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Energy Brief for Oct 25

Price Overview

The petroleum complex continued to trade in a rather volatile fashion.  Early strength carried values to new highs for the move at85.41 basis December before profit taking emerged, pressuring values to unchanged levels.  Ideas that global stockpiles are continuing to fall amid a shift to petroleum due to shortages of coal and natural gas continues to underpin values.  Caution at the higher levels continues to be apparent on recurring signs that the Chinese economy might be slowing as power shortages impede manufacturing of aluminum and steel, and on reports of a resurgence in Covid infections in some areas.  Offsetting the Chinese concerns were reports that crude processing in India during September had increased by 2.9 percent year over year. Fears persist that the strong recent gains will help temper demand at a time when OPEC production is set to increase. 

Of interest today was the weakness in the forward curve, suggesting some better nearby availability while for the most part crude failed to respond to the strong gains in natural gas. Whether this is a sign of exhaustion on the upside given the overbought condition of the market remains to be seen, but does appear to suggest some shifting in focus at least for now and that the bulk of bullish news might be priced in. Saudi Arabia continues to advocate a cautious approach and supports maintaining production discipline awaiting further guidance on the recovery from Covid and the slowdown in the Chinese economy. Undoubtedly winter weather and the direction of the dollar have the potential to shape sentiment. Despite today’s price action, the uptrend in crude values has not shown any signs of reversing and the concern over declining inventories suggests the 80.00 area is likely strong support. 

The DOE report is expected to show crude inventories up 1.7 mb, distillates down 2.4 and gasoline down 1.9.  Refinery utilization is expected up .1 to 84.8 percent.

Natural Gas

Prices stormed out of the weekend with a gap higher open and traded up to match the mid-month highs near 6.11 before ending the session at 6.056 basis December for a gain of 59 1/2 cents.  Substantially cooler revisions to the weather forecasts ignited the strength, with average lower 48 temperatures dropping by 15 degrees and the second half of the 15 day outlooks trending below normal.  Some La Nina talk also refocused traders concerns to weather and the potential for a cold winter in the US as well as Asia.  LNG flows popped over 11 bcf again today, and added underlying support as hope was rekindled that exports could get back to capacity after a long string of maintenance and other issues.  Even with the positive news flow, the market appeared to get ahead of itself, with  the 5.75 and 5.95 areas appearing to initiate stop loss buying that help propel the market to its highs.  With funds  still maintaining a fairly large net short position, the amplified moves could continue, but the weather must now prove itself to maintain the upside momentum.  Another above average build expected Thursday could help staunch upside pressure, with early estimates pointing to an 87 bcf build verses the average at this time of year at 62.  The strong close makes continued strength likely, with the contract highs near 6.59 the next target.  Initial support now emerges at 6.00 and below there at 5.85.

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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