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Energy Brief for Oct 4

Price Overview

The petroleum complex traded sharply higher, rallying by over $2.00 per barrel in crude and 6.2 cents per gallon in gasoline and heating oil on active short covering and fresh buying that was the result of OPEC+ sticking to previously agreed production hikes that would add 400 tb/d in November.  In addition, strength to natural gas supported bullish sentiment on concerns that overseas gas shortages will lead to a substitution of crude oil and coal for LNG in power generation.

The cautious approach by OPEC after a failure to meet production targets in September, with compliance levels at 116 percent, continues to underpin values especially as demand prospects brighten. Forecasts that a deficit of as much as 1.5 mb/d will develop in 2022 has helped heighten investment demand and reverse speculative interest from a neutral posture to a more bullish tone. The Commitment of Traders reflected this with portfolio managers purchasing the equivalent of 42 mb in the six most important futures and options contracts in the week ending September 28th.  Purchases over the last six weeks have totaled 170 million barrels, reversing more than half of the earlier sales of 268 mb from the previous ten weeks.  In the most recent week, buying interest was led by new bullish positions rather than short covering with short positions at their lowest level since 2019.  Currently the major petroleum futures contracts have a combined fund net long position of 847 mb, with longs outnumbering shorts by a ratio of 6 to 1.  

The steady as she goes approach by OPEC is becoming more of an issue as developing tightness in global petroleum markets is exacerbated by fears of growing shortages of LNG.  The concerns might necessitate the emergency release of SPR crude as we approach winter.

Whether this will be enough to offset the increasing gap between supply and demand is questionable given persistent challenges on the supply side linked to COVID-19 related project delays, the global pivot away from fossil fuels towards greener energy, strains on supply chains, and potential power shortages. Subsequently we see the potential for OPEC sustainable production capacity to be tested in the next six months.  The possibility that the supply deficit will be 1.5 mb/d in the first half of 2022 will continue to offer support.  Penetration of the 77.00 level basis November today will likely set this area as support and opens the upside for further gains until OPEC moves to more aggressively expand production or a breakthrough occurs with respect to Iranian sanctions.

Natural Gas

The story remains the same in the natural gas market, as soaring overseas prices pull US values higher.  The active November contract tested 6 dollars again today but was unable to maintain those levels, ending the session nearly 15 cents higher at 5.766.  Some support was offered by forecast revisions that upped demand expectations for the coming week, but not enough to alter the effect that recent mild temperatures have had on storage restocking.  Early estimates for this week’s storage injection are in the 100-110 bcf range, which is well above the average build for this time of year at 72.  The strength to global gas prices is showing no signs of abating, which will continue to add volatility to the US market despite current capacity restraints on LNG exports.  The multiple attempts at surpassing the 6-dollar level have created solid resistance, but a settle through that area in the coming days could ignite a spike up test of the 6.50 level.  Initial support should surface near 5.55.

Charts Courtesy of DTN Prophet X, EIA, Reuters

 

The authors of this piece do currently maintain positions in the commodities mentioned within this report.

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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