Energy Brief for Oct 22
The petroleum complex showed a mixed trend following yesterday’s volatile trade on the downside. Crude was sharply higher in the nearby contracts while products traded lower. Some relief in crude was apparent on signs that energy supply shortages in China might be improving as coal production increases eased concerns over the Chinese economy for now. In addition, expectations that US refinery utilization will increase at a time when Cushing stocks have declined supported the front months. In the background was the recognition that supply availability will likely improve as the 21-22 winter ends and the shift from natural gas to crude oil slows at a time when OPEC+ production increases, which supported a widening backwardation in crude.
The potential for an increase in refinery utilization in response to the strength in US and Asian margins has offered resistance to both the gasoline and 2 oil crack. Tightness in Cushing stocks, which stand at 31.2 mb, along with forecasts for above normal temperatures this winter appear to have undercut buying of the crack spreads. From a high of over 20.00 in the December RBOB crack reached last Thursday to near 18.30 today, and the December 2 oil crack moving from a high of 27 to just over 23.00 today, they appear to be at key levels of support. The backwardation in crude has also strengthened to over 7.00 in the Dec 21-June 22 spread, possibly a blow-off top that could begin to attract additional supplies at a time when demand could be tempered by moderate winter temperatures and lower refinery throughput if margins remain weak.
After an inside day on the charts Thursday, prices worked higher for much of the session today before ending with a gain of 11 1/2 cents at 5.461 basis December. Yesterday’s storage report indicated a 92 bcf build, above expectations near 90, and improved total storage to approximately 5 percent below the 5 year average. The market saw good selling interest and traded down to the days lows at 5.24 soon after the release. Prices worked higher into early morning trade today as weather chatter hinted at potential cooling into the first part of November, reminding trade that we are nearing the winter withdrawl season and flushing out some shorts ahead of the weekend. By the end of the session prices were in the middle of the days range as the overall weather picture remains one of slack demand allowing for the rebuilding of inventories this month. The market could remain somewhat rangebound as we work out of the shoulder season and await colder temperatures. With prices trading up to the gap at 5.59 today, that level low looks like solid near term resistance, with the 5.07 area on the downside marking key support.
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.