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Energy Brief for Dec 11

Price Overview

The petroleum complex continues to trade at higher levels as optimism surrounding the COVID vaccine reversing demand declines helped underpin values.  Some resistance does appear evident above the 48.00 area basis February, reflecting prospects that OPEC will revisit their production levels in February and move toward the 2 million increase originally envisioned as concerns intensify within the alliance that non-OPEC members will see the higher prices as an opportunity to increase production and take away market share.

The market generally ignored the agreement by the EU to implement new climate change targets. They agreed to cut their net greenhouse gas emissions by at least 55 percent from 1990 levels by 2030, substantially toughening the existing target of 40 percent.  The EU emissions market already seeks to put a price on carbon emissions. The price of permits rose to an all time high above 31 Euros a tonne on Friday on expectations that the supply of permits would decrease to force deeper emission cuts.  Although cuts in carbon emissions has not been a priority in the US, the discussion and potential legislative action might pick up under the Biden Administration. With both biodiesel and renewable RIN’s recently strengthening to their highest levels in over a year and half, more stringent carbon regulations are being already anticipated.  What impact it will have on longer term supply/demand trends will be a key consideration for petroleum valuations longer term.

Natural Gas

The recovery that started Wednesday found good follow through as we ended the week more that 20 cents above Tuesday’s lows.  The rebound gained strength after the storage report was released yesterday showing a 91 bcf drawdown from stocks.  This was well above estimates in the 82 area as prices jumped over 10 cents soon after the release.  Continued support was evident today, based mostly on near term weather forecast revisions that pushed weekend consumption estimates higher by over 5 bcf/d.  LNG flows and production remain supportive underlying factors, although output has had minor upticks over the last two days.  Weather remains the key variable, and will be for the next few months.  The market will have difficulty forging much more upside without the emergence of a cooler temperature trend.  With 2.60 taken out today on the January contract, the 2.70 level now looks like the next area of resistance, but if we see a return of the downward trend in HDD revisions early next week the 2.50 level will be quickly tested.

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Charts Courtesy of DTN Prophet X, EIA, Reuters

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 information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  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 position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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