lower production trend was the main impetus for the jump, as Saturday and Sunday both came in under 90 bcf/d, with today's output estimated at 89.6. Short term weather reports added support with an increase in demand of 8.9 bcf/d expected for tomorrow on cooler temperatures. Thursday's storage report is estimated to show a build of 92 bcf compared to the 5 year avearge for this time of year at 74. With some states beginning to ease quarantine restrictions, commercial and industrial demand could see minor improvement. Whether it is enough to spur June consistently above the 2.00 level will likely be seen over the next few sessions, and will need to be coupled with continued production decline. An extension higher likely stalls at the 2.10 area, with initial support on the downside at 1.90.
Charts Courtesy of DTN Prophet X
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