News & Views
Energy Complex Pulling Back After Week Of Heavy Buying
The energy complex is pulling back today after a week of heavy buying. Profit takers are being blamed for the downward action seen in oil prices this morning but the US crude benchmark is on track for a ~4% gain on the week. It’s a similar story for heating oil futures, up just over 3% on the week, but gasoline prices are just about flat since Monday as traders position themselves ahead of the expiration of the summer-grade September futures contract.
The cone is shrinking: Hurricane Dorian’s projected path is focusing on the southern half of Florida’s east coast. It is still projected to make landfall as a category 3 storm, classified by sustained wind speeds of 111-129 miles per hour, sometime early Tuesday morning. The governor of Florida initially declared a state of emergency for 26 counties ahead of the storm, then revised it for the entire state’s 67 counties as heavy rainfall could be widespread.
Discretionary spending is likely to receive a bit of a boost this weekend. Gas prices at the pump are about 9% lower than they were this time last year due to slightly lower consumption and strong inventory levels. 2019 is also projected to be one of the busiest driving years since 1970 with miles driven expected to be over 3 trillion nationwide.
Positive sentiment surrounding trade talks between US and China, paired with this week’s bullish inventory report from the Department of Energy, has paved the way for higher short-term oil prices. Numerous technical resistance levels were blown through this week, leaving the door open for WTI futures to make a run at $60. The charts have a speed bump around $58 but, as we saw this week, positive headlines can make short work of chart signals.
Energy Complex Saw Buying Pressure
The energy complex saw some buying pressure yesterday as the DOE reported a large draw in national crude oil inventories caused almost completely by a drop off in imports. Climbing oil production and a pullback in refinery runs barely made a dent in the ~1.3 million barrel per day drop in imports, leading the metric’s total to the lowest level on record. While there’s speculation about a potential drop in US crude exports due to trade disputes with China, analysts are oddly quiet about the cause of the drop in last week’s imports, which could mean that number might be a fluke. WTI futures seemed lean towards the same conclusion after the report released yesterday morning, settling just 85 cents per barrel higher after an earlier gain of over 2 dollars.
Hurricane Dorian swept over Puerto Rico yesterday as a category 1 storm and is now headed to the US mainland via Florida’s east coast. Directional forecasts expect the storm to make landfall somewhere between Cape Canaveral and Palm Beach early Monday morning, possibly as a major hurricane (category 3). Almost all of the state’s refined product terminals lie within the forecast’s error cone; flooding due to heavy rainfall poses the biggest threat to local energy prices. Historically speaking September is the peak month for tropical activity in the Atlantic basin and this year it is starting off with a bang.
Oil prices are up slightly again today, looking to hold on to momentum gained from yesterday’s buying activity. It looks like the chicken or the egg conundrum while trying to assess whether equities are bolstering energy or vice versa. Currently oil prices seem to be the stronger counterpart in the equation as headlines can’t decide whether to be optimistic or cautious on the US economic outlook.
Sizable Draw In Crude Oil Inventories
A sizable draw in crude oil inventories as estimated by the American Petroleum Institute inspired after-hours buying in energy futures yesterday. After an already strong day, seeing gains of over $1 per barrel during the formal session, the reported +11 million barrel drop in national crude stores sent WTI futures another 90 cents higher as of this morning.
Tropical Storm Dorian is bearing down on Puerto Rico this morning and is expected to make landfall later this afternoon. Overnight developments have upgraded the storm’s forecast to probable hurricane status as it reaches the American mainland early Monday morning. The entire east coast of Florida and Georgia fall within the storm’s forecasted cone of uncertainty, marking any point along that portion of the seaboard as possible landfall destinations. The anticipated impact to energy infrastructure remains minimal as there are no refineries in the storms projected path however, as we saw last night, things can change quickly.
Likewise, yesterday’s Tropical Depression Six was upgraded early this morning and claimed the 5th named storm so far this season. Tropical Storm Erin’s estimated trajectory is now pointed squarely at Halifax, staying off the US East coast by about 150 miles. However, the estimated path has pulled further east over the last 24 hours which suggests it could still pose a threat.
Futures seem to be shrugging off a slew of bearish headlines going into mid-week: recession fears on lower treasury yields, the possibility of the return of Iranian barrels to the international market, and posturing by China that it expects trade trifles to continue. It will be interesting to see if any of these factors will take hold in energy prices if the Department of Energy’s weekly inventory report (due out at 10:30am CDT) disproves the API’s estimate.
Energy Prices Up This Morning
Energy prices are up this morning after the flurry of headlines from the G7 meeting saw futures up then down during Monday’s trading session. Aside from concerns over the Amazon rainforest fire and gossip surrounding the First Lady and the Canadian Prime Minister, a sit-down brokered by France’s Macron between the White House and Tehran is rumored to be in the works. The bearish economic implications of Iranian supply returning to the market have given way to doubt that any agreement will be reached between the US and Iran given that an entirely new nuclear deal will need to be in place before sanctions are lifted.
Tropical storm Dorian has formed on the outskirts of the Caribbean Sea over the weekend. The system is currently projected to make landfall on the east coast of Florida this Sunday but will likely remain a storm and anticipated impact to infrastructure is expected to be minimal. Another organized disturbance, currently designated as Tropical Depression Six, has formed overnight between the American mainland and Bermuda. This formation will likely strengthen into a tropical storm and make landfall in Nova Scotia or Newfoundland this weekend. Other than causing local disturbances, the storm will likely be a non-event for energy prices.
Futures bulls have a tough road ahead of them both fundamentally and technical over the next couple weeks. Despite the positive news surrounding a possible break and resolution to the US-China trade war, concerns over whether or not anything will come of the peace talks has sent Chinese currency to an 11-year low Monday. The charts don’t offer much hope either with myriad resistance levels presenting formidable opposition to higher prices in the short term.
Trade Teeter Totter Continues To Roil Markets
The trade teeter totter continues to roil markets with a new round of tariffs announced Friday morning sending energy and equity markets sharply lower, only to see a recovery rally this morning following reports that the US and China were returning to the negotiating table.
Fake News? After the overnight tweet about China wanting to make a deal sent equity markets sharply higher, and helped refined products turn 2 cent losses into penny gains, numerous other notes have surfaced suggesting that there has been no change in the official Chinese stance, and the phone calls may not have happened at all.
Keep an eye on corn and ethanol prices today after the US announced a new trade deal with Japan had been agreed to in principal, which includes a large increase in US corn exports. Ethanol & its RINs had already staged a nice recovery rally last week, and this latest bit of good news may help that upward momentum continue.
Iran claims it has sold the roughly 2 million barrels of oil onboard its tanker that had been held for weeks in Gibraltar, a move seen as trying to circumvent US intervention. Still no word on the British tanker that was seized by Iran in retaliation, although reports last week suggest it may also be released soon. Meanwhile, Israel attacked Iranian-linked forces in 3 different countries over the weekend, a stark reminder that the tensions in the region extend well beyond shipping lanes.
Tropical Storm Dorian formed over the weekend, and is on a path that could bring it to Florida next weekend. While models do suggest this storm may become a hurricane as it nears Puerto Rico, current forecasts suggest the storm will weaken due to dry air and wind shear, and may dissipate before reaching the US Coast. The other storm system known for now as 98L is still given 80% odds of developing this week, but is tracking off the US East coast and doesn’t currently appear to be a threat to land. Speaking of fake news: The US President is denying claims he suggested the country consider using nuclear bombs to stop hurricanes.
16 oil rigs were taken off-line last week, according to Baker Hughes’ weekly rig count, which brings the US total to a new 18 month low. The Permian basin led the decrease again, with 7 fewer rigs (a 1.5% decline in active rigs for that basin), while the DJ Niobrara basin in Colorado laid down 5 rigs, which amounts to a 16% reduction in just 1 week.
Money managers continue to seem uninterested in energy contracts, making small reductions in Brent and RBOB net length last week, while WTI and ULSD both saw small increases.
Quiet Overnight Session Quickly Shifted Into Heavy Selloff
A quiet overnight session quickly shifted into a heavy selloff for energy prices as a new round of tariffs announced by China seem to have spooked traders in both energy and equity markets, ahead of a much anticipated news conference from the FED Chairman later today.
RBOB gasoline prices were leading the move lower, down more than 4.5 cents at one point, and coming within about a penny of their August low trades. Diesel prices were also down more than 4 cents momentarily, but remain about 6 cents above its August (and June) low prints. The relative weakness in gasoline is also visible in the RBOB calendar spreads, with the U/V “sunburn” spread dropping to below 12 cents from a high near 18 in July, as traders appear to doubt demand for summer grades ahead of the fall RVP transition.
Ethanol prices, and the RINs associated with them have had a notable recovery rally this week as the Ag lobby has been out in force, pressuring the White House to increase RFS obligations on refiners. The EPA meanwhile has rebutted claims by renewable groups this week, suggesting there is “zero evidence” that the small refinery waivers has had a negative impact on corn producers.
The national hurricane center is giving a disturbance a 70% chance of developing over the next 5 days off the US southeast Coast, but current forecast models appear to keep this storm shifting East offshore after brushing the Carolinas.
Energy Complex Finished Mixed Yesterday
The energy complex finished mixed yesterday after a lackluster inventory report from the DOE. Crude oil stocks drew down just under 3 million barrels last week, about half a million barrels less than the API’s estimate. Diesel stocks rose over 2.5 million barrels and gasoline levels bumped by +300k barrels. Prices seemed to react the opposite as expected given the headline values with Crude oil losing about 50 cents on the day, RBOB and HO adding $.0127 and $.0030 per gallon respectively.
The Tanker Saga™ continues: after British forces in Gibraltar released an Iranian tanker earlier last week, reports had the transport headed to Syria via Greece, much to Washington’s chagrin. Military action seems to be halted as of now as Greece reports it will not help the tanker reach its intended destination, and ultimately assist the Iran Revolutionary Guard, easing tensions in the area.
Atlantic cyclone Chantal was downgraded to a tropical depression overnight and does not pose any threat of landfall at this time. While meteorologists only anticipate rough seas resulting from the latest named storm, attention now shifts to the Atlantic basin as a whole, ripe with warm water ready for tropical development, as we head into peak hurricane season.
If all the headlines about the persistence of an oil supply glut aren’t convincing enough, the Department of Energy announced yesterday that it will be selling 10 million barrels of crude oil out of the Strategic Petroleum Reserve by the end of August. While the liquidation is part of a mandatory sales program, set to sell 260 million barrels through 2027, the news seems to fall in line with multiple recent reports suggesting the world’s got too much oil going into 2020. It will be interesting to see how energy economics react, given its history of correction and even over-correction, as crude oil bulls (read OPEC), continue their push for higher prices. While that seems like a hopeless cause for the cartel, climate activists might lend an inadvertent hand in their cause.
Prices Up This Morning
Prices are up this morning after reports that the American Petroleum Institute is estimating a crude oil inventory draw of 3.5 million barrels last week, the first drawdown the API has reported in 8 weeks. Gasoline stocks likewise fell by just under half a million barrels but futures are nonetheless jumping in tandem with crude oil, bringing diesel futures along for the ride.
Tropical storm Chantal has formed out in the Atlantic over the past couple days, positioning to ride south along the eastern seaboard later this month, according to the EIA’s weather disruption tracker. Other reports are deeming the storm to pose no threat of landfall as it matures, estimating its formation to fizzle out to a mere depression over the next couple weeks. The energy industry will keep this development on its literal and figurative radar as it makes its way towards the American mainland.
Amid tanker seizures and drone attacks dominating the news out of the Middle East, focus is now shifting to the “countdown clock” used to describe the coming end to the weapons embargo on Iran. The UN’s sanction on arms sales to Tehran is scheduled to expire in October of 2020, 5 years after its adoption. An uptick in related activity could put buying pressure on energy prices, adding to the region’s uncertainty and, what some are deeming, turmoil.
Renewable Identification Number prices jumped yesterday as President Trump’s cabinet assured farmers that the worst is over after granting 31 small refinery waivers earlier this month. Ethanol RIN prices added 3 cents, up from ~10.5 cents on the news.
The Department of Energy’s weekly inventory report is due out at 9:30 CDT today and traders will be watching to see if it agrees with the API’s publication. Similar draws could bolster this morning’s bullish sentiment and set the tone for the remainder of this week’s trading, barring headlines from OPEC and the like.
Energy Traders Taking No News As Good News
Energy traders are taking no news as good news in the US-China trade spat: it was all quiet on the eastern front to start the week, boosting some buying in the energy and equities markets yesterday. Prompt month RBOB and HO contracts settled about 75 points and 2 cents higher yesterday while WTI added over $1.
Recession fears have waned for now on news that banks around the world, specifically Germany which lead the headlines yesterday, are prepared to implement stimulus programs to battle a global slowdown in economic growth. Aside from news arising that other national banks intend to follow suit, investors will be looking to the Federal Reserve’s minutes due tomorrow afternoon, to see if the US will shift its monetary policy as well.
The EIA published a note yesterday that the US overtook Saudi Arabia as the world’s largest petroleum producer in 2018. With a 16% increase in petroleum and a 12% increase in natural gas production in 2018, the US set a new all-time high combined production record. With the world’s largest oil cartel cutting 2019 projected demand and anticipating a 2020 supply glut, production break-evens will likely enter the conversation again if the oil markets are due for global rebalancing.
Yesterday’s report of another drone attack on a Saudi oil and gas field is taking credit for prices leaning to the higher side of unchanged this morning. Damage from the attack, thought to be staged by the Yemeni Houthi rebels, was limited to the plant’s natural gas processing unit and likewise had limited impact on energy prices. Barring surprise headlines, prices will likely wait for tomorrow’s inventory data release by the DOE and the Fed minutes to take a firmer stance on futures prices.
Energy Futures Starting Week With Modest Round Of Buying
Energy futures are starting the week with a modest round of buying as stock markets point to a strong open, giving a temporary reprieve on fears of a recession and allowing attention to turn towards new oil supply drama.
There was another drone attack on a Saudi oil field over the weekend that’s getting credit for early buying, although reports suggest that production was not affected.
The US attempted, unsuccessfully, to intervene and prevent the Iranian crude tanker from being released by Gibraltar. Now we’ll have to see if Iran releases the British ship it’s been holding captive in retaliation, or if it uses the US intervention as an excuse to change tactics yet again.
More bad news for Venezuela: reports this morning that China National Petroleum Corp, one of the last buyers remaining for Venezuelan crude, was suspending purchases due to US sanctions.
OPEC’s monthly report, released Friday, showed the cartel’s output dropping sharply again and reaching the lowest level of the past 5 years. Saudi Arabia continued to lead the cartel, accounting for more than half of the monthly decline, adding to less-voluntary reductions from Iran, Venezuela, Libya and Nigeria. The report also painted a weak picture for demand, with both global economic and oil consumption estimates reduced further over the past month.
Baker Hughes reported an increase of 6 oil rigs working last week, snapping a 6 week streak of declines. The total US oil rig count is still 99 below year ago levels.
Money managers seemed a bit unsure of themselves last week – which isn’t hard to understand given the volatility we’ve witnessed lately – adding to WTI net length, while cutting their long exposure in Brent, RBOB and ULSD. The drop in RBOB length was perhaps the most notable as it appears the large speculators are starting to bail out of gasoline bets a couple months earlier than last year, and unless we see something to disrupt supplies as driving season comes to an end, it seems like there could be more downside pressure to come on gasoline prices.
Energy Prices Fall On Recession Fears And Tariff Disputes
The weekly inventory report published by the Department of Energy yesterday helped temper Wednesday’s selling enthusiasm by undercutting the anticipated crude oil stockpile build, a precedent set by the API late Tuesday, and showing drawdowns in refined product stocks by 1.5-2 million barrels each. However, recession fears surrounding the US economy and further hostile comments out of China regarding tariffs kept the downward pressure on energy and equity prices, forcing refined product prices largely lower for the day. Gasoline futures lead the complex taking a 6 cent hair cut while lagged behind losing around 3.5 cents. European and American crude oil benchmarks fell in lockstep, both trading down 2.6%.
Despite Monday’s attempt by the White house to ease trade tensions among consumers ahead of the holiday season, China responded this morning stating the delay wasn’t enough to stave off retaliation. The news has sparked some additional selling this morning, pushing futures below where they started the week, wiping out Monday’s sizeable gains.
The recession signal triggered yesterday has since remedied itself for the time being, keeping further selling in equity markets at bay so far this morning. The 10/2 year yield rate is once again in positive territory after inverting yesterday morning for the first time since 2007. The worst may still be yet to come as data going back four decades indicates a recession typically follows a 10/2 inversion by about 2 years, on average.
Technical data has presented itself as a tricky read so far this month, with political and economic tensions whipsawing energy futures with the days’ headlines. RBOB seems to be on the precipice of a technical breakdown while sitting near 2019 lows. A break below some technical support showing up on the weekly chart would call for some heavy selling, resulting in the benchmark revisiting lows not seen since last winter. HO futures have a more tame outlook as they are set to test support about a dime lower.
Energy Prices Rebound
Energy prices are rebounding today after a week of bearish headlines stemming from tariff disputes with China and ominous economic indicators signaling ‘trouble ahead’. Prompt month RBOB futures are up nearly 2 cents while HO bumps about half a cent to start the day. Both American and European crude oil benchmarks are adding about 50 cents per barrel as well.
While the world’s largest oil cartel has been a stronger proponent for higher prices the last few years, OPEC released its 2H 2019 outlook for oil economics that paints a pretty bleak picture for prices. Noting the seemingly inescapable repercussions of the US-China trade debacle’s effect on global economies and further production increases by its rivals, the Organization anticipates another 1 million barrel per day production cut is needed to keep prices afloat.
Hurricane activity in the Gulf of Mexico and the Atlantic Ocean remains quiet going into the second half of August but that may change soon. Weather constraints known to inhibit cyclonic activity, such as Saharan dust, wind shear, and dry air, are anticipated to diminish over the coming weeks, opening the window for tropical disturbances.
The latest installment of the Iranian-directed Tanker Saga™ has Gibraltar, a British territory off the south coast of Spain, releasing a seized oil transport in hopes Tehran will release one of Britain’s in return. While the economic impact of two vessels returning to market has little impact on the global supply situation, the gestures, seemingly carried out in good faith, could ease tensions and inspire buying in oil markets.
Energy Complex Selling Off After Seeing Heavy Buying
The energy complex is selling off this morning after seeing heavy buying yesterday. The White House announced a delay in the implementation of a 10% tariff on Chinese manufactured consumer goods (electronics, toys, etc.) in order to keep from disincentivizing a strong holiday season for businesses and shoppers. The news incited a strong stock market rally and with it gains of over 7 cents to each refined product prompt month futures contracts and $2.50-$3.00 to both US and European crude oil benchmarks.
Both equity and energy prices are pulling back this morning, each giving back half, if not most, of yesterday’s gains. Equities traders are running for the exit as the it was reported that the 10/2 year treasury yield curve has inverted this morning, signaling a recession might be on the horizon. That, combined with the API’s surprise build in crude oil stocks last week, has sent energy futures sharply lower. RBOB and HO prices are down about 4 cents to start the day with WTI down $1.50 in lock-step.
Renewable Identification Number prices seemed to have stabilized after the EPA granted 31 small refinery waivers earlier this week. The news took RINs down to a new 2019 low around 11.5 cents.
Complex Managed To Shrug Off Sell-off In Equity Markets
It’s another quiet start for energy futures Tuesday after the complex managed to shrug off a large sell-off in equity markets to start the week, with rumors of a new OPEC production cut getting credit for the relative strength. WTI did manage to trade north of $55 overnight before pulling back this morning, marking a 9% bounce from last week’s lows.
While petroleum prices were going nowhere Monday, corn prices had their worst sell off in more than 5 years, trading limit-down (25 cents/bushel) after the USDA reported more acreage planted than had been expected due to widespread flooding this spring. Ethanol prices fell 8 cents in sympathy. RIN values continued to slide following Friday’s EPA announcement of 31 approved small refinery waivers, although it’s worth noting that 6 applications were rejected this year, the most in 3 years since a federal court ruled how the waiver should be applied, which lowers the total amount of fuel exempted from the RFS.
The EIA’s monthly drilling activity report is projecting further increases in shale output in September, which should bring total US production to a new all-time high despite the reduction in active drilling rigs. The “DUC” count remains north of 8,000 wells, which means production can continue to grow for months, even with fewer rigs at work.
Feeling the heat? You’re not alone. Texas set a new record for electricity demand this week, and electricity prices saw a huge spike that show one of the downsides of the state’s recent reliance on wind farms.
Pessimism Taking Charge Of Trading
Pessimism is taking charge of trading to start the week, with fears of a global economic downturn taking credit for an early sell-off in both equity and energy markets. The moves are relatively small compared to what we’ve seen over the past couple of weeks however, and so far refined products are holding about a nickel above their August lows.
A Bloomberg article over the weekend makes an argument for why the negative sentiment for oil demand will only get worse after the EIA and IEA both reduced consumption estimates last week. While Reuters notes that suppliers are already posturing for another production cut to try and prop up prices.
Baker Hughes reported 6 more oil rigs were taken off-line last week, a 6th consecutive weekly decline that brings the total US oil rig count to an 18 month low. The reduced drilling activity is bad news for pipeline operators that suddenly find themselves with excess capacity after years of being maxed out as new production came online. The Dallas Fed also noted the slowdown in manufacturing activity which is largely tied to the energy sector.
Money managers remain cautious, making only small changes to their net-long holdings of energy contracts last week. The total speculative length remains well below levels we saw in each of the past 2 years.
The world’s largest oil producer, Saudi Aramco announced plans to acquire a 20% stake in Reliance industries, owner of the world’s largest refining complex.
The EPA announced that it was approving 31 exemptions for small refineries for the 2018 renewable fuel obligations, sparking the latest round of heavy selling in RINs.
Energy Complex Bouncing For Second Day
The energy complex is bouncing for a second day so far this morning. Gas and diesel both posted 2+ cent gains yesterday and seem content to do the same today. As admirable as the rally seems, both contracts have almost a dime to go if they want to reverse this week’s losses.
Production concerns arising out of the majority of shale basins helped fuel the buying pressure seen over the past couple days. While the possible shortage of future crude supplies might seem like a pressing issue worthy of fear-based buying, the fact that oil production has set several new all-time highs in 2019 might keep the bulls at bay.
Despite the 2-day bounce in petroleum futures, lackluster demand growth concerns, posited first by the EIA (Energy Information Administration) then by the IEA (International Energy Agency), still overshadow prices going forward. Regardless of momentum, or reversal thereof, commodities tend to lose their value if no one wants to buy them.
Refined product charts look to be on the precipice: both RBOB and HO prompt month futures are staring down their 200-week moving averages, one of the last technical bastions keeping both contracts from seeing further downward action. $1.65 seems to be the threshold to beat for RBOB prices with $1.30 as the prize if broken. HO has a similar story if not muted with $1.72 as the next support level to break, a price not seen since December of last year, which could possibly lead to the mid $1.60s.
Heavy Selling In Energy Futures
A surprise across-the-board build in crude oil and refined products inventories incited some heavy selling in energy futures yesterday. Both gasoline and diesel prompt month contracts dropped about 7 cents while America and European crude oil benchmarks dropped over $2 per barrel. Crude stocks broke its 7-week trend of decreasing inventories, but inventory levels in Cushing, the delivery point of the NYMEX futures contract, continued its decline for the 5th week in a row.
And then it was gone: the last 4 weeks of refinery production decreases, spurred by the closing of Pennsylvania’s largest refinery, have been made up and then some as throughput rates jump to seasonal highs. While PADD 1 rates remain low, around 10% lower than they were in May, throughput in every other PADD jumped to highs not seen at this time of year.
While published fundamental data typically sets the tone for energy trading during the week, it seems this week’s early selling on recession fears marked pace and the DOE report fanned the flame. Multiple central banks cutting rates, a US treasury yield curve teetering on inversion, and gold prices hitting a 6-year high have the markets nervous a recession is on its way, sooner rather than later.
Prices are bouncing this morning, taking a breather from the almost overwhelming amount of selling pressure seen in the last week: both RBOB and HO futures have lost over 20 cents in their last 5 trading sessions. While some attribute the upward action seen today to Chinese currency strength or expectations of an oil supply cut, one can’t help but think this is only a temporary reprieve before seeing further selling.
Energy Complex Continued To Fall Yesterday
The energy complex continued to fall yesterday, wiping out early gains that positioned futures for a bounce. Tuesday’s price action saw refined product benchmarks break away from equities markets, which staged a recovery rally after Monday’s brutal selloff, and are now approaching June lows this morning in pre-market trading. Prompt month RBOB futures are down almost a 2 cents while HO has shaved off over 3 cents.
The American and European crude oil benchmarks seem to be leading energy prices lower this morning, both off around $1.20 and $.85 cents per barrel, respectively. Today’s selling seems to be a product of momentum trading with no new headlines guiding prices lower and major technical support levels within reach of being tested.
The EIA released its monthly Short-Term Energy Outlook report yesterday, confirming lower oil demand estimates for the rest of 2019 and 2020. While the global oil supply glut may have hid from traders for a time, overshadowed by overseas tensions and OPEC production cuts, or talk thereof, it seems that fundamental state of more supply than demand has now returned to the foreground and has incited selling pressure.
The American Petroleum Institute estimates a crude oil draw of around 3.5 million barrels last week which, if confirmed by the Department of Energy’s inventory report due out at 9:30am CDT, would send national stocks down for the 8th week in a row. Likewise gasoline inventory is expected to move lower by just over a million barrels while diesel stocks are estimated to build by the same amount.
Equities Weighed Heavy On Energy Prices
Equities weighed heavy on energy prices yesterday in what was the worst day of the year for stocks. The Chinese government devalued its currency yesterday, placing it at a 7-to-1 disadvantage to the US dollar for the first time in 10 years. This is the latest move by the People’s Republic in an ongoing trade spat between the two largest economies in the world, currently with no end in sight. Whether or not the official stance by the US Treasury, labeling China as a currency manipulator, is just an extension of the President’s twitter account is yet to be seen.
Speaking of Trump Tweets, it seems that the public’s direct line to the president’s thoughts have a more profound impact on oil prices than the soap opera unfolding in the Strait of Hormuz. It seems that traders are more concerned about second half 2019 oil demand and global trade disputes rather than Middle East tensions that may turn out to be much ado about nothing.
The tropical weather radar remains clear after Friday’s storms with strong signs of development disappeared over the weekend. While this year’s Atlantic hurricane season is still predicted to be in line with that of years past, there are no cyclonic developments anticipated for the foreseeable future.
Refined product prices took a tumble yesterday with RBOB and HO prompt month contracts each taking a ~3% haircut. The complex is bouncing back this morning with each product up about a penny in what looks like a repeat of last week’s Thursday-Friday move: big losses followed by shallow gains. Traders will be watching today’s action carefully to see if the rally is a sign that energy prices are flattening out or if this is another dead cat bounce with further selling on the horizon.
Energy Prices Selling Off This Morning
Iran was busy this weekend, capturing yet another oil tanker, this time near Farsi Island in the Persian Gulf. According to Iran the ship was seized on allegations of smuggling fuel. While initially suspect, that claim seems more likely given the small ship was carrying less than 4,000 barrels of fuel and Iraq’s oil minister has denounced any connection with the ship. The headline of another ship being held by Iran seems bullish outright, but the details surrounding the detention have rendered it a non-event.
Energy prices are selling off this morning. Both refined product prompt month contracts are down almost 3 cents in pre-market trading, WTI and Brent benchmarks are likewise down almost $1 each.
The Atlantic quieted down significantly over the weekend, going from two possible tropical development areas to none. The more daunting of the two, a tropical disturbance the National Oceanic and Atmospheric Administration reported Friday to have a greater than 60% chance of development over the next five days, that have been heading towards the Gulf in a couple weeks, has since dissipated. No tropical cyclonic development is expected in the next 5 days.
Baker Hughes reported a decline in US oil and gas rigs for the 5th week in a row, bringing the active total oil production platforms to 770. Thursday’s massive selloff, some seeing as the harbinger for lower prices, could add more pressure to close rigs in the short term.
Tough Start To August Trading Turned Ugly
A tough start to August trading turned downright ugly for energy markets Thursday, with refined products wiping out two weeks of gains in what was the biggest day of selling in more than a year. The big news of the day was when President trump announced a new round of tariffs on Chinese goods, that moved the trade war from the back burner to the front as China has already warned of retaliatory moves.
Before the tweet stock markets had been rallying, taking back most of the post-FOMC losses, but quickly joined energy prices in a heavy wave of selling, highlighted by a 600 point intraday drop in the DJIA. In other words, equity and energy traders seem to have voted quite strongly that the only thing Trump’s trade twitter tirades are good for is alliteration.
The good news for those wanting higher energy prices is that a recovery bounce is underway, taking back about 1/3 of Thursday’s losses. There’s an interesting pivot point on the chart right around current levels that acted as resistance during June’s rally, and as support during July’s early selloff, and seems like a natural landing spot for prices to consolidate while they wait for the next shots to be fired in the trade or tanker wars.
The longer term charts meanwhile are showing triangle formations in most of the petroleum futures contracts that suggest there’s going to be a much larger price move coming this fall once one of those converging trend lines breaks, although which direction that breakout will take is unclear although product charts seem to be giving slight favor to lower prices, while crude charts are mixed.
The July non-farm payroll report showed 164,000 jobs added during July, with the official unemployment rate holding steady at 3.7 percent, while the unofficial “U-6” rate dropped to 7%. This report was about average for 2019, and the market reaction has been muted so far. Equities dipped briefly after the report which pulled energy prices back from their highs of the day, but both asset classes have since stabilized.
Energy Markets Starting August Trading With A Thud
Energy markets are starting August trading with a thud, with crude prices down a dollar or more and products down 3-4 cents, as disappointment in the FED seems to be outweighing inventory draws reported by the DOE.
The FED did announce its first interest rate cut in a decade Wednesday, but financial markets threw a small tantrum that it was only 25 points, and perhaps more importantly that the FED chairman said this was not the first of many. That late selling in equities carried over into the energy arena as product prices dropped 1-2 cents post settlement, and that weakness carried through the overnight session. One other reason for concern in the FED’s rate cut: Look at the chart below and note that more often than not, when the FED starts cutting rates, there’s a recession in the not-too-distant future.
Dramatic video of an explosion at the Exxon Baytown refinery – the 3rd largest refinery in the US – had futures and cash markets rallying briefly Wednesday morning. When it was discovered the fire was contained to the chemical plant section of the refinery and that gasoline and diesel production may not be affected however, prices quickly settled back down.
Notable items from the DOE weekly status report:
US crude production bounced back by 900,000 barrels/day last week as rigs shuttered by Hurricane Barry came back online. The total is now just 100,000 barrels from the all-time high.
US petroleum demand estimates dipped on the week, but are holding above their seasonal range. The EIA also announced that electricity demand had reached a two year high this week as a heat wave swept across the US, which could bring some much-needed incremental diesel demand to supplement traditional power generation sources.
A big deal was announced Wednesday when the UK’s EG Group announced its planned acquisition of Cumberland Farms’ C-Store Chain, after buying Kroger’s C-Stores last year. An interesting side note to this story, the British pound has been plunging recently, largely due to Brexit concerns, which means the actual purchase price for the acquirers may be rising rapidly even though the dollar amount isn’t changing.
Two storm systems continue to churn in the Atlantic. The first still looks like a non-event, but the second is now given a 70% chance of developing over the next 5 days. That system – known for now as 96-L – will need to be watched over the next week as there is a window in which it could be steered towards the US.