News & Views
WTI Punched Through 200 Day Moving Average
WTI managed to punch through its 200 day moving average Tuesday, sparking the first notable price rally in crude and refined products in the past couple of weeks. While this may be the most interesting move in a while, the gains are small on the weekly and monthly charts, and don’t change the long-term price outlook that’s torn between supply concerns in the Middle East, and demand concerns just about everywhere else.
Today will be the busy day for news with the DOE’s weekly status report due out this morning and the FED decision this afternoon. Pretty much everyone is expecting at least a 25 basis point cut from the FED, so we may not see much market movement unless something else happens, or the FOMC changes their forward outlook in the statement.
Today is also the last trading day for August 19 RBOB and ULSD futures, so look to the September (“U”) contracts to see where the real action will be that should drive physical prices at the racks tomorrow.
The API was said to show inventory draws across the board last week with crude stocks down 6 million barrels, gasoline down 3.3 million and diesel down 890k. The DOE’s weekly report is due out at its normal time.
The tropics are starting to heat up. Disturbance 1 that’s headed towards Florida is still only given a 10% chance of development while a second disturbance is given a 50/50 shot at reaching storm status over the next 5 days. The first system looks like it will stay off of the SE coast and be a non-issue, while it’s too soon to say if the 2nd has a chance to thread the needle in the Caribbean and become a threat to the US.
A common theme among the earnings reports from refiners in the past couple of weeks has been the anticipated impact of the IMO bunker fuel changes coming at the end of the year. Meanwhile, Indonesia has already announced its plans to not enforce the new rules, which some worry may be the first of many that may nullify the efforts to clean up the fuels used at sea.
Oil Prices Attempting To Rally Ahead Of Weekly Inventory Reports
Oil prices are attempting to rally ahead of the weekly inventory reports and the FOMC’s highly anticipated announcement due tomorrow. WTI rallied right back into the 200 day moving average that helped reject last week’s rally attempt, which makes a good pivot point to watch as the market continues its search for direction. If WTI can sustain a push above that level, it seems likely that we’ll see a run at $60, which should help products add another 8-10 cents. If it fails again, it seems more likely we’ll see another test of the lower end of our summer trading range.
Traders have priced in a 100% probability that the FOMC will cut its interest rate target tomorrow by at least 25 points, and a 25% chance of a 50 point cut. That certainty of a rate cut is getting some of the credit for the early rally in energy prices, although stock markets are pointed to a lower open, which contradicts that theory. Odds are that without any news from the Strait of Hormuz, interest rates are the easiest thing to explain a brief bit of buying.
A US federal appeals court rejected PDVSA’s appeal, and set the stage for Citgo’s assets to be seized and sold to pay off a previous $1.4 billion judgement against the Venezuelan oil company. Don’t expect changes any time soon however as it looks like this could get appealed again to the US Supreme court, and it’s hotly debated just who is in fact legally in charge of PDVSA these days.
The stream of oil company earnings reports continue this week, with mixed results so far and more signals that smaller drillers are continuing to struggle, which may mean less drilling activity in the US in the back half of the year. The multi-billion dollar question is when that slowdown in drilling will actually translate to less oil production, as the log of drilled but uncompleted wells (DUCs) may keep output rising for some time.
The storm system heading towards Florida was “downgraded” by the NHC in its latest advisory, with a 0% chance of development over the next 48 hours, and only a 10% chance of development over the next 5 days. No doubt the weather channel will continue showing it multiple times an hour this week, but it appears this will be a non-issue for fuel supplies in the area.
Quiet Start For The Most Important Weeks Of The Year
It’s a quiet start for what could be one of the most important weeks of the year for financial markets. Energy prices are treading water as we await news on US-China trade talks, and the FOMC’s first interest rate cut in years. There were no new developments in the Strait of Hormuz over the weekend, letting energy traders sit back and watch how the other big stories will play out before making a move.
Baker Hughes reported a decline of 3 oil rigs drilling in the US last week, marking a 4th consecutive week of reduced drilling activity. The rig count has dropped in each month so far this year as producers continue to struggle with profitability, even as prices have rebounded. One interesting note in this week’s count: The Permian basin has more than half of the active drilling rigs in the country, and has been leading the declines for most of the year but actually increased by 3 rigs last week.
Money managers that jumped into long bets on energy prices ahead of Hurricane Barry two weeks ago look to have bailed out in the last commitment of traders reports. The large speculative category of trader saw large declines in almost all contracts last week, with European distillates the only one to see a net increase in net length held by money managers.
A Reuters article this morning highlights the challenging environment for ethanol producers in the US. The chart below shows that margins for producing ethanol from Corn have held in negative territory for most of the year. No surprise here, renewable fuel producers are blaming small refinery exemptions from the RFS for their woes, while refining groups suggest they’re not to blame.
It’s not just ethanol producers that are struggling. 2 more biodiesel plants have announced they will be shutting their doors this month, with the lack of a $1/gallon blenders credit making them unprofitable. The latest spending bill moving through congress does not include the tax extenders package that would reinstate that credit, along with the federal oil spill fee.
We are still more than a month away from the peak of hurricane season, but another system will need to be watched this week. Currently the NHC is only giving a 20% chance of development for a storm system that could heads towards Florida. Given that most terminals in Florida seem to be oversupplied with fuel currently, it seems less likely there will be much disruption even if this system does turn into a storm.
Sideways Action For Energy Markets Continues
The sideways action for energy markets continues, with oil prices trying to lead a modest rally this morning that would finish a choppy week of trading with gains that pale in comparison to last week’s heavy selling. The small trading range and back and forth action suggest a wait and see attitude as the Iranian tensions continue to simmer and as traders continue to debate how much the FED will cut interest rates next week.
It’s been a few days since we’ve had any market moving headlines from the Strait of Hormuz, as both Britain and Iran continue to hold a tanker hostage, while naval escorts seem to be preventing any further disruption for the time being. The economic sanctions on Iran continue to take a toll however, as two Iranian ships sit stranded off the coast of Brazil as that country refuses to refuel them.
While the action in futures has been lackluster, it’s been a busy week for companies reporting quarterly earnings. Oil refiners have been a bit of a mixed bag, although common themes include lower crack spreads than a year ago as discounts for North American crude – particularly Western Canadian crude – have shrunk. Oil producers meanwhile continue to struggle to create positive cash flows even as US production reaches all-time highs. Reuters notes that oilfield service companies are painting a grim picture for the back half of 2019, with most predicting more cut backs in operations and more rigs taken offline.
The slowdown in drilling activity is visible in in West Texas diesel prices as rack offers have dipped below Gulf Coast spot replacement costs this week – a phenomenon that’s happened only twice in the past two years.
Energy Markets Having Hard Time Making Up Mind
Energy markets are having a hard time making up their mind this week. A bullish DOE report had prices rallying Wednesday morning, only to see those gains wiped out in the afternoon, and then attempt another move higher overnight.
It’s hard to say what caused the sudden sell-off late in Wednesday’s session after the earlier DOE-induced strength. Perhaps the most notable item that could have contributed was that WTI rallied right into its 200 day moving average, only to stall out, making it look like a technical resistance layer the bulls weren’t able to overcome. Today’s rebound leaves the outlook even less clear, as technical indicators move into neutral territory and may leave us in an extended sideways pattern.
It is also possible that some traders sold into Wednesday’s rally as the large draw in crude oil stocks was driven primarily by a short-term storm-related issues rather than a long term fundamental change. Then again, demand figures rebounded nicely on the week, setting the stage for US Gasoline demand to make a run at all-time highs before the end of driving season.
The crude output chart below may have the most noteworthy impact from Hurricane Barry, causing the largest weekly drop in US crude production since the rash of hurricanes in 2017. With no reports of major damage from Barry however, we should see production bounce back to previous levels in next week’s report. It’s also worth noting that despite the largest weekly drop in nearly 2 years, total output was still 300mb/day above year-ago levels…which were a record high at the time.
PADD 3 refinery runs dropped by more than 400mb/day last week, which seems to be primarily due to the precautionary shut downs ahead of Barry. PADD 1 saw a 100mb/day increase last week, which helps to explain the relatively muted reaction to the PES shutdown over the past month.
Energy Futures Moving In Opposite Directions
A conflicting inventory report has energy futures moving in opposite directions to start Wednesday’s session, a pattern this week in which gasoline prices tend to want to resist the pull of crude oil and diesel prices, while the entire complex moves back and forth waiting on the next bit of news from Iran, China or the FED.
The API was said to show a large crude oil draw of almost 11 million barrels last week – which was widely expected as producers shut in ahead of Hurricane Barry – which is helping oil contracts find a bid this morning. Products saw increases of 4.4 million barrels for gasoline, which seems to be pushing RBOB futures lower and 1.4 million barrels for diesel. The EIA’s weekly status report is due out at its normal time this morning.
Tuesday’s session started out in a mirror image of today’s start with RBOB moving higher while the other contracts moved lower. By the end of the day all contracts were in the green, aided by a strong day for equity markets, and reports that the US may have destroyed more than one Iranian drone last week. Besides that report, there do not appear to have been any new developments in the Persian Gulf drama, which is keeping buyers at bay for now.
Many headlines for both equity and energy prices continue to focus on what the FOMC will do with interest rates next week. The CME’s fedwatch tool shows that traders are giving a 100% probability of a rate cut with 25pts vs 50 the hot debate. The Dallas FED meanwhile released its Permian Basin Economic indicator report this week, showing that while Texas’s unemployment rate just reached an all-time low, the rate in the Permian is increasing as rig counts drop. It’s worth noting that despite the drop in rig counts, production levels continue to climb due to an overhang of Drilled but uncompleted wells.
The EIA continues to highlight the changing landscape of global oil trade this week, with a note this morning showing how Saudi Arabia is sending less crude to the US, and more to Asian nations as US production swells. While China’s oil imports are a hot topic this week, the country is also increasing its export quota for refined products as the country’s refining capacity continues to grow.
A couple of other interesting reads today:
Reuters takes a look at OPEC’s changing metric for considering a balanced global oil market.
Bloomberg interviews a ship captain as he steers an oil tanker through the Strait of Hormuz.
Energy Futures Trading Sideways
Energy futures are trading sideways to start Tuesday’s session as the tensions with Iran near the world’s most important waterway seem to have cooled for the time being. A new prime minister has been chosen in the U.K., and it seems like the markets may be taking a wait-and-see approach to how he’ll handle the Iranian seizure of a British ship last week.
RBOB gasoline futures are moving opposite of diesel and crude oil for a 2nd straight day, in what appears to be a bit of confusion over the PES bankruptcy, and whether or not the debtor in possession financing arrangement means the plant could reopen again at some point.
As the forward curve charts below show, futures markets remain primarily in a state of backwardation for most of the next several years, with near-term supply concerns fading compared to new capacity expectations and demand concerns. The notable exceptions are the contango in ULSD through year end – when the new IMO rules take effect – and WTI holding a small carry in the front few months as production holds near record highs.
As predicted, Chinese imports of Iranian crude have become the latest hot topic in trade talks, after a Chinese company was sanctioned for unauthorized purchases. It seems unlikely this will have an immediate impact on prices, but is a reminder of the simmering tensions with both countries.
The IEA published a note Monday detailing the emergency stockpiles of oil held by participating countries around the world that are “large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period.” The agency also noted that global supplies are above average, which should help cushion the impact if shipping through the strait is disrupted.
The EIA meanwhile published a note this morning detailing how another key shipping bottleneck, the Suez Canal, has seen its activity shift in the past few years as the US and Russia become bigger players in the global petroleum markets.
Energy Futures Were Going To Settle Lower
Early Friday afternoon it appeared that energy futures were going to settle lower for a 5th straight day, despite the ongoing tensions with Iran and the world’s most important shipping lane. Then news broke that Iran had seized two British tankers and an immediate rally pushed prices higher for the day and that buying continued when trading resumed Sunday night.
What we know now is that one tanker is still being held by Iran while the British and US weigh their options. There has been no further escalation yet, although Iran has claimed to have detained and executed some US spies (which is an occasional claim made by their regime) which may explain why the gains so far are relatively muted.
In addition to the daily dose of drama from the Strait of Hormuz, Libya was forced to shut its largest oil field over the weekend after a pipeline was sabotaged. That line and field have resumed operations as of this morning.
Baker Hughes reported a 3rd consecutive week of reductions in the active oil rig count last week. The US total dropped to a fresh 17 month low of 779, even though reports suggest US shale drillers are benefiting from the turmoil in the Middle East.
Money managers are jumping back in to bet on higher oil prices, with both Brent and WTI seeing large increases in net-length last week. The new money snapped a 9 week streak of decreases for speculative long bets on Brent crude, and could provide the catalyst for the next technical break to the upside if hedge funds and other large speculators continue to bet that the Middle East tensions will eventually reach a boiling point.
PES filed bankruptcy over the weekend – for the 2nd time in 2 years - a month after the explosion and fire shut down its operations. While there have been local challenges in replacing the East Coast’s largest capacity refinery, so far the impact has not trickled down to other markets outside of Philadelphia as many were predicting a few weeks ago.
Today’s interesting read: Bloomberg is reporting that millions of barrels of Iranian crude are stacking up in Chinese ports, which could be next hot button item in either the trade or tanker wars.
Energy Futures Sold Off For Four Straight Days
Energy futures have sold off for four straight days to start the week, shaving 12 cents off of diesel prices and 14 cents off of gasoline. Prices are attempting a recovery rally this morning – and oversold technical indicators suggest we’re due for a bounce – but we’ve seen similar early gains in each of the past 3 sessions, and all ended the day with losses.
In addition to the losses in futures, basis values for many regional products have been declining this week as refiners dodged a major bullet from Hurricane Barry. Gulf Coast Conventional gasoline prices had a rough week, dropping by nearly 20 cents per gallon once it was clear refinery disruptions would be minimized. Diesel prices in the Midwest are also seeing unusually large discounts to futures for this time of year as regional inventories reach all-time highs.
Once again, conflicting stories from the Strait of Hormuz are getting credit for the early buying. Yesterday afternoon the US said it destroyed an Iranian drone (note, it did not shoot it down, but jammed its electronic signal) while this morning Iran is claiming it did not lose a drone, and perhaps the US shot one of its own down by mistake. The bulls will say either way this is a sign that tensions in the world’s most important shipping lane are still building. Bears will say this week’s back and forth looks more like children arguing on the playground than two countries about to go to war.
The US is attempting to build a coalition to protect the shipping lanes that have been the center of the energy market’s attention since attacks on tankers started this spring. According to a Reuters article, so far the plan has not had much, if any, success as other countries look to avoid escalating the conflict.
Energy Futures Attempting To Rally
For a third straight day, energy futures are attempting to rally. We’ll have to wait and see if the early gains can hold, unlike the previous two sessions in which the early morning gains turned to afternoon losses.
Wednesday’s reversal was driven by some ugly demand numbers reported in the DOE’s weekly status update that led to large builds in refined product inventories. While crude stocks did see a draw – and output was curbed 300,000 barrels/day due to Barry – traders were more focused on the weak consumption figures, which are coming just when US refiners are poised to crank up to maximum output levels, which could make for sloppy supply markets this fall. The report was also seen as a warning sign for equity markets that the US economy may in fact be slowing.
Reports that Iran was now seizing the tanker ship that it had previously towed for repairs is getting some credit for the early bounce in prices this morning, although given the tiny size of the ship (6,200 barrel capacity, vs a 2 million barrel capacity for a VLCC) there won’t be any direct impact on supplies. The move could also weaken Iran’s negotiating position after it’s boats were unable to intercept a “grown up” British ship last week, and had to settle for a small disabled boat now.
Meanwhile, Russia is signaling it would like to join an EU payment channel to help Iran circumvent US sanctions. While that may be just more meddling than any game changer for oil markets, if successful, that payment channel would only mean more oil supplies reaching the global market.
Notes from the DOE Weekly Report:
While the product builds and weak demand figures made the headlines, the export charts below show how in the new era of energy production in the US, a storm like Barry actually has more impact on fuel leaving the US than coming in. As long as the refineries continue to operate (as almost all did during this storm) the disruption in boat traffic is likely to be bearish for product prices.
Energy Complex Trying To Claw Back Gains
The energy complex is trying to claw back some gains this morning after another heavy wave of selling Tuesday. Uncertainty surrounding Iran continues to grab most of the headlines, with both bulls and bears having arguments to be made as the great lying game known as diplomacy continues to lumber on.
Statements from the US President and Secretary of State that suggested progress was being made with Iran got credit for the sharp sell-off Tuesday, after prices were trending higher earlier in the session. Hours later the Iranian foreign minister rejected those claims, but the oil markets didn’t seem to notice. There was also a sigh of relief when reports broke that an oil tanker that had gone missing in the Strait of Hormuz had simply been towed for repairs.
Right on cue, the EIA this morning published a note highlighting how the forced cut backs in Iranian oil exports have impacted OPEC and global supplies.
The API was said to report small draws for crude oil of 1.4 million barrels, and gasoline of 476,000 gallons, while distillates saw a large increase of 6.2 million barrels. The EIA’s report is due out at its normal time. Several forecasts call for larger crude stock draws as Gulf of Mexico production was being shut in last week due to Barry, but given the timing, we may not see the full impact of those short term precautions until next week’s report.
We’re less than 6 months away from the IMO 2020 marine diesel spec change, and Reuters is reporting Asian refiners are testing new grades of fuel that will comply with the statute, and may have a fringe benefit of tightening up the gasoline market. The billion dollar question is just how much can each refinery actually convert from the gasoline stream to the “Very Low” Sulphur diesel stream. Mexico’s state oil company meanwhile has had to admit it is unable to comply with tighter diesel specs as their refineries continue to struggle after years of neglect.
First Hurricane Of The Season Made Landfall
The first named hurricane of the season made landfall late Saturday and was quickly downgraded to a tropical storm, causing minimal impact to energy infrastructure as of this morning.
Energy futures sold off yesterday, erasing premiums added last week in anticipation of supply outages due to the storm. Prompt month RBOB prices fell over 4.5 cents, HO futures fell almost 3 cents.
The complex is up slightly this morning, taking a step back from yesterday’s sharp downturn, with refined products leading the charge up 50 points to a penny.
The IEA is expecting a sizeable crude oil surplus in 2020 as published in their latest Oil Market Report Friday. Whether or not this will translate to lower prices at the pump will be a function of refinery run health and the moving target that is diesel demand resulting from the 2020 IMO spec change.
The API is scheduled to release their weekly inventory estimates this afternoon and WTI futures saw some buying pressure earlier in anticipation of a 2 million barrel draw in Cushing stocks. As usual, tomorrow’s DOE data publication will likely set the tone for fundamental sentiment for the remainder of the week.
Gasoline Prices Leading Push Lower
Gasoline prices are leading a push lower this morning as Hurricane Barry passed through refining country over the weekend without inflicting much damage on energy infrastructure.
Oil prices are clinging to modest gains, with some positive economic data from China taking credit for the relative strength while oil platforms in the Gulf of Mexico are already starting to be brought back online.
Britain this morning said the Iranian tanker it seized would be released as long as it doesn’t attempt to deliver its cargo to Syria, after talks with Iranian officials, easing some of the building tensions between those two countries recently.
Baker Hughes reported 4 more oil rigs were taken off-line last week, bringing the total US oil rig count to a 17 month low.
Money managers continue to seem disinterested with the petroleum complex of late, with only small changes witnessed in speculative holdings last week. WTI and Brent both saw small reductions in the net length held by money managers, while refined products saw small increases.
Energy Prices Treading Water
Energy prices are treading water this morning as the storm threat was reduced slightly overnight, and the IEA threw cold water on the bulls in its monthly report.
The latest forecast for Barry is a bit better than prior days, with the odds that this storm won’t reach hurricane strength increasing, and the path shifting far enough west that it might spare the New Orleans and Baton Rouge refiners from a direct hit, without threatening the Lake Charles and Beaumont facilities. The heavy rain will still create severe flooding threats – even if the refineries and terminals aren’t forced to close, trucks may not be able to reach them – but the total threat seems to be less today than it appeared earlier in the week. So far only the P66 Alliance refinery (the southern-most refinery on the map below) has reported plans to shut down as a precaution.
The bad news for refiners is that IF the storm passes without damaging supply infrastructure, it is still likely that regional demand will see a negative impact as vehicles will stay off the road until the threat passes.
The IEA’s monthly report was highlighted by global supplies outpacing demand in the first half of 2019, and a forecast that has flipped from a deficit to a surplus in the 2nd half of the year. The report cited several reasons for the bearish shift in the supply/demand equation…”European demand is sluggish; growth in India vanished in April and May due to a slowdown in LPG deliveries and weakness in the aviation sector; and in the US demand for both gasoline and diesel in the first half of 2019 is lower year-on-year.”
US stocks reached record highs this week, the DJIA broke 27,000 and the S&P broke 3,000 for the first time ever, following testimony from FED Chair Jerome Powell that all-but guaranteed a July rate cut. The correlation between energy and equity prices had collapsed in June, but is picking up again in July, so that optimism might help keep a bid under oil prices.
Bad news for those hoping for the PES refinery to be raised from the dead. The state of Pennsylvania is signaling that it will not help fund repairs to the plant – unlike a decade ago when state and local agencies contributed to its recuperation.
Hurricane Expected To Make Landfall
A hurricane is expected to make landfall in the heart of refining country this weekend, US Oil stocks dropped by almost 10 million barrels last week, Iranian boats threatened an oil tanker in the strait of Hormuz, and US equities reached an all-time Wednesday so it’s easy to understand why energy prices have surged to their highest levels in 8 weeks. Then again, it may be just as noteworthy that prices aren’t rallying more given the bullish combination of events, which could mean a price collapse if the literal and figurative storms pass without long term damage.
The storm soon to be known as Barry is not even a tropical depression at this point, but is still forecast to reach hurricane strength over the next 2 days before making landfall over the weekend. The largest concern remains the heavy rainfall amounts forecasts for areas that are already flooded. Reports of precautionary shutdowns at oil platforms and refineries in the storm’s path are increasing, but so far there appears to be no impact to regional supplies.
While futures were rallying sharply Gulf Coast cash markets seemed to largely shrug off the storm, with basis values for USGC RBOB, CBOB and ULSD all little changed from previous levels. While the cluster of refineries along the Mississippi river remain at risk, most of the Colonial pipeline origin points west of the forecasted path, which may explain the lack of concern from physical traders.
Reports that the British Navy had to intervene to stop Iranian vessels from impeding a BP oil tanker in the Strait of Hormuz that broke overnight had oil prices rallying, but they’ve since given back all of those gains, suggesting the Iranian harassment of ships in the region is becoming the energy market equivalent of the “Boy Who Cried Wolf”.
OPEC released its monthly oil market report this morning, which showed the cartel’s output dropped again last month, although Saudi Arabian output increased for the first time in several months, which offset most of the drop in exports from Iran. The cartel also issued its forecast for 2020, which suggests similar supply & demand growth globally as 2019, with developed nations once again picking up the slack from sluggish US & Chinese economies.
The DOE weekly report was largely lost in the shuffle Wednesday, with the large draw in crude oil stocks, and growing refinery runs, in spite of the PES shutdown the most notable items.
Energy Prices In Full Rally Mode
Storm threats and a large inventory decline have energy prices in full rally mode this morning, with most contracts up 2% or more on the day already. The 2-day rally following Monday’s brief sell-off puts the complex within striking distance of its June & July high trades, and could mean a technical breakout if they can move above those levels. Then again, this could just be another head-fake in a choppy market if the storm passes without causing major damage.
The latest forecasts increased the probability that this storm system will become at least a tropical storm by the weekend, and the current paths have it headed towards the refining hub around New Orleans, which is home to roughly 14% of US refining capacity.
While the storm itself doesn’t appear particularly impressive compared to previous hurricanes to hit the area, the heavy rain forecasted comes at a time when the Mississippi river is already at flood stage, along with numerous other waterways in the area. That means this system is more likely to cause disruptions to the waterborne traffic of crude and refined products, even if the refineries themselves manage to escape any damage.
Read this Accuweather note for more detail on why this storm will threaten the Gulf Coast and other parts of the US.
The API was reported to show US crude oil inventories declining by 8.1 million barrels last week, while gasoline stocks dropped by just 257,000 barrels. Distillate stocks actually saw a healthy build of 3.7 million barrels last week, which seems a bit strange since ULSD prices are leading the charge higher this morning, up more than a nickel so far. The EIA’s weekly report is due out at its normal time.
Refineries most likely to be impacted by the storm based on the current forecast (Photo #2)
Energy Futures Chop Back And Forth
Energy futures continue to chop back and forth, struggling to find direction with a variety of geopolitical & weather issues stoking conflicting concerns for both supply & demand.
Iran: The saber rattling continues as Iran broke its nuclear agreement with Europe, and threatened to retaliate against British ships, after one of its own was arrested on the way to Syria last week.
China: The Trade Truce brought cheer to equity markets last week, but will an arms sale to Taiwan threaten that progress?
Refiners: The Philadelphia-area supply situation seems to be calming down in the wake of the sudden shutdown of PES. Gulf Coast refiners meanwhile are coming back online after an unusually busy spring maintenance season, and should see peak rates over the next couple of months. There were reports that the Irving refinery in New Brunswick was forced to shut an FCC unit last week, but so far the market seems to have largely shrugged off that news, even though the plant is a key supplier to the US East Coast, which is now more dependent on imports than ever.
Weather: The unusual system sitting over land in the South Eastern US is expected to become a tropical storm this weekend, with refineries in Louisiana and Texas in its path. While the winds may not reach hurricane force, rain will be a threat to both supply & demand in the coming week.
The EIA reported yesterday that US crude production surpassed 12 million barrels/day for the first time ever in April, just 8 months after breaking the 11 million barrel/day mark for the first time over an entire month. A Wall Street Journal report this morning highlights why the challenges of drilling oil wells close to one another may mean that US production may peak much sooner than most current forecasts.
Unusual Day For Market Watchers
Are prices up or down today? That depends on your reference point. Today is an unusual day for market watchers in that futures are trading lower (from Friday’s settlement) but since cash markets have been closed from Wednesday, physical prices may still be moving higher from where they left off since futures moved higher over the holiday.
Good news is bad news:
The early selling seems to be in sympathy with stock markets around the world that are reacting negatively to Friday’s strong US Payroll report that estimated 224,000 jobs were added in June, and has traders betting on a less aggressive rate cut by the FED in July. Based on the CME’s FedWatch tool, traders were giving a 100% chance of at least a 25 point cut, and a 20% chance of a 50 point rate cut at this month’s FOMC meeting prior to Friday’s report. This morning, the odds of a 50 point cut have been slashed to zero, which seems to be disappointing stock markets.
Look out below? The National Hurricane center is giving a low pressure system that’s currently moving over Georgia an 80% chance of developing into a tropical system when it dips down into the Gulf of Mexico later this week. While this pattern would be an unusual path for a tropical storm, and the water this time of year may not be warm enough to allow this system to become a large storm, areas of Louisiana and Texas home to numerous refineries have already been dealing with flood waters and may still be at risk.
The EPA published its proposal for 2020 renewable volumes under the RFS on Friday. The proposed volumes include volume growth targets in line with recent years, and the agency once again decided not to reallocate any volumes waived due to small refinery exemptions, which is drawing loud criticism from agricultural groups and presumably less loud praise from refiners.
A little too optimistic? Note in the RFS table below how the original statute assumed that by 2020 the US would be producing more than 10 billion gallons of cellulosic ethanol, which is half of what the total combined renewable fuel consumption will actually be next year, and some 20 times the expected actual production of cellulosic fuel.
The CFTC commitment of traders reports are delayed due to the Holiday, but ICE published figures last week that showed money managers reduced their net long holdings in Brent for an 8th straight week.
Baker Hughes reported that 5 oil rigs were taken off-line last week, wiping out the gains of the previous two weekly reports. The Woodford basin in Oklahoma accounted for most of the decline last week, after posting the largest increases the past two weeks.
Morning Selloff Snowballs Into Something Meaningful
A little morning selloff snowballed into something much more meaningful Tuesday, and when the dust settled petroleum futures had wiped out almost all of their gains from the past two weeks.
“That’s not the reaction we were looking for”: The big sell-off came in the wake of OPEC & Friends formally extending their output cut targets for the next 9 months, and formalizing their partnership through a “charter of cooperation”.
Inventory draws reported by the API late Tuesday seem to have helped the complex find a modest bid through the overnight session, keeping the selling in check for now. The report was said to show a 5 million barrel decline in US Oil stocks, while distillates dropped by 1.7 million barrels and gasoline stocks fell by 387,000 barrels. The EIA’s weekly status report is due out at its normal time this morning.
So what exactly was so bearish to justify Tuesday’s selling? Really, not much. There were reports that Philadelphia union and city leaders were meeting to discuss potential options for restarting part of the shuttered PES refining complex, although most reports suggest it’s unlikely that a new buyer will be found. The EU tariff news was a bearish surprise, although stock markets had a limited reaction to that story. It’s also likely that with vacation season in full swing, and many already looking ahead to the long weekend, the snowball effect was easier to achieve once the selling started due to light trading volume.
Speaking of the long weekend: Spot prices will not be posted Thursday and Friday, even though NYMEX & ICE futures will be trading both days, so most rack postings tonight will carry through the weekend. Most refiners are leaving the option open (as they normally do) to change prices if needed even though most offices will be officially closed until Monday.
Demand Fears Outweighing Supply Concerns
Demand fears are outweighing supply concerns to start Tuesday’s session, as Monday’s early move higher has largely evaporated, and volumes begin to decrease ahead of the long holiday weekend.
The NYMEX will have futures trading both Thursday and Friday, but the cash markets will not be assessed so most US traders will be done for the week at some point Wednesday. Most rack prices posted Wednesday night will carry through the weekend – unless something wild happens Thursday or Friday.
It’s official: OPEC & friends formally agreed to extend their output cuts for 9 additional months (through March 2020) earlier today. The enthusiasm for these additional cuts ran out of steam midway through Monday’s session – as it really doesn’t change much in terms of global supply, and this decision had been foreshadowed for months – and the official announcement today seems to have fallen on deaf ears as prices continue their retreat.
Just when it looked like there was light at the end of the trade war tunnel: A day after markets surged due to the US/China truce, the US announced it was considering imposing new tariffs on goods from the European Union. Although there are no direct impacts on petroleum products, the concern of a demand slump is real given many EU countries are already struggling through a period of stagnant growth.
While gasoline prices have pushed to multi-month highs in the wake of the PES shutdown, and record setting demand estimates from the DOE, ethanol prices have been pulling back sharply along with corn prices as concerns over the 2019 crop seem to be dwindling.
Bullish Headlines Have Energy Markets Surging
A pair of bullish headlines have energy markets surging to start the week, with most petroleum futures trading up more than 2%. An OPEC deal is bullish for supply, while a potential Chinese trade deal is bullish for demand – and for US equities which are also trading sharply higher to start the week.
Russia stole OPEC’s thunder by announcing they’d agreed to extend output cuts with Saudi Arabia through the end of the year. While the extended oil production cuts show a disciplined approach among the newly expanded cartel, the timing of the announcement also suggests Russia is taking more control, causing some to declare the end of OPEC.
Deal or no deal? Stock markets are surging this morning after the US announced it was suspending new tariffs and agreed to restart trade talks with China. While that news may not directly impact oil and refined product movements, it certainly helps alleviate some concerns about a global economic slowdown, which is bullish for demand.
Baker Hughes reported 4 more oil rigs were put to work last week, the 2nd weekly increase after reaching a 1 year low. The gains were spread out with the Woodford basin adding 4 rigs, Permian adding 2, the “other” category adding 3, while the Williston, Eagle Ford and Niobrara all had reductions for the week.
Money managers made slight reductions in their net-long holdings of Brent and WTI last week, but jumped in eagerly to add to RBOB length following the PES fire the previous week.