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Will $40 be Breached?

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Oil prices traded down to fresh near-four month lows on Monday, pressured by more evidence of lingering oversupply and strength in the dollar.  Last week, the front month (September) WTI contract fell by more than two dollars, putting it within shouting distance of the psychological $40 marker (finished products suffered similar losses during the week).  One of the data points that had been supporting oil prices through the spring is strong gasoline demand. However, the Government’s energy watchdog (EIA) published data last week that indicated May gasoline demand was some two hundred thousand barrels per day weaker than previous estimates – not bullish.  On Monday, the market was greeted with news that OPEC has continued to increase its output (July over June), which will further saturate the physical oil market.  As such, prices were soft all day and threatened to close below $40 for the first time since the infamous “Doha No-Ha” meeting in April (which would be very negative for near-term price action).

September WTI began to trend lower overnight into Monday, and picked up the rate of descent in the early Monday trading hours.  Without any supportive news in the market, the market put itself in reverse and hit the gas pedal hard.  WTI was down over a dollar by noontime and by early afternoon traded right around $40 (even briefly dipping below it on a few occasions).  The sturdy defense of that figure was evident, if only because of the time the market spent just above it without collapsing through it.  There was no late rally to give the bulls hope on the day, and September WTI closed at $40.06 (down $1.54), the lowest front month close since April 18.

RBOB and Heating Oil each closed lower, though HO took the brunt of the loss with a five cent loss, illustrating the volatility in the product markets. RBOB has been a relative strong point in the market of late after lagging HO for the better part of July (at a time when RBOB is typically the stronger commodity).  RBOB outperformed HO by three cents last week, and again by three cents on Monday.

Gulf Coast cash markets were strong on Monday, with gasoline differentials moving up by over three cents.  The Phillips 66 Alliance Louisiana refinery was shut down on Monday, leading to some nervous buying by pipeline shippers.  In addition, a weather pattern in the Caribbean has captured the market’s attention. The storm, which would become “Earl” if named, does not appear to be a threat to oil production in the Gulf of Mexico, but could potential threaten refining assets in Central America.

Published by PAPCO, Inc. (PAPCO)

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