Weekly Commentary Summary
Fundamental Analytics offers timely weekly commentaries tied to reporting from the DOE, as well as weekly reports on crude oil and natural gas. We also offer a weekly commodity market update highlighting developments in agricultural and energy markets. If you are interested in receiving any or all of these updates, please let us know. Below are some summaries of our January Commodity Market Updates.
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January is the start of refineries turnaround, when parts of the refineries are shut down for maintenance and preparation for the summer driving season. There is a drop in Crude Runs in the refineries through January and into February. Correspondingly, there is a drop in the production of gasoline during this period as demand for gasoline is lower in January.
Corn is the raw material in the production of biofuel ethanol in the US. About 40% of the US corn crop is used in the production of ethanol. Corn prices have rebounded since mid-September, but ethanol prices remain low. In fact, Ethanol prices in equivalent bushel prices (1 bushel of corn produces 2.8 gallons of ethanol) are lower than corn prices. Ethanol refiners are currently running at a loss. Ethanol inventories are at record high levels for this time of the year, so supply is plentiful. Consequently, ethanol refiners have been cutting production. For the week ending December 28, ethanol production dropped by 31,000 barrels per day.
Natural Gas prices gapped up on Monday due to cold weather and cold weather forecasts.
Natural Gas production remains strong but storage, as reported by the EIA for January 4, 2019, is at a record low of 2,614 bcf for this time of the year. The computer model forecast of storage by the end of the winter season has storage at about 1,400 bcf for a normal cold winter. Should the current seasonally colder winter weather continue for extended periods, storage would end up closer to 1,200 bcf. Low storage will cause prices to rise.
The March-April Natural Gas calendar spread is a measure of traders’ expectation of end of winter storage levels. Expectation of low storage widens the spread. On Monday, the spread increased. In 2014, shortage ended at a record low and the 2014 March-April Natural Gas calendar spread spiked. The current March-April Natural Gas calendar spread has been as high and could even reach the level it reached in mid-November 2018 $1.58 in mid-November.
US domestic crude oil prices are often influenced by global events. On Monday the International Monetary Fund reported an increased possibility of a global economic slowdown and reduced its 2019 global growth forecast to 3.5% from 3.7%. Also on Monday China reported the lowest annual economic growth in nearly 30 years. The annual economic growth rate of China was 6.6% in 2018. Crude oil prices dropped nearly 2% in reaction to the global news.
In contrast, US domestic natural gas prices are not affected by global economic events but rather by US domestic factors of supply/demand and weather. However, those factors are often not sufficient to explain natural gas price behavior. Last Friday prices were up in response to cold weather forecasts. Yet, when the cold weather materialized, prices dropped sharply on Tuesday, down over 12%. This price behavior illustrates the difficulty and risk of speculating in natural gas.
Since mid-December prices have dropped from $4.00 to $2.87, 28%, as of Monday’s settle. During the same time period March Open Interest increased from 216,000 contracts to 307,000 contracts, a 42% increase. As a general rule, when open interest grows as prices are falling this is an indication of new shorts in the market.
Last weekend a new extended forecast predicted milder winter in early February. Despite the severe cold weather this week in much of the US, the market gapped down on Monday in response to the longer term forecast. Being short natural gas in mid-winter can be a risky position, especially with the relatively low natural gas shortage level. In mid-November prices had an explosive up move when cold weather forecasts were released. Those holding short positions in winter are more sensitive to upside risks and will quickly cover if prices turn. A new cold weather forecast in the next days or weeks is likely to create dramatic price up moves from a short covering rally given the high price volatility in natural gas.
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What to Watch in Upcoming Weeks
Below are a few things to watch in early/mid-February of 2019. These factors are likely to impact energy and agricultural markets.
● Ag Market response to delayed USDA reports
● Magnitude of losses to South American soybean crop
● Gasoline cracks and refineries moving to driving season production levels.
● Distillate cracks may indicate future direction of crude oil.
● US sanctions on PDVSA, the Venezuelan state-owned oil company, are in line with expectations but may have little impact on price.
The Fundamental Analytics Team
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