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Thursday, Jan 31 2019

Energy Prices Moving Higher For 3rd Day

Energy prices are moving higher for a 3rd day to start Thursday’s session, with momentum from some bullish data points in the DOE report, and a market-friendly FOMC statement carrying through from Wednesday’s session. Prices are once again within striking distance of their December highs, which capped the last rally attempt, and look to be the difference between this rally lasting a few days, and it lasting a few weeks.

A little Patience from the FED went a long way in financial markets, with US equity markets surging after the central bank sent a strong signal that it would not rush further monetary tightening. Monday the CME’s FEDWATCH tool showed roughly a 20% chance of at least 1 more interest rate hike in 2019, and a 10% probability of a decrease. This morning, after the “patience statement”, there’s a 5% chance of an increase, and a 20% chance of a decrease in the next 12 months. You can argue whether or not this is good for the economy as a whole, but it’s hard to argue that more accommodative monetary policy is anything but good news for stock markets.

Reports (also known as rumors) that the White House was considering a release of the US Strategic Petroleum Reserve to counter any negative effects from the Venezuelan sanctions suggest the administration has a much better handle on how to work the media than they do an oil refinery. In reality, if the rumors manage to take the steam out of the rally in oil & products futures, that would seem to be a mission accomplished, even if there is a negative impact to Gulf Coast refiners.

Speaking of which, while much of the focus is on potential fall-out with Citgo and its 2 Gulf Coast refineries due to sanctions, it was Citgo’s Chicago-area headline that had the most market impact Wednesday, when reports of a reduction in processing rates due to extreme cold sent Chicago gasoline prices up nearly 10 cents on the day.

Speaking of refinery run cuts: The headline drop of 586,000 barrels/day of refinery throughput seemed to catch some traders off-guard based on the strong reaction in refined product prices after the report. Then again, even after the 3.4% drop during the week, refinery runs are still 450,000 barrels/day higher than they were this time last year…and last year’s figure was a record high for the 4th week in January.

Unbelievable? The weekly gasoline demand estimate from the DOE surged nearly 8% last week, and at 9.56 million barrels/day is ½ million bpd higher than this time last year, and is at a level historically only witnessed during the summer driving season. Considering the numerous anecdotes about gasoline consumption slowing last week on the heels of 2 winter storms. Read the methodology notes from the EIA if you need a reminder why the weekly estimates are not reliable as a true indicator of actual consumption. If the theory that implied demand spiked as secondary fuel inventories were stockpiled ahead of the storm, we should see a large correction in the estimate in the next 2 weeks.

CLICK HERE for a PDF of today's charts

Market Talk
Wednesday, Jan 30 2019

Energy Futures Moving Higher For 2nd Day

Energy futures are moving higher for a 2nd day, and most contracts in the petroleum complex have now wiped out Monday’s heavy losses as the uncertainty over Venezuela and optimism in US stocks both seem to be helping encourage buyers.

While most of the oil market chatter continues to revolve around Venezuela, the correlation between energy and equity markets continues to be strong, so it seems the early boost in stocks on the backs of some positive earnings reports is aiding in the bounce in petroleum futures.

Unlike when sanctions were placed on Iran last year, Saudi Arabia is not rushing in to offset any potential lost production from Venezuela, at least according to some reports. Whether or not that holds true, and how much extra oil may be needed, is just a guess at this point, and anyone who says differently is probably trying to sell you something. Assuming there will be some drop off in heavy oil supplies for Gulf Coast refiners, that’s just more bad news as most are already struggling with an excess of gasoline while trying to maximize their diesel output.

Speaking of which, diesel prices led the move higher Tuesday, ending the day up around 6 cents after several utilities from the Great Lakes region to the East Coast notified customers of natural gas curtailments due to the winter storm, sending buyers scrambling for heating oil. The rush may prove short-lived however as above average temperatures are forecast for the weekend, which may explain why natural gas futures continue to slide even while spot supplies are tight in several markets.

The API was said to report another week of inventory builds across the board, with crude and gasoline stocks up more than 2 million barrels, while distillates were up just over 200,000 barrels on the week. The DOE’s weekly status report is due out at its normal time this morning, and based on the strength in basis values across many spot markets since bottoming out early in January, (not to mention the weak margin environment) it seems likely we’ll see refinery run rates cut back further in this report.

CLICK HERE for a PDF of today's charts

Market Talk
Tuesday, Jan 29 2019

Traders Digest Impacts Of New Oil Sanctions

Energy futures are bouncing this morning as traders try to digest the impacts of new oil sanctions, after a heavy wave of selling Monday pushed prices below the floor of the trading range that’s held for the past 2 weeks. Diesel prices are leading the move higher this morning (up 3 cents at the moment vs ½ cent for gasoline) as yet another major winter storm sweeps the country and boosts heating demand.

While the extreme cold temperatures are likely to cause issues at terminals across the Eastern half of the country (vapor recovery units are especially vulnerable to extreme cold) the market reaction suggests there’s more concern about a negative impact on gasoline demand than there is about a disruption to supplies. Midwestern gasoline cash markets dropped below their Christmas eve lows during Monday’s sell-off, even though futures are still about a dime higher than their December floor.

The big news Monday afternoon was that the US will be imposing sanctions on Venezuela’s oil industry, in an attempt to force a transfer of power in the country. While the sanctions aren’t officially an embargo, they will act like one if the current leadership doesn’t relinquish control.

Citgo is allowed to continue operations in the US and oil on the way to the US that’s already been paid for will be left alone, but new oil purchases will be required to be done through “blocked” accounts that will be held until the regime change is complete. Product sales to Venezuela will be limited according to the Treasury secretary, but the details of those restrictions were not made clear.

Oil prices did not have a dramatic reaction to the news, although it seems to be helping limit any additional downside after Monday’s big sell-off. The feeling seems to be that there’s plenty of oil around, particularly with US refiners heading into maintenance, even though localized shortages of heavy crude are an ongoing concern.

The FED kicks off a 2 day Open Market Committee (FOMC) meeting today. According to the CME’s FEDWatch tool, traders are giving a zero percent chance of interest rates changing as a result of this meeting. It’s worth noting that based on where treasury futures are trading, there’s a 23% probability of at least one more interest rate increase in 2019 priced into current values, but also a 10% probability of a 25 point reduction in the FED’s interest rate target by next January.

Meanwhile, the Dallas FED reported accelerating growth in Texas Manufacturing in its monthly survey. Another positive sign for long term manufacturing in the state? Exxon reportedly approved plans to nearly double the size of its Beaumont TX refinery, which would make it the largest plant in the US when work is completed around 2022.

The EIA offered some more color to its Annual Energy Outlook projections made last week in a new note this morning detailing how the US will become a net exporter of energy in 2020.

CLICK HERE for a PDF of today's charts

Market Talk
Monday, Jan 28 2019

Energy & Equity Markets Are Sliding

Energy & Equity markets are sliding Monday morning, after a sigh-of-relief rally Friday when the US Government reopened temporarily, proved to be short lived. For petroleum contracts, this sell-off pulls prices well away from the December highs they were threatening last week, and the failure to break out leaves us in technical limbo.

This is scheduled to be a busy week for headlines with quarterly earnings reports coming out, a FED meeting, along with more Brexit & Chinese trade talks. For the energy markets this very well may mean more back and forth trading as there appears to be a lack of conviction in either direction.

Baker Hughes reported an increase of 10 oil rigs working in the US last week, reversing a 3 week trend of rig count declines. Perhaps more interesting is that while Texas led the rig count charge in 2018, the lone star state has seen its drilling activity slow for the past 3 weeks, while North Dakota and New Mexico have been increasing over that span, and accounted for the majority of last week’s increase.

We haven’t seen a CFTC commitments of traders report since the week of December 18 due to the government shutdown, but if you make an inference based on what ICE reports on Brent, not to mention the strong price rally to begin 2019, it’s safe to say the speculators are dipping their toes back in the water, with open interest and managed money net length both increasing for a 3rd week.

Today’s interesting read has a lot to do with the activity of those speculative funds: Dr. Philip Verlager explains why projections for increased oil production from shale may be overestimated due to cash flow concerns.

Today’s not-so-interesting read: The EIA’s report on US distillate consumption in 2017. Not only is the data going on 2 years old, the report offers little insight into the drivers of consumption trends.

CLICK HERE for a PDF of today's charts

Market Talk
Friday, Jan 25 2019

A Great Deal Of Uncertainty

There is a great deal of uncertainty these days, whether it be from trade talks, the government shutdown, or geopolitical unrest. Many times in years past, and even in the first few weeks of 2019, uncertainty such as we’re seeing now would lead to great bouts of volatility in oil & refined product prices. The past two days however, it feels like there’s so much confusion as to what might come next, that traders have just stopped guessing and fuel prices are going nowhere.

From a technical perspective this back and forth action that ultimately goes nowhere leaves indicators in neutral territory, so until we break out of the December trading range (either to the upside or down) don’t expect any consistency in daily price changes. From a seasonal perspective, there is a strong history of seeing prices rise as we approach spring – particularly for gasoline - so if I had to make a bet on which direction we will eventually break, my SWAG would be to the upside.

In its annual Energy Outlook the EIA is projecting (not predicting) that the US will become a net energy exporter in 2020, and that continued gains in energy efficiency will keep domestic demand relatively flat despite a growing economy. The report also provides estimates on how the upcoming IMO diesel spec changes will impact fuel usage and refinery operations. The entire 165 page report is an interesting read for anyone in the industry (and required reading for the employees of TACenergy) but it’s hard to imagine the government employees working without pay will see the value in federally funded projections of oil consumption in 2050 this week.

Yesterday’s EIA weekly status report was largely shrugged off at least in terms of market reaction. The most notable point from the report was that total US Gasoline inventories reached a new all-time high. What’s more important for those in the industry however is that record was set while the western half of the country is seeing below-average stockpiles, meaning the glut of gasoline East of the rockies is becoming a serious issue that could ultimately force some refiners to cut back on production.

Click here to download today's Market Talk Update PDF >

Click here to download the EIA Annual Energy Outlook PDF >

Market Talk
Thursday, Jan 24 2019

Energy Futures Slipping Modestly Lower

Energy futures are slipping modestly lower to start Thursday’s session, weighed down by reports of more large inventory builds in the US and new concerns over the Chinese economy (the largest energy importer in the world) slowing down.

Those bearish influences seem to be outweighing new turmoil in Venezuela, although prices have had a hard time making up their mind this week, and continue to bounce back and forth within their recent trading range, so a mid-day reversal would not be surprising.

The API was said to show large inventory builds across the board last week of more than 6.5 million barrels of crude oil, 3.6 million barrels of gasoline, and 2.5 million barrels of distillates. Futures prices had been having a strong afternoon Wednesday, bouncing again off early morning lows, but were knocked back down after the API data was released.

The Venezuelan saga took a dramatic turn Wednesday as a new self-appointed President was recognized by several foreign countries, including the US, and large demonstrations broke out opposing the current regime. Even though Venezuela has more proven oil reserves than any country on the planet, oil markets seemed to shrug off the news.

It’s certainly possible that an attempt at regime change could be bullish near-term as it puts the country’s last million barrels/day of production at risk, but it could be bearish long term if a more competent government can restore production to previous levels near 3 million barrels/day.

Short term it’s US Gulf Coast refiners that could see the biggest impact from a drop in Venezuelan crude exports, as those heavy barrels have few natural replacements, and could mean either paying a hefty premium for an ideal replacement, or having to reduce run rates if one can’t be found.

Speaking of Gulf Coast Refiners, spot markets have been behaving as though there’s suddenly a shortage of products coming from the US refining hub. Both gasoline and diesel basis values for Gulf Coast origins are up a nickel or more in the past few weeks suggesting that there’s either been a healthy export demand to offset lackluster domestic consumption, large reductions in refinery runs, or perhaps both. We’ll find out which it is at 11am central when the DOE’s weekly status report is released.

In addition to the normal weekly report, the DOE/EIA is also releasing its annual energy outlook later this morning. No surprise here, the report is reported to project growing domestic production for Oil, Natural Gas & Renewables in the coming year.

CLICK HERE for a PDF of today's charts

Market Talk
Wednesday, Jan 23 2019

Oil Prices Moving Higher After Bouncing Sharply

Oil prices are moving higher this morning after bouncing sharply off of early morning lows Tuesday. It appears that both WTI and Brent are following the moves in equity markets that are shifting from global recession fears one moment to hopes for new fiscal stimulus the next.

Diesel prices seem to be following the lead of oil, erasing all of Tuesday’s early losses, and seeing additional strength in most US cash markets (see the Gulf Coast ULSD basis chart below) as demand rebounds from the holiday lows. Gasoline prices continue to lag however, giving back overnight gains after losing more than a nickel Tuesday as another demand-sapping winter storm makes its way across the country.

There remains a great deal of uncertainty around US drilling activity in 2019 with oil prices bouncing back and forth around break-even level for several of the country’s largest shale plays. Schlumberger gave a mixed outlook for 2019 as part of its earnings release Tuesday, suggesting the recent price collapse has forced some firms to cut back on new spending.

There have also been concerns raised that with hedge funds bailing out of energy contracts that hedging for oil producers may become more costly if a lack of speculative longs reduces liquidity. Whether or not that’s true is a hard case to prove under any circumstances given the various and nuanced ways of hedging oil output, and downright impossible currently since we aren’t receiving CFTC data during the government shutdown.

That said, the forward curve charts below show that 2 & 3 year forward values for WTI and Brent have been moving lower over the past week even while prompt prices continued to rally, suggesting that producers may have been using the new year rally as an opportunity to lock in prices for their future output.

CLICK HERE for a PDF of today's charts

Market Talk
Tuesday, Jan 22 2019

Recovery Rally Taking Step Backward

The recovery rally in energy & equity markets is taking a step backwards to start Tuesday’s trading session as recession fears seem to have crept back into the headlines after several weeks of optimism. As the charts below show, the two asset classes continue to trade in close formation on a daily, and often hourly basis.

Negative economic data seems to be the major theme driving the headlines today. The IMF sent a warning shot Monday when it lowered its global growth forecasts for 2019, and noted additional downside risks to the global economy. China reported its economy is still growing, but its rate of growth (estimated at 6.6% in 2018) was the slowest in nearly 3 decades.

More to the story? While we can’t see the Commitments of Trader data from the CFTC during the government shutdown, there are reports that the liquidation by money managers we saw during the 4th quarter price melt-down may be have been driven by poor-performing energy hedge funds closing their doors, rather than just getting out of the way. That begs the question of whether or not funds will play a lesser role in the market going forward, or if this is just the latest swing of the pendulum in a wildly cyclical marketplace.

The EIA continues to flex its federal funding this week, publishing a new report on its detailed tracking of power plant fuel inventories, including their petroleum backup supplies. Speaking of which, despite a surge in power demand from the winter storm and subsequent cold snap that’s gripped much of the country, distillate prices have not seen any notable spike, and natural gas prices are tumbling this morning, suggesting limited impact on supplies compared to previous years.

CLICK HERE for a PDF of today's charts

Market Talk
Monday, Jan 21 2019

Quiet Start For Energy Futures

It’s a quiet start for energy futures as the MLK Day holiday has banks, schools and spot markets closed meaning many market participants are taking the day off. Due to the global status (not to mention earnings expectations) of the CME Group, NYMEX energy contracts will trade until noon today, but settlements will not be posted until tomorrow.

A strong Friday session pushed futures to the edge of a technical breakout, with most petroleum contracts just a few ticks away from their December highs. If they can break and hold above those levels, there is a strong technical argument to be made for higher prices, even though fundamental factors don’t appear to be nearly as supportive.

Baker Hughes reported a decline of 21 oil rigs in the US last week, the largest weekly drop since February 2016. The total rig count of 852 is still 105 more rigs than were drilling this time last year, but could be a signal that drilling may slow down for a while, at least until the backlog of drilled but uncompleted wells (aka DUCs) gets worked through. If that happens, we could see US production continue to climb even with rig counts decreasing.

Money managers added to the net-long holdings in Brent for a 2nd straight week, but the total amount of speculative funds betting on higher oil prices remains far below the past several years, according to the ICE commitments of traders report. While the CFTC is still not publishing COT data due to the government shutdown, it seems reasonable to think that large funds may be following a similar pattern for NYMEX contracts, dipping their toes back in the speculative pool after energy prices finally seem to have bottomed out.

CLICK HERE for a PDF of today's charts

Market Talk
Friday, Jan 18 2019

Back And Forth Continues

The back and forth continues after Thursday’s early sell-off was rejected and prices have trickled higher overnight. With the latest bounce we’re just 1 strong day away from the December highs, and if those levels are broken, we could see another 10% increase in short order.

The IEA released its monthly oil market report this morning, and is holding both its supply and demand forecasts steady for the next year. The agency is suggesting that the OPEC & Russia cuts have put a “qualified” floor under the oil market, but recognizes that, “…the journey to a balanced market will take time, and is more likely to be a marathon than a sprint.” That’s a good reminder why it pays to watch weekly charts, rather than just shorter term charts, to avoid getting caught up in the noise.

While the IEA is projecting the US will take the crown of the world’s largest oil producer this year it’s monthly highlights end on a bit of an ominous note. The agency is expecting the largest increase in global refining capacity in 40 years amid already weak gasoline margins, soft demand, and uncertainty over the IMO’s diesel specs. “By the end of the year, all industry players, upstream and downstream, may feel as if they have run a marathon.”

Another headwind for several US refiners: Their built in head-start from cheap Canadian imports seems to be going away.

Western Canadian crude prices have stormed back from a $13/barrel quagmire 2 months ago, to trading around $43/barrel this week, marking the smallest discount to WTI in nearly a decade. The mandatory output cuts announced by Alberta and additional rail outlets are getting credit for the increase, although the high run rates by US refiners in the mid-continent are no-doubt helping the rally as well.

Another factor that helping drive up the price of Canadian heavy grades are the potential sanctions on Venezuela that is reported to have Gulf Coast refiners scrambling to find similar grades to keep their refineries running as planned.

Keep an eye on the FERC investigation announced this week into 3 natural gas pipelines. While this won’t have any impact on crude or refined products near term, the long-term implications for pipeline operators could continue to shake up the midstream industry.

CLICK HERE for a PDF of today's charts

Market Talk
Wednesday, Jan 16 2019

Energy Futures Slipping Into Red

Energy futures are slipping marginally into the red to start Wednesday’s trading after a strong showing Tuesday as more soft fundamental data for refined products seems to be countering a sigh of relief in global equity markets after the Brexit defeat was largely shrugged off by investors.

The API was said to report another large build in gasoline inventories of 6 million barrels last week, and distillates built by 3.2 million barrels. Crude stocks were off slightly with declines of 560,000 barrels nationwide. A week ago we saw prices largely ignore large inventory builds in the EIA’s weekly report in the midst of the recovery rally, so it will be interesting to see the reaction today should stocks build now that the momentum has faded.

It’s energy data deluge week. Yesterday the US EIA published its monthly Short Term Energy outlook (STEO). Tomorrow we’ll get OPEC’s monthly oil market report, and Friday we’ll see the IEA’s monthly report.

The STEO report is forecasting that global fuel supplies will continue to hold slightly above demand for 2019 and 2020, creating modest inventory builds, but the agency is still predicting a modest increase in prices during that time. This report also predicts that sometime in late 2020 the US will cross over into a net exporter of petroleum on a consistent basis, something it did for one week in 2018 for the first time in roughly 75 years.

Talk about uncertainty: The EIA’s prediction for crude oil prices one year from now, “…suggest that a range of $28/b to $101/b encompasses the market expectation for December 2019 WTI prices at the 95% confidence level.” It sure is a good thing the EIA wasn’t caught up in the government shutdown or we wouldn’t have received that tidbit of wisdom.

CLICK HERE for a PDF of today's charts

Market Talk
Wednesday, Jan 16 2019

The Back And Forth Continues For Energy Markets

The back and forth continues for energy markets this week as prices move lower after scratching out 2 days of modest increases.

The stage was set for another move higher as prices recovered from record oil production and large product inventory builds Wednesday, but seem to have been knocked back by the latest round of fear sweeping through equity markets overnight. We saw a similar sideways pattern from late November to mid-December, at similar values, which could be setting up a strong move to the upside if prices can break through the December highs later this month.

OPEC released its monthly oil market report this morning, showing a production drop of 751,000 barrels/day last month, with intentional production cuts from Saudi Arabia accounting for nearly 2/3rds of the drop, while Iran and Libya also had large declines that weren’t necessarily on purpose. The cartel held its demand outlook for 2019 steady, but made a small reduction in its non-OPEC supply forecast due to the mandatory output cuts in Alberta. The report also featured an interesting read on Monetary policy and its impact on oil markets.

Notes from the DOE/EIA weekly status report:

US crude oil production reached a new all-time high last week at 11.9 million barrels, which is 2.15 million barrels/day more than a year ago. Exporters seem to be figuring out the logistics puzzle of getting oil from the ground to the sea, sending nearly 3 million barrels/day of that domestic production out of the country last week.

Just like we’ve seen the past 2 years, diesel demand had a huge spike in the 2nd week of 2019 as industries across the nation got back to work after the holidays. The 2019 version of the diesel demand restart was particularly dramatic with the EIA’s estimate rising more than 50% in just one week. Diesel production is also following its seasonal trend by declining from the first week of the year, but still remains some 10% above its historical range for this time of year.

Gasoline inventories are on a record-setting pace, holding above the previous record-levels for the first two weeks of the year we saw back in 2017. The gasoline glut is so far contained to the middle of the country with PADDs 2 & 3 showing a huge excess, while the East Coast (PADD 1) is near its 5 year average for January, and the Rockies West (PADDs 4 & 5) are at the bottom end of their seasonal ranges.

CLICK HERE for a PDF of today's charts.

Market Talk
Tuesday, Jan 15 2019

Good News Getting Credit For Early Gains

Bad news from China took the blame for Monday’s selloff, so it seems logical that some good news is getting credit for the early gains. China’s National Development & Reform Commission is pledging additional stimulus to reduce the risk of a major slowdown in its economy.

The EIA published a note this morning projecting upward pressure in diesel margins coming from the IMO’s change to diesel specifications.

Bad news for US Exports? Mexico has drastically cut back its imports of gasoline from the US so far in 2019, backing up barrels into parts of the US. The reduction is reported to be an attempt to combat theft that has also created fuel shortages across parts of Mexico. There are also reports that this could reduce planned imports of light crude from the US, which could be bad news for Permian producers that are still racing to find new homes for their output.

The big Unknown of the day:

The British parliament will vote on Brexit today, and the outcome is expected to create large swings in currency markets.

CLICK HERE for a PDF of today's charts

Market Talk
Monday, Jan 14 2019

Energy And Equity Markets Starting Monday In Red

Energy and equity markets are both starting Monday in the red, marking a 2nd day of losses after a strong 2 week recovery rally. More bad economic news from China, the ongoing government shutdown, and softer treasury auctions are all getting some blame for the negative sentiment to start the week.

Venezuela continues to make headlines for all the wrong reasons, after it failed to make a $1 billion payment last week to comply with the deal struck a few months ago that would have left Citgo intact. While the court battles are likely to play out for much longer, this makes it more likely that eventually the US refineries and accompanying assets will eventually be auctioned off.

Nearly 12 years ago, Exxon Mobil pulled out of Venezuela after the government attempted a retroactive taxation policy that effectively nationalized many industries. That decision played a huge role in the crumbling of the country’s oil production (not to mention many other facets of its society) and now we’re seeing Venezuela try to encroach on Exxon’s activities in neighboring Guyana which now has a bright outlook for future oil production.

Baker Hughes reported a 2nd straight decline in US Oil rigs, with a drop of 4 last week, although the total count is still 121 rigs more than this time last year.

The CFTC is still not publishing Commitments of Traders reports due to the shutdown, but ICE reported a modest increase in Managed money net length held in Brent oil contracts last week, but the speculative bets on higher oil prices are only about 28% of what they were a year ago. Short positions in Brent are above their 5 year average, and have held relatively steady in the past two weeks in spite of the recovery rally. If those shorts start to get squeezed out of the market, that could be a catalyst for the next push for higher prices.

CLICK HERE for a PDF of today's charts

Market Talk
Friday, Jan 11 2019

Rare Red Day For Energy Markets

It’s a rare red day for energy markets in 2019 as prices take a breather from their strong start to the year. If the early losses hold this would snap a 9 day streak of gains for oil and diesel prices. US Equity markets are also pointed lower this morning after getting off to their best start to a year in more than a decade, and the correlation between the two asset classes remains high.

While the 2 week rally has ended talks short term of an extended bear market, there are still plenty of longer term headwind for oil prices: Saudi Arabia released details on an audit of its proven oil reserves this week, revising its total higher than previously announced by some 8 billion barrels. While the Kingdom’s pledge to manage the global supply/demand equation has been a big factor in the recent price rise, this announcement makes it clear that they won’t be running low on reserves anytime soon.

Another headwind? The EIA published a note this morning detailing the growth of Iraqi oil production since the first gulf war. Increases in that country over the past few years are already large enough to offset most of any expected losses due to Iranian sanctions.

CLICK HERE for a PDF of today's charts

Market Talk
Thursday, Jan 10 2019

Energy Prices Caught Up In Technical Breakout

If all you saw were the 5-6 cent price increases in refined products Wednesday, you might have assumed that the weekly DOE report had some bullish figures. In reality, that report showed some of the worst demand figures and largest inventory builds in years, and yet those fundamental headwinds seemed to only matter for a few minutes as energy prices were caught up in a technical breakout.

Although there is some modest selling to start Thursday’s session, WTI prices are still up more than 20% from their Christmas even lows, and the entire petroleum complex looks poised to test its December highs, some 7-10 cents above current levels for refined products.

The weekly demand estimate for distillates fell to a 2.9 million barrels/day, marking a 3 year low, nearly 2 million barrels/day lower than the record high we saw just 3 weeks ago. The good news is that we typically see a dramatic demand drop this time of year, and in each of the past 5 years we’ve seen demand pop right back north of 4 million barrels/day by the 4th week of the year. The bad news, at least from a refining perspective, is that the demand drop is coinciding with US Diesel production setting new records, driving a 20 million barrel inventory increase in just 2 weeks.

Gasoline inventories also had a large build last week, and have risen by 15 million barrels in the past 2 weeks, but have not seen nearly as dramatic of a demand drop as we often see in early January. Demand estimates are slightly lower than a year ago, but remain above the 5 year average for this time of year.

US Refineries just finished another record setting year for run rates, and are starting 2019 at an even faster pace. Expect that refinery run rate to drop over the next several weeks however as we typically see a decline of around 2 million barrels/day for the early maintenance period ahead of the spring transition.

CLICK HERE for a PDF of today's charts

Market Talk
Wednesday, Jan 9 2019

Markets Managed Strong Recovery Rally

An end to the bear market? In the 10 trading sessions since the Christmas eve meltdown, energy and equity markets have managed a strong recovery rally, ending (many) calls of an extended bear market. Energy futures punched through their November support/January resistance overnight and are currently set up with plenty of room to run to the upside.

While the technical outlook is positive short term, there are still some fundamental hurdles to clear if this run – which for crude oil is in its 8th consecutive trading day – is going to continue.

Tuesday’s API report was said to show large refined product builds of 5.5 million barrels of gasoline, and 10 million barrels of distillates, while crude oil stocks fell by 6.1 million barrels. Those large product builds are in line with what we saw from the DOE report last week, and based the strong rally in futures overnight, it seems traders aren’t expecting a similar build in this morning’s report.

Speaking of the DOE, the EIA continues to take advantage of its fully-funded status during the government shutdown, publishing a note this morning detailing how global energy demand growth is driven by emerging economies in Asia and Africa.

CLICK HERE for a PDF of today's charts

Market Talk
Tuesday, Jan 8 2019

Oil Prices Moving Higher

Oil prices are moving higher for a 7th straight trading session, aided by reports of additional production cuts from Saudi Arabia, and the return of optimism to global equity markets as trade talks progress between the US and China.

While the recovery rally in both energy and equity prices since the Christmas-Eve meltdown is noteworthy, energy futures are still struggling to break back above the old support of its November lows that has turned into chart resistance in the new year.

Reports Monday morning that Exxon was restarting units at its Beaumont TX refinery shut following a fire over the weekend seemed to put an end to the early rally in refined products. The reversal marked the 3rd out of 4 trading sessions in 2019 that RBOB gasoline futures wiped out early gains of nearly 5 cents.

Several short term technical indicators continue to point higher for oil and refined product futures, but if they can’t break and hold above those November lows (round numbers, $50 for WTI, $59 for Brent, $1.81 for ULSD and $1.40 for RBOB) it seems like this rally may turn into nothing more than an opportunity for sellers. That said, if that resistance is broken, there’s plenty of room on the charts for prices to run higher.

Winter doldrums: Diesel prices in the Chicago market have dropped to a discount of more than 30 cents below ULSD futures, as the Midwest slogs through the weakest demand period of the year, making prices in the windy city some 20 cents cheaper than any other major spot market in the US. With Canadian oil prices surging after Alberta forced production cuts to boost prices that dropped to $13/barrel this fall, the heavy discounts for refined products creates a brutal combination for PADD 2 refinery margins.

CLICK HERE for a PDF of today's charts

Market Talk
Monday, Jan 7 2019

Stage Set For Strong Friday Rally In Energy Prices

The stage was all set for a strong Friday rally in energy prices, with most contracts breaking through chart resistance early in the morning, and US equity markets beginning one of their largest daily rallies on record thanks to a strong jobs report and dovish comments from the FED. A bearish DOE report threw cold water on the rally however, and suddenly the early morning gains were largely erased.

After Friday’s disappointing finish, refined products are trying to lead another push higher this morning, aided by news that Exxon’s refinery in Beaumont TX had shut its roughly 380mb/day of capacity due to an electrical fire over the weekend. The early gains are once again pushing gasoline and diesel prices through chart resistance, which would set the stage for another 10-20 cents of upside near term if they can hold.

The CFTC is still not publishing the weekly commitments of traders report due to the government shutdown. ICE reported a modest decline in the net long position held by money managers in Brent, with total speculative positions hanging near the bottom end of their 5-year range.

Baker Hughes reported a decrease of 8 oil rigs last week. The total oil rig count is still up 151 rigs from a year ago, but Bloomberg is reporting that the jobs in Texas oil country are no longer increasing due to falling prices, suggesting rig counts may stagnate in 2019.

Notes from the DOE Weekly report (which is set to resume its normal Wednesday morning release schedule starting this week):

Total petroleum consumption is down 13% in the past two weeks based on the EIA’s estimates, with diesel demand leading the drop, falling by 33% during that time. While a sharp drop in demand during the holidays and lasting into the first week of January is the typical seasonal pattern, this year’s move is nearly double what we’ve come to expect.

Bad news for refiners: The drop in demand coincided with US Diesel output reaching its highest level of the year, and the 2nd highest weekly reading on record driving the large build in inventories.

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Market Talk
Friday, Jan 4 2019

Energy Futures On The Move Higher

Energy futures are on the move higher again this morning, marking a 5th day of gains for crude oil, and a 3rd for refined products, if the early gains can hold. Prices are approaching a pivotal short term technical test that may determine how long this recovery rally can last.

After Wednesday’s 10 cent reversal, Thursday’s session seemed a bit tame with only a 6 cent swing in gasoline and diesel prices. Strong early morning gains of 4+ cents were temporarily wiped out when the sell-off in US stock markets picked up steam mid-morning, but the buyers stepped back in to push prices higher on the day.

Old support becomes new resistance: Both RBOB and ULSD futures are challenging price levels that acted as support back in November again this morning, which happens to be right where they stalled out during Wednesday’s early spike. If they can break through that overhead resistance there’s room for another 10 cents of upside. If they fail however, the longer term bearish trend will remain intact.

The API was said to show a decrease in crude oil stocks of 4.5 million barrels last week (a common occurrence at year end due to tax implications of imports) while refined product inventories had large builds of 8 million barrels for gasoline and 4 million barrels of distillates. The DOE’s version of the weekly stats is due out at 11am eastern today. The EIA is making the most of its funding this week, publishing a new note on retail gasoline prices, which dropped in 2018 for the first time in 3 years.

The December payroll report showed an increase of 312,000 jobs for the month, and both October and November job counts were revised higher. The headline (U-3) unemployment rate ticked higher to 3.9% while the U-6 rate held steady at 7.6%. The US dollar index jumped immediately after the report as the increase in payrolls, which was stronger than most forecasts, may encourage the FED to continue with tighter monetary policy. Energy prices have shrugged off the news, and the move higher in the dollar so far, and continued on their early up-trend.

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Market Talk
Thursday, Jan 3 2019

Energy Futures Kicked Off New Year With Stylish Volatility

Welcome to 2019, please buckle up, it looks like we’re in for a wild ride.

Energy futures kicked off the new year with stylish volatility Wednesday, as both refined product contracts bounced more than 10 cents/gallon off their overnight lows, only to fall back by more than a nickel from their morning highs by the time prices settled. So far today’s session has been a mirror image with 2 cent overnight losses turning into 4 cent early morning gains.

The 10-minute-bar chart of WTI below shows how yesterday’s a heavy influx of volume pushed oil prices up by more than $3/barrel in just a 90 minute span. The speed and volume combination suggested to many market participants that the move was driven by large funds deploying capital that had moved out of energy commodities during the Q4 sell-off.

Due to the government shutdown, we haven’t seen an updated commitment of traders report from the CFTC in two weeks, and it could be a while before we know whether or not this latest bounce is driven by the big funds. The EIA has been funded despite the shutdown, and will release its weekly status report tomorrow. The Federal Oil Spill fee expired (for the 2nd straight year) on 12/31. While many expect the fee to be included in whatever bill ends the shutdown, since last year’s reinstatement did not include a retroactive recovery of that tax, most suppliers have decided not to collect the fee in the interim.

Equity markets are seeing a similar bout of yo-yo trading with most US indices erasing heavy losses from early in Wednesday’s session, only to see another round of heavy selling this morning. For a 2nd day, it’s China taking the blame for the early sell-off, as Apple reduced its revenue expectations due to a slowing Chinese economy. The silver lining in the bad news from China? Some believe that the slowdown will force the world’s two largest economies to end their trade tantrums.

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Market Talk
Wednesday, Jan 2 2019

Energy Futures Starting 2019 On Weak Note

Energy futures are starting 2019 on a weak note, with most contracts trading down 1% or more in sympathy with a selloff in stock markets around the globe. Weak manufacturing data from China seems to be taking blame for the early selling as it stokes fears of an economic slowdown.

As the table below shows, 2018 was a negative year for energy and stock prices and an EIA report this morning details how substantial the drop in energy prices was compared to other commodities in the past quarter.

So where are prices headed in 2019? To start, both WTI and RBOB are trading dangerously close to technical “trapdoor” levels that could open the door for another 10-20% of downside in short order. ULSD futures briefly reached a new 16 month low overnight, which could set up a test of the $1.50 range (some 16 cents below current levels) if we don’t see a bounce soon. Brent looks slightly stronger from a chart perspective, but also needs to carve out a bottom soon if it’s going to resist the pull lower from the NYMEX contracts.

Near term there may be little hope either fundamentally or technically for energy futures, but most years the complex figures out a way to rally heading into spring. Keeping in mind that many were calling for $100 oil back in September, it would probably be good to take any calls for an outright price collapse with a grain of salt.

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Market Talk
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