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Energy Brief Sep 29

Price Overview

The petroleum complex traded mixed with early selling interest attributed to the API report which showed a build in crude of 4.1 mb, gasoline of 3.6 mb and distillate up 2.5, sharply above expectations. Despite the DOE report confirming a build even larger than the API, prices recovered to show modest losses as the market focused on other considerations.  These included:

  • the possibility that shortages will shift power generation away from natural gas, which is high priced and in short supply globally, to oil-based sources. Rystad Energy forecast demand for oil might increase by up to 400 tb/d over the next two quarters, particularly in Asia. 
  • Forecasts suggesting that global oil demand has been underestimated as economic recovery progresses, leading to further potential inventory declines in 2022.
  • The appearance that OPEC will not add more supply at their meeting on Monday, but will stick with plans to increase production by 400 tb/d amid over-compliance of 116 percent reported in September. Expanding production remains challenging due to under investment and supply chain issues.

The DOE report showed commercial crude inventories building by 4.6 mb, gasoline stocks up .2 and distillates increasing by .4.  Domestic production rose to 11.1 mb from 10.6 last week, while total petroleum stocks excluding the SPR rose 10.9 mb on large increases in propane and other oils. Capacity utilization rose to 88.1 percent, up .6 from last week. Total disappearance was indicated at 20.4 mb from 21.1 previously.

The appearance that OPEC+ is unlikely to change policy at their meeting on October 4th despite signs of developing tightness will likely continue to underpin values given that some producers are having difficulty reaching output targets, particularly in Africa. In addition, the Iranian negotiations to lift sanctions appear to have stalled, suggesting no near-term supply relief, which will keep control of the market in the hands of the Saudis and Russia. We still see the 77.00 level basis November as a viable objective near term and expect pullbacks to the 73.00 area to find good support.  Strengthening demand at a time when stocks are declining and production levels are uncertain should underpin the market for the foreseeable future.  With reports of power shortages and credit liquidity issues, the Chinese economy has the potential to eventually become a drag on growth but the rebound in India’s demand might moderate any strong reaction, particularly in light of the potential for strong growth in the US.  

Natural Gas

The buying frenzy continued into the early morning hours yesterday as the November reached an intraday high at 6.318, which was nearly 60 cents above Monday’s settlement.  The market has since retrenched, settling today at 5.477 for a loss of 40 cents on the session.  The heightened volatility continues to be linked to overseas prices as Asian and European markets made all-time highs yesterday on continued concern regarding storage deficits heading into the winter demand season.  The price action since Monday, with much of the rally occurring after hours, could indicate algorithmic pressure and a flushing out of fund shorts.  The substantial pullback was due in part to the expected large storage build tomorrow, with estimates pointing to an 87 bcf increase verses the 5-year average of 72.  With the recent trend of above average builds expected to continue into the end of injection season, some of the fear of low US storage levels into the winter has been relieved.  This has been aided by the recent inability of LNG exports to consistently reach maximum capacity levels in the face of planned maintenance and the slow recovery from recent storms.  Prices have retraced 50 percent of the rally since mid-month, and with the 5.50 level taken out the next level of support looks to be near 5.35.  With such a wide range cleared out on the upside, the high from 2014 near 6.50 still looks like a likely target on continued volatility.

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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