News & Views
Oil Prices Settle At Their Highest Levels
Oil prices settled at their highest levels in five months Wednesday, but remain well below the intraday highs set earlier in the month, and seem hesitant to make a push to break out of their sideways trading ranges as monthly reports from OPEC and the IEA paint a bleak picture for consumption.
The IEA’s monthly oil market update reduced its global oil demand estimates for 2020 and 2021, the first decrease in several months, primarily driven by weakness in the aviation sector. Global oil output is growing once again as the U.S., Canada and Saudi Arabia lead the recovery in production. The report also predicts that refinery intake will lag the global demand recovery as inventory gluts limit their operational capacity.
The DOE’s weekly report was much more bullish than the monthly forecasts released this week, with U.S. petroleum consumption and refinery runs both recovering to their highest levels in the past five months, driving inventory draws across the board. In most years, we would expect to see gasoline demand and refinery runs peak for the season around this time, which will make the next few weekly reports particularly noteworthy to see if typical seasonality holds true in this most unusual of years. The report also showed the largest drop in U.S. refining capacity in over eight years, and more reductions are expected, as this data seems to only just now be reflecting the shuttering of the PES facility.
Yesterday we guessed that the partnership announced to convert a refinery in Bakersfield, California to produce renewable diesel would likely not be the last such plan announced. Sure enough, later in the day, P66 announced its plan to convert its San Francisco (Rodeo) refinery to a renewable facility. In just the past few months, we’ve seen fossil to renewable refinery announcements from Holly (Cheyenne, WY), Marathon (Martinez, CA and Dickinson, ND) Global Clean Energy (Bakersfield, CA) and now P66 (Rodeo, CA). This is in addition to numerous other Renewable production projects that were slated to come online in the next two years.
The announced shutdowns of several refineries seems to be contributing to a selloff in RIN values, with D6 values dropping a dime in the past 10 days. The EPA continues to be quiet on the RFS targets for 2021, and on the rumors swirling about plans for small refinery waivers.
Tropical Storm Josephine is expected to be named later today according to the NHC. While this will set yet another record for the pace of storms in a season, this system looks like it will stay out to sea and not threaten the U.S. coast.
A Strong Start And Weak Finish Sets The Stage
A strong start and weak finish Tuesday set the stage for a technical selloff in both energy and equity markets, as the recent bull rally seemed to run out of steam. Reversal bars on the daily charts after WTI flirted with a five-month-high and the S&P 500 came close to a new record high only to end lower on the day, suggested we may be due for a heavy round of selling. Instead, both asset classes are moving higher again to start Wednesday’s session, with bullish inventory figures seeming to help NYMEX futures erase yesterday’s losses and diminish the technical threat.
The API was said to report inventory draws across the board last week, with crude stocks down 4.4 million barrels, diesel down 2.9 million barrels and gasoline lower by 1.3 million barrels. The DOE’s weekly report will be out at its normal time this morning.
Any bullish sentiment from the weekly inventory data is being held in check by more bearish outlooks from the EIA and OPEC monthly reports.
OPEC’s monthly oil market report lowered expectations for global economic activity and oil demand, while increasing its forecast for supplies. OPEC’s production increased by nearly one million barrels/day on the month as the carte’s output cut agreements started to ease. The report also noted the lack of investment flows into the oil markets in recent months, while Gold and other commodities have seen record setting action.
The EIA’s Short term energy outlook painted an uncertain picture, as it has the past several months, and noted how July prices stagnated as the demand recovery battled to a stalemate with the threat of additional COVID shutdowns.
The August report used a smaller reduction in U.S. GDP than the July report, but despite that relative improvement, the forecast suggests that U.S. energy consumption in 2021 will still be lower than in 2019, as the COVID recovery is expected to stretch further into the future.
One notable item from the report is that the price curve for Oman crude flipped from backwardation to contango in the last two weeks of July, suggesting that Asian refinery runs – particularly in China – have slowed, while Middle Eastern production comes back online.
The latest in a long line of renewable diesel projects planned for 2022 was announced Tuesday as an alliance that will see ExxonMobil buying the output from the refinery in Bakersfield, CA that’s being retooled for RD production. This is at least the fourth traditional refinery being converted to RD production that’s been discussed in recent weeks, and given the state of environmental rules and weak refinery margins, it’s likely not going to be the last.
Week 32 - US DOE Inventory Recap
Controversial Negotiations Over Gas Regulations
Energy and equity prices are both moving higher for a second day, as apparent optimism over COVID counts, potential stimulus, tax breaks and other rumored economic policies seem to be outweighing negative sentiment over the latest escalation in U.S./China tensions.
While so far petroleum prices seem to be following macro factors, we’ll get a deluge of inventory data in short order to influence prices. In addition to the weekly inventory data, later today we’ll see the EIA’s Short Term Energy outlook, then we’ll get the IEA and OPEC monthly reports later in the week.
Even though WTI is close to reaching a five-month-high, refined product prices are still stuck in their neutral pattern for now. In order to break out of the sideways trend we’ll need to see ULSD and RBOB both break and hold above the $1.30 mark. RBOB will face an even earlier test with the 200-day moving average currently at $1.2730 – a level of resistance that repelled the upward momentum in gasoline prices half a dozen times in July.
It is an election year: After negotiations at the White House, the EPA is reportedly planning to rescind some rules on methane gas regulations that would have widespread impact on testing for oil & gas drilling and shipping operations. The move is sure to be highly controversial, as environmental concerns continue to become mainstream and it appears that some major oil companies will oppose the easing of restriction. This comes a week after the agency was also reportedly planning on recommending numerous small-refinery waivers to the RFS. That report helped send RINs sharply lower, but has not yet actually happened, the latest in a long line of White House/EPA negotiation rumors that hasn’t come to fruition.
The EIA this morning published a note highlighting the drop in LNG exports from the U.S. this year. The EPA’s rumored change to methane rules could further complicate this issue as foreign buyers may require certain clean-energy protocols in order to purchase U.S. exports.
Energy Futures Bounce Back After Weak Friday Finish
Energy futures are bouncing to start the week, after a weak Friday finish. The early buying seems to be aided by U.S. stock markets reaching their highest levels since the start of COVID, amidst a couple of optimistic demand-recovery headlines from China and Saudi Arabia.
Volatility for both energy and equity markets continues to drift lower, with the VIX and OVX indices reaching pre-COVID levels, as fear seems to have lost its grip on these markets. With so much uncertainty remaining on a variety of global issues, it’s hard to imagine this period of calm can last the rest of the year.
Baker Hughes reported four more oil rigs taken out of service last week, bringing the total U.S. drilling rig count to a new all-time low. Three of the four rigs taken offline last week came from the New Mexico side of the Permian basin.
Money managers continue to do relatively little in the petroleum arena, with only minor increases in NYMEX contracts and minor reductions in Brent seen last week. Open interest for Brent dropped to its lowest level of the year, but remains above its seasonal range, as that contract continues to find new global interest. Meanwhile, WTI is holding at the bottom of its five-year range, as the Cushing, OK hub slowly becomes less relevant.
We’re still a month away from the peak of the Atlantic Hurricane season, and several states are still recovering from widespread power outages caused by Isaias, and the NHC is giving 60 percent odds of another system forming into a named storm this week. The good news is this storm appears to be far enough south that the odds of it getting anywhere close to the U.S. are low.
Big Three Energy Benchmarks Close With Gains
It’s a quiet start this morning as the big three energy benchmarks look to close out the week with gains. Crude oil and diesel futures are down less than 0.5 percent this morning while RBOB is the only of the three to show green, but only just. It wouldn’t be a surprise if weekend excitement pushed the complex positive ahead of the settlement.
The disturbance off the mid-Atlantic coast has completely fallen off the proverbial and literal radar yesterday, only to be replaced with a new area of interest located west of the Cabo Verde Islands. It currently has a 10 percent chance of development in the next two days but the industry will continue to keep an eye out as it makes its way westward.
Today’s interesting read: the EIA breaks down COVID’s impact on jet fuel markets as average daily flights get cut by nearly 2/3.
It’s important to remember that the longer a security trades within a certain range, especially a constricting one, the tighter the spring may be coiling. If more positive economic numbers are published next week, in tandem with today’s surprise addition of 1.8 million jobs according to the BLS report, we could see a technical breakout that could finally close the gap set by panic selling back in March.