After yesterday’s Crop Production USDA Supply/Demand report that surprised even the most veteran investors we are still back at it again like our countrymen in Texas and Florida. Let’s not forget our First Responders and our Men and Woman of the Armed Forces. Our prayers go out to every individual affected by the current events, and again, we Americans showed our fortitude in times of crisis for our neighbors. So let’s be unified and roll up our sleeves and get our country back on track as we start the market day. We kick off this morning with Producer Price Index (PPI) at 7:30 A.M., EIA Energy Stocks at 9:30 A.M. and Dairy Product Sales at 2:00 P.M. In the aftermath of the Hurricanes last night’s API Energy Stocks showed the thirst we have for refined product. The Crude stocks showed builds of 6.181 million barrels and not surprisingly huge draws on Gasoline of 7.896 million barrels and draws in Distillates of 1.805 million barrels. Refineries are working amazingly after this one-two punch and we need to refine as much Energy to get power back to the affected regions so they can get back on their feet again. We are still monitoring Hurricane Jose a Category 1 with Sustained Winds at 65 knots moving southeast at 7 knots and hopefully back out to sea. In the overnight electronic session the October Crude Oil is currently trading at 4865 which is 42 points higher. The trading range has been 4877 to 4812.
On the Corn front yesterday’s Crop Production USDA Supply/Demand raised some eyebrows. As a typical report what you think or expect and does not equate in the reality of the markets. And the reality is the market is never wrong. The Corn and Soybeans bounced off the lows while the Wheat futures continued the climb. Tomorrow all September Grain Futures expire and investors prepare for the next sleight of hand whether it is weather fundamentals or any technical factor this oversold market still looks heavy. In the overnight electronic session the December Corn is currently trading at 353 ¾ which is 2 ¼ cents higher. The trading range has been 354 ¾ to 350 ¼. We should see some interesting market moves in the trading sessions to finish off this week.
On the Ethanol front we had quite a bit of activity as this market is aware we have shortages and need refined product in volume and this market took notice. We saw activity in the October, November and December contracts. The October contract posted a trade at 1.558 which is .008 of a cent higher. ( contracts traded at that price and fading Open Interest at 798 contracts and expect the November and December contracts to be busy attempting to spread Energy volume as reconstruction begins.
On the Natural Gas front the market is continuing to slowly climb in this early shoulder season. In the overnight electronic session the October contract is currently trading at 3.046 which is 4 ½ cents higher. The trading range has been 3.053 to 2.995. We should see some extraordinary movement in the Energy sector with current and recent events.
— Daniel Flynn
The Energy Report: More demand and less supply
While Florida and the rest of the Gulf Coast deal with the aftermath of Hurricane Harvey and Irma and the energy markets assess the short-term demand destruction, in the bigger picture for energy, we are getting very bullish data in supply versus demand. All major reporting agencies, Organization of the Petroleum Exporting Countries (OPEC), The Energy Information Agency(EIA) and the International Energy Agency (IEA) are reporting that we are seeing more demand and supply, which should set the stage for an end of year rally especially when we go full scale recovery phase in the storm impacted areas.
The IEA was the latest to give oil a boost as I predicted it would, raised its global oil demand forecast. The IEA raised its global oil demand forecast by very strong 1.6 million barrels a day while admitting that OPEC compliance to production cuts have improved. As I have written before, the IEA is notorious for underestimating demand and had to once again raise their forecast. I think that they are still underestimating global demand and will have to raise it again even though 1.6 million barrels a day increase is extremely large year over year growth by historical standards. The IEA said that oil demand increased by 2.3 million barrels per day, or 2.4 percent, in the second quarter of 2017 In 2018. The IEA is predicting growth of 1.4 million barrels per day or 1.4 percent, which we also think is low.
The Energy Information Administration also once again lowered the forecast for US oil production as shale oil producers have pulled back and are having a tough time overcoming the steep shale oil decline rate. The EIA lowered their 2017 production estimate to 9.25 million barrels a day from 9.35 million barrels a day in 2017. It also lowered its forecast for 2018 to 9.84 million barrels a day down from 9.91 million barrels a day and down from a previous forecasts that was over 10 million barrels a day. The EIA also raised their US oil demand forecast to 20.38 million barrels a day up from 20.3 million barrels. This comes as all reporting agencies saw an improvement in OPEC compliance, even OPEC themselves.
Not only did we see OPEC production fall for the first time in 4 months, OPEC and other reporting agencies instead saw demand exceptions for OPEC crude. OPEC production fell to 30.004 million barrels a day excluding Libya, Nigeria as Saudi Arabia oil production fell to 9.95 million barrels a day according to the Saudis. OPEC raised its oil demand growth estimate for 2017 to 1.42 million barrels a day up 50,000 barrels a day putting global demand at 96.8 million barrels a day.
In a nut shell all agencies are seeing more supply and less production. Storm related demand destruction and seasonal factors is very bullish into year end.
Natural gas is up with pipeline delays and less impact on energy infrastructure than feared. Andy Weissman says that Hurricanes Harvey and Irma have led to an inflection point in the natural gas storage trajectory, with a total net estimated demand loss of 70 Bcf, sharply reducing the extent of upside pressure likely later this fall. Nevertheless, the front-month contract rallied earlier this week on smaller-than-feared Irma impact, potential delays to Rover Phase 1b, and bullish weather shifts. The October natural gas contract has closed between $2.88 and $3.07/MMBtu for longer than a month. While the most-likely scenario is for continued range-bound trading, if support or resistance fails, a significant price movement becomes likely. By late fall, a potentially sharp increase in weather-driven demand for natural gas, augmented by a ramp-up in LNG exports, could propel NYMEX futures higher. Electricity futures may succumb and move lower with seasonal demand, particularly if natural gas prices break lower in the near term.
The grain report was bearish for beans and corn as the yields came in at or higher than expectations. We also saw acres come in higher. Wheat was a bit more friendly. DTN reported that corn prices fell after USDA increased its average yield estimate in the September report. This pushed corn production to 14.184 billion bushels. Ethanol futures were mixed to mostly lower on the weakness in corn, although the firm RBOB gasoline market did draw some buyers back into the energy complex.
Reuters reports the use of ethanol in gasoline will go nationally by 2020, state media reported on Wednesday citing a government document, as Beijing intensifies its push to boost industrial demand for corn and clean up choking smog. It’s the first time the government has set a targeted timeline for pushing the biofuel, known as E10 and containing 10 percent corn, across the world’s largest car market, although it has yet to announce a formal policy. Mandates requiring that a minimum amount of biofuel must be blended into fuel for the nation’s cars, similar to the United States and Brazil, are currently set at a provincial level. “This news has greatly boosted confidence inside the industry,” said Michael Mao, analyst with Sublime China Information, adding that without government support ethanol would likely be too expensive to survive in the market.
— Phil Flynn
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