Energy Brief for November 10
The petroleum complex continued to trade in a volatile fashion with crude values traversing a range of nearly 3 ½ dollars and staging a reversal to the downside. Overnight strength that carried values to as high as 84.97 basis December was traced to the API report released yesterday afternoon that showed a sharp draw in crude inventories of 4.5 mb, and of 3.3 and 4.5 in distillate and gasoline respectively. Good selling interest developed today after the higher-than-expected US inflation reading and the DOE report, which showed a build in crude inventory levels.
The concerted selling interest in the petroleum complex was in response to fears that the surge in the US CPI above expectations might encourage a faster response by the US government to release inventory from the SPR to calm rising gasoline prices, along with the potential for rising interest rates to moderate economic growth. The sentiment ran counter to a report yesterday by the EIA forecasting gasoline prices falling over the next few months. In addition, the strong dollar and weaker equity markets encouraged selling. Upon the release of the DOE report, which showed a build in crude inventories of 1 mb, selling intensified. The report also showed a draw in gasoline stocks of 1.6 mb and in distillate stocks of 2.6, both above expectations. Total product supplied of 19.3 mb was slightly below last week’s level of 20 but showed distillate supplied at 4.3 mb compared to 3.7 mb in the prior week. More impressive was the increase in net exports of crude and petroleum products to 1.3 mb.
Near term market resistance might emerge on the possibility of an SPR release by the US to temper the higher prices. The potential for some easing of sanctions on Iran as negotiations restart at the end of this month might also encourage profit taking. Support on the downside will likely be apparent near 80.00 basis December as international travel picks up with border reopening’s, which should lead to a recovery in demand for jet kero. Limiting downside pressure on values will continue to be OPEC’s discipline and the underlying strength to the global economy and particularly the US which suggests a relatively tight stock situation that allows little room for any unexpected shortfalls on the supply side or better than anticipated strength in demand. US demand has surpassed pre-pandemic levels, and the possibility that shortages outside the US in other main fuels such as natural gas and coal will boost demand for petroleum derivatives as we move into the Northern Hemisphere winter provides a bullish bias to values and limited downside for now. In this environment OPEC+ appears to be in control and is intent on preserving current valuations and possibly pushing them higher if demand can be maintained. The OPEC Monthly Report to be released tomorrow should help provide insights into how the supply-demand situation might be shaping up.
Selling pressure picked up steam over the last two sessions, with the December contract losing 45 cents yesterday followed by an additional 10 cent drop today to settle at 4.88. The weakness emanated from overseas news that Russia had started to increase bookings into Europe, sending prices there lower by over 10 percent. Adding to the downsinde bias were current mild temperatures in the US, and a further delay of the expected cooling in the back end of the 15 day forecasts. LNG flows continue to offer underlying support as they have held above 11 bcf/d. The weekly storage report was released this morning due to Veterans Day tomorrow. It showed a 7 bcf build in comparison to expectations near 10. The market saw some recovery after the release, settling in the middle of the days range. The lows reached today were in line with the 100 day moving average near 4.74, and look like key support on any further selling. The market is nearing oversold technical levels and a recovery back into the lower end of our recent range above 5.10 looks likely near term, with the next level of resistance at 5.30 which marks a 50 percent retracement of the move lower since late last week.
The authors of this piece do not currently maintain positions in the commodities mentioned within this report.
Charts Courtesy of DTN Prophet X, EIA, Reuters
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