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Energy Brief for November 5

Price Overview

The petroleum complex continues to trade in a volatile fashion with early weakness to just below the 79.00 level basis December attracting renewed buying interest and short covering that carried values back above 81.00 by mid- morning. The strong gains appeared to be linked to a recognition that the OPEC+ agreement to maintain output increases of 400 tb/d in December along with the strong payroll employment numbers reported today suggest a relatively tight stock situation that allows little room for any unexpected shortfalls on the supply side or better than anticipated strength in demand. With demand in the US reaching above pre-pandemic levels and prospects that the shortages being encountered in other main fuels such as natural gas and coal outside the US might boost demand for petroleum derivatives as we move into the Northern Hemisphere winter presents a relatively tight situation early in 2022.  This might be especially true if the rising availability of vaccines outside the US contributes to further recovery in economic growth. 

One sector that might see a boost in demand is air travel. With more countries relaxing restrictions on international travel, an increase in demand for jet kero, which is still 15-20 percent below pre-covid levels, might be in the cards creating a tighter situation than currently anticipated.

The possibility that supply chain backups will ease and freight traffic improves more than expected as pent-up demand is satisfied could also provide a boost to diesel demand. The strength should be reflected in the 2-oil crack as we move into winter.  The weakness since mid- February has likely run its course. An improvement in demand as holiday travel picks up should help carry values up to as high as 26.50 from near 23.00 currently. 

Natural Gas

The market experienced some end-of-week profit taking on the lightest volume of the week, as the December contract settled 20 cents lower on the day at 5.516.  Trade has been choppy since the release of the weekly storage report yesterday showing a 63 bcf injection.  This was on target with expectations and left total stocks at 3,611 bcf, just 2.7 percent below the 5 year average.  With the next couple of weeks currently expected to show small injections, the fear of inadequate supplies into the winter withdrawl season continues to abate.  Strong production numbers added resistance, coming in above 96 bcf the last two days.  Coupled with inconsistent LNG flows due to unplanned maintenance issues, the market has an argument for trading lower, but weather will have the final say as winter approaches.  Forecast revisions into the weekend withdrew a small amount of demand, adding to the negative tilt.  Initial support likely emerges at 5.50, and below that area not much surfaces until the October lows near 5.07.  Resistance lies in the 5.85-5.87 area from the session highs the last two days, and if violated the 6.00 level could be quickly retested.

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

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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