Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded under pressure with the nearby contracts in WTI showing the sharpest losses, leading to weakness in the backwardation. Pressure was linked to the limited disruption from freezing temperatures in Texas and reports that the nuclear negotiations between the US and Iran were entering their final stage and might be moving closer to an agreement. Not surprisingly the market appeared to greet the news with caution and failed to move markedly lower, registering a loss of 1.50 basis March. Talk of tight inventories, particularly of diesel, uncertainty over demand, and tension between Russia and Ukraine appeared to offer underlying support.
Of interest with respect to the JCPOA was the Biden Administration’s restoration of sanction waivers to allow Iran to have international nuclear cooperation projects with Russian, Chinese and European companies to carry out non-proliferation work so that it would be more difficult for Iranian sites to be used for nuclear weapons development. According to the State Department the granting of the waivers would help the talks in Vienna at reinstating the JCPOA and the commitments originally made by Iran. Given the modest progress and the appearance that the US is willing to reach an agreement to alleviate upside price pressure, traders will need to watch for further signs of progress given the afloat stocks being held by Iran, recent shipments of Iranian crude to China and the capacity restraints on OPEC+.
The overbought status of the market in response to Ukraine, weather and low inventories continues to give us pause on the long side as the market appears prone to a correction that could push the March down to the 88.50 level and possibly toward 85.00. High prices affecting demand and possible reductions in market share of OPEC members in the event of a US-Iranian nuclear deal along with the expansion in non-OPEC production should encourage the cartel’s main producers in the Middle East to do all they can to expand output, helping relieve inventory tightness. Additional guidance on the supply-demand outlook will be provided by OPEC with their monthly report on Thursday, followed by the IEA Monthly report on Friday.
Wednesday’s DOE release is expected to show crude stocks increasing by .7 mb, gasoline stocks up 1.6, distillates down 1.8 and refinery utilization at 86.1 compared to 86.7 last week.
Natural Gas
Prices gapped down Sunday night as the 4.55 level offered little support. March traded as low as 4.12 intraday before ending the session 34 cents lower at 4.232. Warmer weather rivisions were again the main culprit as models lost as much as 30 bcf in demand on the 15 day forecast compared to Friday. The swing warmer has turned the second half of the month back to above average expectations. The passing of Winter Storm Landon also underwhelmed the market as production has already started to recover with Friday indicating the bottom of the output drop at 86.2 bcf/d. By Sunday levels had already recovered above 90 bcf. In typical fashion the markets reaction on the downside has likely been overdone as it has put trust in forecasts that are known to rapidly change their mind. With total storage nearly 6 percent below the 5 year average and a fourth consecutive 200-plus withdrawl likely on Thursday, today could mark a near term low. Any reversal of recent warming could see a quick recovery to fill today’s gap at 4.487.
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.
