News & Views
Largest Losing Month For Oil & US Equity Markets
Energy futures are were trading modestly higher to start the last trading day of what will likely go down as the largest losing month for Oil & US equity markets in the past 2 years. (As this was being written oil & gasoline futures dropped into the red) The good news for investors is that US stocks are staging a more substantial rally, adding nearly 4% since bottoming out earlier in the week.
After trading nearly in lockstep during the sell-off earlier in the month, equity and energy prices have been trading more independently over the past couple of weeks, although part of that detachment appears to be the large moves in equities that have been coming later in the afternoon once energy prices have already posted their settlements for the day.
The API was said to show a build in crude oil inventories of 5.69 million barrels, while refined product inventories both decreased by more than 3 million barrels on the week. The DOE’s weekly report is due out at 10:30 eastern.
As we look ahead to November trading, the two big questions remain how stock markets will act, and how the physical oil market will handle the Iranian sanctions that officially kick in 4 days from now. From a chart perspective, things are looking pretty bearish as long-term trend-lines have been broken, opening the door for another $5-6 drop in oil and 10-20 cent drop for refined products over the next few weeks.
Leader in the clubhouse for best “Face in hand Trader” of October.
Energy Futures Moving Into Red Again
Energy futures are moving into the red again this morning, threatening their October lows, as fears shift rapidly from the world facing a shortage to an excess of oil supply, and as equity markets around the world remain on shaky ground.
It’s a bit unusual to see ULSD futures leading the move lower as the diesel contract is the only 1 of the big 4 petroleum futures to still be trading above the bullish trend-line that started last July. RBOB gasoline futures meanwhile still look the most bearish after wiping out 8 months’ worth of gains in just the past 4 weeks.
WTI and Brent are both on the cusp of a bearish outside-down pattern for the month of October (setting a higher high, then a lower low than previous month’s trading) which is known as a classic sign of a trend reversal and could spell more downside ahead.
As the charts below show, the October Sell-off has all come in the front 12-18 months of the forward curve, with values for both Brent and WTI actually moving higher 2 years and further out. That move from steep backwardation to contango in the front months is reflective of short term supplies being able to cover the expected declines from Iran and Venezuela, while doubts linger about the long term options to keep up with global demand.
RBOB And Brent Clinging To Small Gains
It’s a mixed bag to start the week for energy futures with RBOB and Brent clinging to small gains while WTI and ULSD are moving modestly lower. Stock market volatility and uncertainty surrounding the sanctions on Iran that officially start Sunday remain the two main headlines that seem to be driving the price action.
RBOB gasoline futures are once again taking their place as the most volatile of the energy contracts, attempting to lead the way higher this morning after leading the way lower over the past few weeks. Today’s relative strength in gasoline could be some bottom fishing by those who think that the spread between gasoline and diesel has gone too far after gasoline crack-spreads hit 3 year lows last week and ULSD spreads reached 3 year highs.
Money managers cut their net-long holdings across the big 4 petroleum contracts last week, as the flight to safety trades seems to be continuing based on the Commitments of Traders (COT) data. WTI and RBOB net length held by the large speculative category of trader dropped to their lowest levels of the year, although so far the liquidation has been relatively orderly compared to sell-offs we’ve witnessed in years past.
Baker Hughes reported a net increase of 2 oil rigs actively drilling in the US last week, bringing the total count to a fresh 3.5 year high.
Energy Futures Follow Lead Of Equity Markets
Energy futures continue to follow the lead of equity markets in a volatile week that pushed several of the most-watched indices and contracts to 6 month lows. Thursday’s session saw a strong rally in stocks help oil and diesel prices bounce off of multi-month lows, only to pick up the selling again overnight after disappointing earnings reports from several of the world’s largest technology companies.
Meanwhile, the guesses stories surrounding the upcoming sanctions against Iran are reaching a fever pitch this week, with reports that the US may be hesitating on how it will regulate international financial transactions via the SWIFT network, China apparently making a U-turn in its stance and telling its oil companies to avoid Iranian crude, all while the Iranians race to insulate their population from economic fall-out.
So what really matters in all of this? Over the next few months we’ll find out just how well the world’s major oil exporters can step in to replace the barrels that Iran can no longer sell. As the chart below shows, based on the increases from the US, Saudi Arabia and Russia this year, the total decline in global production may be minimal – even when factoring Venezuela’s collapse into the equation. If that proves true it could spell more downside for energy prices, with the billion dollar caveat of whether or not the new oil production can get from where it is to where it needs to be.
Energy Futures Treading Water
Energy futures are treading water this morning after once again being caught up in a stock market sell-off Wednesday afternoon. The weekly DOE report offered a little something for both the bulls and bears to enjoy, but ultimately the fundamentals couldn’t outweigh the influence of fear that’s gripped many markets lately.
For a while during Wednesday’s session, it appeared that energy prices had found a temporary floor and may be set for a rally. Gasoline prices got a boost immediately after the DOE report, as a draw in total inventories of almost 5 million barrels on the week gave hope that the glut of supply building along the eastern half of the country may be diminishing.
Reality seemed to set in later in the day however, as refinery production continues to far-outweigh domestic gasoline consumption, and stocks remain above their seasonal range for this time of year. When the dust settled, most gasoline prices were trading at 6 month lows to end the formal session, and then got caught up in the afternoon equity collapse to add to the daily losses.
In other news, Chevron & the EPA reached a $150 million settlement agreement to improve safety and air quality concerns following various refinery incidents over the past 6 years.
Energy Futures Taking Lead From Equity Markets
Energy futures are taking the lead from equity markets in a modest recovery rally this morning, after reaching multi-month lows during a harsh selloff on Tuesday. US stock markets actually managed to erase most of their losses during Tuesday’s trading, but energy prices didn’t react much as it appears they were more focused on the Saudi’s new efforts to play nice with the world.
Despite the bounce, it’s been a brutal month for both energy and equity markets, with several indices having their worst monthly performance of the past 3 years. While short term technical indicators are in over-sold territory and begging for a corrective rally, longer term trend-lines are breaking down suggesting we could see more heavy selling before the end of the year.
It’s not just petroleum products & stocks that are feeling the pain in October. RIN values continue to come under pressure, with Ethanol RINs approaching a 6 year low below 9 cents/RIN this week as ethanol stocks remain ample, more small refinery exemption waivers have been requested, and an EPA proposal on RFS reforms is expected early next year.
An EIA report published this morning notes how the return of sanctions on Iran is creating uncertainty in oil price forecasts, while Global supply balances are still expected to outpace consumption in 2019.
Global Equities Markets Selling Off
- Global equities markets are selling off this morning, taking energy prices with them. The S&P, Germany’s DAX, and Hong Kong’s Hang Seng are posting losses of 1.5-3% so far today.
- RBOB, HO, WTI, and Brent futures contracts are down ~2% this morning and falling. Momentum will likely carry the complex downward the rest of the day unless some drastic news breaks to incite some buying.
- Saudi Arabia announced it could supply more crude quickly if needed, easing tensions felt in overseas markets due to speculation on US sanctions after the suspected murder of journalist Jamal Khashoggi.
- Hurricane but not the kind we are used to: Major Hurricane Willa is expected to make landfall on the western coast of Mexico later this afternoon as a Category 5 storm. While it is expected to be locally devastating, minimum impact is projected for the United States.
- Gasoline and American crude oil futures both opened below some significant support levels this morning. WTI has another ~$2 to fall before being tested around the $66 mark, RBOB can shave another 7 cents before testing the support at $1.80.
Mixed Start For Energy Markets
It’s a mixed start for energy markets to begin the week with oil and diesel futures clinging to modest gains while gasoline prices drop about a penny. Nervous markets around the world continue to be an overriding theme as trade threats, rising interest rates, and a potential regime shake-up in the world’s most critical oil producer all remain front and center in the headlines.
The Saudi mystery took several turns this weekend, with several high ranking officials being removed from their positions after the Kingdom changed its story on what happened to journalist Jamal Khashoggi. Energy traders are breathing a little easier as the change in stance includes mention that there is “no intention” of using oil as a political weapon against the mounting international pressure.
Money managers slashed their net-long holdings in petroleum contracts across the board in the latest CFTC report, which is not too surprising given the heavy selling we saw in the week preceding the data being collected. Now that the shine has come off the energy rally for the speculative class of trader, a major question is if these funds will stay long or head for the exits as year-end approaches.
Baker Hughes reported 4 more oil rigs were put to work last week in the US, bringing the total to 873 active rigs, the highest count since March of 2015. The rising rig count and rising prices certainly suggests that times are good for US drillers, although a report over the weekend suggests that many in the shale industry continue to struggle to turn a profit.
Two weeks after the explosion at the Irving refinery in St. John NB, investigators are still unable to get to the blast zone to investigate the cause, which could delay repairs and the restart of some units at the plant. So far New York harbor prices still aren’t reacting much to the news, although some signs of tighter supply in New England are showing up at the terminal level.
While Hurricane Michael had little impact on petroleum supplies, the EIA this morning highlighted the widespread electricity outages across the South Eastern US.
Energy Prices Poised For Loss
‘Profit taking’ and ‘short covering’ seem to be the preferred terms to describe market action this week, and this morning is no different. The four mainstays of the energy complex are up around 1-1.5% so far to start this morning and ‘short covering’ after the prior two days of losses is taking credit for the move. Regardless, energy prices are poised for loss on the week.
The global prevalence of the American crude oil benchmark over other grades seems to be increasing as WTI exports in 2018 remain higher than they have ever been. With the increase in world-wide fundamental relevance and the CME group’s creation of a Houston-based futures contract, traded volumes of US crude oil instruments are expected to continue increasing, potentially increasing volatility as well.
The RBOB futures’ charts paint a fairly bearish picture in the short term. After falling through nearly all support levels so far this month, gasoline prices are facing another turning point around the $1.91 level, just 50 points below where it’s trading currently. If broken, prices have nothing but space until the $1.80 mark which they will likely fall to.
ULSD futures aren’t on the same precipice but are trading more in the middle of their technical range, surrounded by resistance and support levels at $2.35 and $2.26 respectively.
Since headline market drivers tend to get lost in the shuffle of news cycles, here’s a quick recap of the major factors moving prices:
Prices Red Across The Board
Prices are red across the board this morning, extending Wednesday’s losses sparked by the EIA data release yesterday. The 6.5 million barrel build in crude oil seemed to outweigh the 1-2 million barrel draw in refined products and sent the complex reeling, oddly led by gasoline futures which sold off nearly 6 cents.
This morning’s price action seems a little more balanced between products: American and European benchmarks are down about a dollar a barrel and refined products are down the same$/gallon equivalent at ~2.5 cents. WTI prices have broken below the $70 mark previously breached last month despite the uncertainty surrounding the Saudi/journalist situation and the all-but-forgotten decrease in exports from Iran.
Midwest refinery turnaround season is in full swing this year, throughputs in the region have gone from seasonal record highs to record lows in just the last five weeks. While the build in stockpiles leading up to turnaround season show that the refineries have prepared for these planned shutdowns, disruptions can still occur if plant maintenance takes longer than expected or units fail upon restart.
Traders Try To Balance Volatile Week
It’s a mixed bag to start for energy prices as traders try to balance another volatile week for US equity markets, the lingering uncertainty surrounding Saudi Arabia, along with the normal weekly inventory data.
The API was said to show inventory declines across the board, with oil stocks off more than 2 million barrels after last week’s huge build. Refined product stocks also were reported to decline, which helped prices move higher overnight, although most contracts have moved slightly into the red this morning. The DOE’s weekly report will be out at its regular time of 10:30 eastern.
US Equities are pointing to a lower open this morning after a strong recovery rally Tuesday erased a good portion of last week’s losses as some positive quarterly earnings reports helped sooth some of the fears that seemed to be driving the action last week. That rally failed to hold through the Asian and European sessions overnight, which seems to be contributing to the pullback in petroleum futures this morning.
Still more questions than answers coming out of Saudi Arabia, as the international debate of what happened, and what might happen rages on. An interesting side note in the Saudi debate; OPEC is nervous it may be sued under US anti-trust laws, and may avoid mentioning oil prices in its meetings.
Irving oil said all of its contractors are back on site at the refinery in St. John that had been shuttered since an explosion last Monday. It’s still unclear how long the facility may be offline or at reduced rates, with the note saying only that turnaround activity would continue and that, “…safety remains paramount as we resume operations of our facilities in a phased approach.”
Energy Markets Trading Modestly Lower
Energy markets are trading modestly lower to start Tuesday’s session as global equity markets seem to have settled down a bit, as has the rhetoric over tensions between the US and Saudi Arabia, which only yesterday had several market watchers calling for $100 and even $400 oil prices if the world’s largest producers decided to brandish the oil weapon.
Right on cue, the EIA published a note this morning highlighting the rapid changes in the US Energy Trade balance over the past decade, with Canada now sending more oil to the US, than the rest of the world combined.
The good news for US consumers with those Canadian imports is that prices are less affected by issues such as the tensions with Saudi Arabia (as several news outlets have highlighted this week, it’s not 1973) or even the sanctions on Iran. Unfortunately for Canadian producers, since most of its exports go to US refiners, logistical bottlenecks coupled with a busy maintenance schedule for refiners as we’re seeing in PADD 2 currently has driven prices to the $25 range even while other oil grades are still going for more than $80.
Spot gasoline prices in the Portland spot trading hub (also known as the PNW) plunged more than 30 cents/gallon Monday as local refiners came back online after last week’s natural-gas pipeline explosion caused them to cut rates.
A week after an explosion shut the Irving refinery in Saint John NB, the Canadian version of OSHA has still yet to examine the site due to safety concerns, leaving plenty of uncertainty as to when the plant will resume operations. The refinery is above average at 320,000 barrels/day, but it’s location is what gives its strong influence on US gasoline and diesel markets from New York City through New England, meaning it could still create a price reaction for futures markets even though the downtime has become yesterday’s news.
Oil Futures Spiked Sunday Night
Oil futures spiked Sunday night when trading resumed as tensions between Saudi Arabia and the US – 2 of the 3 largest oil producers in the world – created concerns for global supplies. Most of those gains have evaporated this morning after a tweet from the US President suggesting cooler heads may prevail.
US drillers put 8 more rigs to work last week according to Baker Hughes’ weekly rig count. The Permian basin accounted for half the move on the week (fitting given that basin accounts for 56% of the total US rig count) as drilling activity nears its highest level in 4 years, to match the 4 year highs in oil prices.
Money managers cut their net-long holdings in WTI to the lowest level of the year last week, reducing bets that oil prices would continue to climb. Brent and ULSD net-length held by the big speculator category were also reduced modestly, while RBOB saw another small increase. Given the data for these COT reports is gathered as of Tuesday – before the big sell-offs we saw on Wednesday and Thursday – it seems likely that we may see a big move lower in these holdings in this week’s report.
Repairs to Enbridge’s natural gas pipeline that had an explosion last week may take weeks, although PNW area refineries seem to be able to continue operations via alternate nat gas supplies. Spot prices for gasoline in the region remain 50 cents above NYMEX futures.
There’s still no definitive word to be found on how long the Irving Oil refinery may be down due to the explosion and fire that shuttered the plant last week, but the lack of reaction in the NYH spot market suggests traders aren’t too worried about an extended outage.
Recovery Rally Underway For Global Equity & Energy Markets
A recovery rally is underway for global equity & energy markets after a brutal 2 day selloff that knocked 6% off of oil prices and nearly 8% off of gasoline.
Despite unplanned refinery closures on both the East and West Coasts, gasoline prices fell to their lowest levels since March Thursday, before finally bouncing off of trend-support overnight. Something to watch today: RBOB futures spiked almost a nickel overnight as 1,500 contracts changed hands in 15 minutes just before midnight, only to give back almost all of those gains this morning. That could be a sign of a large player deciding it’s time to buy the dip, or that someone’s trading algorithm stayed up past its bedtime.
OPEC’s monthly oil market report showed the cartel increased its output in September – with increases from Saudi Arabia, Libya and Angola more than offsetting declines in Iran and Venezuela. The report also revised non-OPEC oil supply estimates higher and revised global oil demand estimates lower, which was more bearish news for a suddenly pessimistic market.
The IEA had similar sentiments in its monthly oil market report, reducing demand estimates as higher prices hit consumer’s pocket books, and increasing supply estimates as the US leads “fast” growth in global oil production. The agency does paint a more bullish picture longer term as higher standards of living should underpin global demand for years to come, while spare oil production capacity is dwindling.
Notes from the DOE weekly status report:
US Crude oil production set yet another record high at 11.2 million barrels/day, but is expected to drop next week due to the passage of Hurricane Michael. Take a look at the stalactite formation this time last year on the Crude Output chart below, which was caused by Hurricane Nate’s precautionary shut-downs in the Gulf of Mexico for an indication of what we can expect in the next couple of DOE reports.
US petroleum demand continues its seasonal decline, reaching its lowest level since early May, even with diesel consumption spiking as fall harvest activity nears its peak.
It should come as no surprise given the 40 cent difference in prices between the two, but gasoline stocks in the US are reaching glut levels while distillate inventories are tight. This is especially true in PADD 1, meaning we have the potential for large swings in futures (since the RBOB and ULSD contract delivery points are in New York) should there be any major winter storms this year.
Panic Has Crept In To Global Equity Markets
For the first time since April a bit of panic has crept in to global equity markets and the ripple effects are being felt in the energy arena. The DJIA had its 3rd worst point drop in history Wednesday, wiping out nearly 2 months of gains, and several other indices have fallen below their 200 day moving averages for the first time in 6 months. Stock markets around the world caught the selling bug overnight and now US futures suggest the cycle may begin again today.
Energy markets have not been immune to the selling– as is often the case in a fear-driven market, correlations between asset-classes increases – setting up a pivotal test for oil prices to end the week. At this moment, both Brent and WTI are trading below the trend line that began almost 8 weeks ago, and if they can settle below it that would leave the door open to a test of the longer term trend some $5/barrel below current levels. If prices manage to bounce however, the past 2 days of selling will look more like an overdue correction for an overheated market, rather than a change in the trend.
The API did not offer any relief for energy bulls as it was reported to show a build of 9.7 million barrels in US oil inventories last week, along with a 3.3 million barrel build in gasoline stocks. If confirmed in today’s Columbus day-delayed DOE report, that would be the largest weekly increase in more than 1.5 years. Then again, last week’s DOE report showed a build that was 7 million barrels larger than the API’s report, so yesterday’s report could simply be the industry group’s data catching up to the government’s, and we may not see much of an increase at all today. We’ll find out at 11am Eastern.
It’s been a rough week for Canada Eh? With the country’s largest refinery closed due to an explosion and fire, Western Canadian Crude prices reaching 2 year lows at $27/barrel, then a major natural gas pipeline explosion that may cause power outages and refinery closures around the Pacific North West.
Those PNW refinery closures have sent prices in the region soaring, with RBOB values around Portland trading some 50 cents above NYMEX futures, which is dragging up gasoline values in California by 20-30 cents as replacement barrels will be needed from the south.
The damage assessments are beginning after the record-setting landfall of Hurricane Michael. While the damage is sure to be devastating in many ways, at this point it appears that the impacts to energy infrastructure are minimal.
Energy Futures Cooling Their Heels
Energy futures are cooling their heels to start Wednesday’s session, after a strong move Tuesday put oil and diesel prices back within striking distance of 4-year highs. The Iranian stories that helped push prices up over the past few months seem to have taken a backseat this week as news stories closer to home have taken back most of the headlines.
Hurricane Michael grew to Category 4 status, and could be the strongest storm ever to hit the Florida Panhandle when it makes landfall later today. As the EIA’s interactive energy disruption map below shows, the storm passed far enough to the east of the oil production and refining assets in and along the coast of the Gulf of Mexico that energy supplies (or prices) should not be materially affected. Most of the marine terminals in the area began closing yesterday afternoon as a precaution, with the Panama city terminal under the most direct threat, while the marine terminals in Niceville and Freeport are in the relatively favorable position of being just west of the storm’s path which should (hopefully) minimize the storm surge effects.
The damage assessment continues at Irving’s St. John refinery after Monday’s explosion and fire. Gasoline markets seemed to have shrugged off the news since the fire was reported in a diesel-treating unit, and East Coast gasoline stocks are in ample supply. Diesel prices are finding some strength from the news as regional supplies were already at the lower end of their seasonal ranges, and if there was extensive damage to the hydro-treater it could be some time before the plant resumes normal ULSD production. That said, the largest supplier of fuel to several New England markets was at last report completely shut down, leaving state officials more worried about supplies than traders have been…so far.
The president told the EPA to waive RVP restrictions to allow year-round sales of E15 gasoline (no coincidence the announcement came on the same day as a planned trip to Iowa). Given the uncertainty surrounding engine warranties (aka lawsuits) with higher ethanol blends, this announcement may prove to be nothing more than an attempt to sway mid-term elections, but it does appear to have helped ethanol prices continue their pullback from multi-year lows, while RIN values continued on their slump as the prospect of more biofuel blending is bearish for the credits.
Energy Markets Trying To Figure Out Potential Impacts Of A Major Hurricane
It’s already been a volatile week of trading and it’s only Tuesday morning. Equity markets around the world are being roiled by trade concerns and rising interest rates, while energy markets are trying to figure out the potential impacts of a major hurricane and refinery fire.
After dropping nearly 2% to start the week, refined products rallied back to positive levels as news broke of an explosion and fire at Irving Oil’s 320mb/day refinery in St. John New Brunswick, Canada’s largest refinery, which is a major supplier of gasoline and diesel to the East Coast.
It’s unclear yet what impact that may have on fuel supplies and prices as it’s still unclear which units were effected, and how long they may be out of service. New York harbor basis values largely shrugged off the news since the largest units at the plant were already off-line for scheduled maintenance.
As the charts below show, New England (PADD 1A) may see the most impact from any downtime at the Irving refinery given its proximity to the refinery, relatively small size (only 7% of total PADD 1 gasoline stocks) and starting inventory levels that are within their seasonal range, albeit at the top end. PADDs 1B & 1C meanwhile are well above their previous 5 year ranges for gasoline inventories, and given their larger total capacity, which could explain the muted reaction in the NY Harbor trading hub.
While the East Coast of Canada was dealing with the shock of a major refinery issue, Western Canadian crude oil prices traded down to the $30/barrel mark for the first time since December 2016 as refinery maintenance in the US and a lack of pipeline capacity forces prices to record discounts of nearly $45/barrel to WTI and $55 less than Brent. For perspective, the last time WCS was trading at $30, WTI was at $44 and Brent was at $45, compared to $74 and $85 today.
Hurricane Michael is now a Category 2 storm, and is expected to become a Category 3 storm before making landfall along the Florida panhandle Wednesday. While several off-shore oil rigs have been evacuated as a precaution as the storm nears, its path keeps it far enough east that it should not have a lasting impact on energy supply infrastructure. The storm could have a larger impact on demand as it targets Florida, Georgia, and perhaps some areas of the Carolinas still recovering from Hurricane Florence.
The IEA continued with its series of analytical reports focusing on “blind spots” in the global energy system with a report on renewables Monday. The report estimated that renewables would account for 40% of total global energy consumption growth in the next 5 years, and while Solar capacity will see the largest increases, biofuels will remain the largest segment of renewable energy supply.
Energy Prices Selling Off Heavily To Start The Week
Energy prices are selling off heavily to start the week following reports that more Iranian oil may remain in the market after US sanctions take full effect next month. Two Indian companies placed orders for Iranian crude in November, and reports suggest the White House is at least considering some waivers on the sanctions in an effort to combat rising prices.
With a third day of selling after 3 weeks of gains, it’s time to look for technical support that could be the difference in a short term correction or a longer term change in trend. Peg the $72 area for WTI, $81 for Brent, $2.30 for ULSD and $2.00 for RBOB as good near term support layers that will be a good test of the bears’ mettle this week.
That system of showers in the Caribbean that was given a low probability of formation last week is about to become Hurricane Michael, and is heading for the US Gulf Coast later in the week. The good news for energy supply is that the current track keeps the storm to the east of the oil production and refining regions, so it should not have much impact to regional prices or inventories. As the EIA’s energy disruption map shows, there are currently no refineries in the forecast cone, and only a handful of off-shore oil rigs in the storm’s path.
Money managers trimmed back their net-length in Brent and WTI but added to the length in both RBOB and ULSD. The decline in Brent ends a 5-week streak of increases in bets on higher prices held by the managed money category of trader.
Baker Hughes reported a decline of 2 oil rigs in its weekly report on Friday, marking a net increase of 2 rigs for the summer of 2018 in the US. The total count is 116 higher than this time last year, but levels have stagnated as drillers shift to work around pipeline constraints. Right on cue, the latest in a slew of new pipeline options to take oil from the Permian is a converted natural gas line, that will temporarily haul crude until the other projects in the works come online.
Energy Prices Finally Saw Meaningful Pullback
Energy prices finally saw a meaningful pullback Thursday for the first time in 3 weeks. The complex was overdue for some selling as many short term technical indicators had moved into overbought territory as prices reached 4-year highs, although sharp drop in US stock markets took credit for some of yesterday’s decline.
While the sell-off knocked energy prices back 3% or more from the highs reached on Wednesday, prices remain in a longer term up-trend, and we’ll need to see at least another $2 taken out of oil prices, and a nickel of losses for refined products before the fall rally comes under real threat of being broken from a chart perspective.
The sell-off in equities has largely been blamed in a sell-off in bond markets, highlighted by a drop in US treasury prices that pushed 10 year treasury yields to their highest level in more than 7 years.
The good news for those that follow the theory that an inverted Treasury yield curve is a sign of a pending recession, is that the 2/10 year treasury curve has been moving lower as the 10 year yield has risen this week. That move is consistent with the idea that good economic data in the US is encouraging the increase in interest rates.
Right on cue, the BLS reported that the unemployment rate dropped to 3.7% in September, its lowest level since 1969. The “U-6” unemployment rate (which some argue is a more meaningful measurement than the “official” rate) dropped from 7.4% to 7.1%.
Today’s interesting read: The IEA published a report that predicts demand for plastic, not motor fuel, will drive global oil demand growth over the next 30 years.
Energy Futures Rallied To End The Day
After a soft start to Wednesday’s session, energy futures rallied to end the day, with Brent, WTI and ULSD contracts all reaching new 3 year and 11 month highs. We’re seeing a similarly soft start to today’s trading but the sellers seem cautious as the oil market has the feel of a bullish freight train that no one wants to step out in front of. The EIA weekly report surprised many with a large build in crude oil stocks that initially sent prices lower, only to see buyers step in as it seemed those increases were driven by the volatile nature of the import/export flow for oil in the US.
Oil stocks had their largest weekly increase of the year, rising just under 8 million barrels as export dropped sharply, which accounted for 6.4 million barrels of the increase.
Refinery runs offered a bit of a surprise, with rates rising in 4 out of 5 PADDS, and showing a small net increase of 77mb/day nationwide despite the expectations for a busy fall maintenance season. As the Refinery Run charts below show, we are still on the early side of the seasonal maintenance window, so it’s likely we’ll continue to see rates drop over the next 4 weeks. Midwest (PADD 2) run rates reached their lowest level in nearly 2.5 years, while Gulf Coast (PADD 3) rates continue to impress, running nearly ½ million barrels/day more than they’ve ever done this time of year.
There’s a glut of gasoline inventory in parts of the US that’s just not going away. Total US gasoline stocks held above their 5-year seasonal range this week, with another counter-seasonal build in PADD 1 inventories largely offsetting declines in the other 4 PADDs. The excess along the East Coast may account for the relative underperformance of RBOB vs the rest of the petroleum complex over the past few weeks. The reason for the excess in gasoline inventories is easily explained by refinery output that is holding above the high end of its 5 year range, while demand is stagnating near the 5 year average.
The storm system moving through the Caribbean is still given a 30% chance of development, although forecast models suggest it’s likely it will make it into the central to eastern part of the Gulf of Mexico next week. That’s good news for the refineries along the TX Gulf Coast, but LA refiners will have to watch for a few more days.
Oil And Diesel Futures Continue To Hold 4-Year Highs
Oil and diesel futures continue to hold near 4-year highs this morning after a choppy but aimless Tuesday session. The sideways action is common following a strong move like we’ve seen in the past few weeks as traders reassess their positions and begin to debate the next big move.
The API was said to report a build in crude oil inventories of around 900,000 barrels, while refined products drew about 1.7 million barrels for gasoline and 1.2 million barrels for distillates. The EIA’s weekly report is due out at its normal time this morning, with refinery inputs a key number to watch as we’ve seen sharp declines the past two weeks as a busy fall maintenance season ramps up.
The National Hurricane center is still giving a low (30%) probability that the disturbance in the Caribbean could develop into a serious storm. Even with the low odds, this bears watching through the weekend as the risks to energy infrastructure will go up quickly if it makes a move into the Gulf of Mexico.
A more interesting read than today’s market headlines? Bloomberg’s note on the drop in Kuwaiti oil shipments to the US.
Energy Futures Catching Their Breath
Energy futures are catching their breath this morning after a strong start to October trading saw WTI join Brent and ULSD at (close enough to) 4 year highs.
It seems like everywhere you turn there’s a new call for $100 oil, and very few bearish outlooks as the world struggles to find a solution to declining production in Iran and Venezuela. Perhaps the most bearish news is that everyone seems bullish, and as the trading adage goes, “when everyone’s on the same side of the boat, that’s when it tips over.”
The wild ride of crude oil spreads continues this week: If you want to buy Brent crude in Western Europe, it’s going to cost around $85/barrel. If you want crude oil in Western Canada meanwhile, you can get that for around $35. The spread between WTI in Midland and WTI in Cushing has tightened dramatically in the past few days as the new Sunrise pipeline has started taking barrels in West Texas as line fill as regular operations are scheduled to begin in the next few weeks.
The EIA published a note today showing how the crude oil being refined on the US Gulf Coast has become lighter over the past several years as new barrels from US shale plays displace imports. The changing crude slate is providing challenges to refiners both domestically and abroad as new projects are needed to optimize run rates, and may further complicate the upcoming marine diesel spec change in 2020.
While most of the tropical storm activity remains in the Pacific Ocean, far enough away from most energy infrastructure not to influence fuel prices, there is a new disturbance in the Caribbean that needs to be watched this week as it could get into the Gulf of Mexico by the weekend.
Energy Futures Picking Up Where They Left Off
Energy futures are picking up October trading right where they left off in September, with gains across the board and Brent crude and ULSD pushing 4-year highs.
The US and Canada reached an 11th hour agreement to join Mexico in a new version of NAFTA Sunday night.
Why should we care? The chart below shows that Canada has not only become the largest importer of petroleum to the US, it now surpasses the total imports of all OPEC nations combined. The dichotomy between Canada and Mexico is also on full display, as the two nations were roughly equal in sales to the US when the first NAFTA agreement was made, and today Canada is selling roughly 5 times more oil to the US than Mexico.
Money managers continue to like jumping on the Brent Bandwagon as the net long holdings of the speculative trader category rose for a 5th straight week, and the short holdings held by funds reached their lowest level since May of 2016. Money managers also added to their net length in ULSD and RBOB, while trimming back their holdings in WTI.
Baker Hughes reported a drop of 3 oil rigs in the US last week, continuing its 5-month trend of holding relatively flat, while Canada is seeing its annual drilling drop-off come early with a decline of 13 oil rigs for the week. Sticking with today’s theme, the chart below shows how drastically different the rig count between the two countries has become over the past 20 years.