News & Views
Energy Complex Took A Breather
The energy complex took a breather yesterday with RBOB shedding almost 2.5 cents off of monthly highs and HO dropping almost 2 cents. WTI stayed positive, but only just, amid rumors of Iraq supporting intended OPEC production cuts. The cartel and friends are schedule to meet next week to discuss their plan moving forward.
Both American and European crude oil benchmarks has continued their climb this morning, both showing modest gains, despite Saudi Arabia’s announcement earlier this week that it is “ready for… disruption” regarding the recent tensions centered around the Strait of Hormuz. The press release is somewhat confounding coming from the Kingdom, whose GDP comes chiefly from its oil production and likewise favors higher prices, as most interpret the message as a means to stabilize the market. Traders will be interested to see if this is borne of genuine intention or just the latest move in a geopolitical chess match.
PES has confirmed Wednesday that it intends to shut down its refinery and put it up for sale amid the massive explosions that rocked Philadelphia last week. Aside from physical prices popping in the New York Harbor vs futures this morning, offsetting the difference between the expiring July contract and the newly-prompt August contract, price reaction to the 335,000 barrel per day production deficit have been limited to NYMEX prices and Colonial shipping premiums. Refined product suppliers are paying .0075 per gallon to ship gasoline up from Houston to New York, hoping to avoid or correct the expected strained regional economics.
Drop In Oil Stocks And A Major Refinery Closure
A large drop in oil stocks and confirmation of a major refinery closure sent the energy complex soaring on Wednesday, but those prices are coming back a bit this morning as a less bullish fundamental picture begins to take shape.
Yesterday’s DOE report – headlined by a huge 12 million barrel decline in crude stocks - came out around the same time as reports that city & company officials were confirming that the PES refinery would be closed down next month.
While futures reacted strongly to the news, with RBOB up a dime at some points during the day, cash markets took the news in stride as it appears the Atlantic basin has enough supply available to fill in the gaps. There is also a sense that the explosions & fire at the refinery only moved up the inevitable closure of that refinery which was already struggling after emerging from bankruptcy last year, handicapped by high operating costs and a lack of favorable crude-buying economics based on its location.
The 12 million barrel drop in crude stocks was the largest weekly decline in nearly 3 years. Domestic production dropped for a 3rd consecutive week, the first such stretch of declines since the last price collapse.
The large decrease can largely be explained by a sharp decline in oil imports along with a strong increase in exports – which reached a new record high of 3.77 million barrels/day last week - making it more likely that we’ll see a correction in the next couple of weeks.
It’s not just oil exports that had a big week, both gasoline and diesel exports saw large increases as refinery production ramped up. Those export figures can go a long way to explaining why the market reaction to the PES news hasn’t been more dramatic, since the US is already producing more refined products than it can consume, this situation becomes one of logistics (shifting Gulf Coast exports to the East Coast) rather than capacity.
Speaking of which, the first two charts below show the historical refinery run rates for PADD 1 (East Coast) and total US, before and after the PES closure. As you can see, there will be a dramatic impact on the East Coast run rates, but the US total hardly changes since the Gulf Coast already produced roughly 10X the products as the East. In addition, the US had added 220mb of refining capacity in the past year, which would cover most of the expected decrease from this plant being shuttered.
So, where to from here? With OPEC and G20 meetings coming in the next week, it seems like we’re due for some sideways trading as the market goes into a short-term “wait and see” mode.
Gasoline Futures Surging This Morning
A potentially permanent refinery closure and a large weekly draw in inventories have gasoline futures surging this morning. July RBOB is currently trading 6 cents higher on the day after reaching 10 cent gains overnight, which will push spot prices for gasoline across most US markets to their highest levels in a month, and with a long holiday weekend quickly approaching, there may be more room higher to run over the next week.
Reuters is reporting that PES is planning to permanently close its Philadelphia refinery that was hit by an explosion and fire last week and may begin laying off workers today.
Values for line-space on Colonial’s main gasoline line have gone positive for the first time since January following that fire as Gulf Coast supplies will be leaned on to replace that plant’s production, in addition to increased imports.
The API was reported to show US crude oil inventories dropped by 7.5 million barrels last week, while gasoline stocks declined by 3.2 million barrels and distillates rose by 160,000 barrels. That report had prices rallying late Tuesday afternoon, and that momentum has carried overnight, although the PES story seems to have clearly given gasoline prices an edge over the other contracts. The DOE’s weekly status report is due out at its normal time this morning.
Yesterday the DOE/EIA reported that Mexico’s refinery output has dropped 50% in the past 5 years, and most plants now operate at less than 40% of their capacity as Pemex has struggled with dropping crude output and a lack of sufficient maintenance. Here too, US Gulf Coast refiners are beneficiaries as Mexican imports of refined products are forced to increase.
Today the DOE/EIA is reporting that US electricity generation from renewables surpassed production from coal for the first time on record.
Prices Off To A Mixed Start
Prices are off to a mixed start today after catching a breather and posting light losses yesterday. Heating oil, American and European crude benchmarks are showing light losses early this morning while RBOB futures are fighting to stay positive.
It seems now that energy futures have priced in all conceivable precipitations resulting from the increased tensions between the US and Iran and that bullish pressure has helped ward demand worries. Decreased manufacturing data published by the Dallas branch of the Federal Reserve yesterday cites the tariff spat with China as the chief cause of demand concerns.
Aside from what could be accurately describe as the US vs World saga, there was still a refinery explosion last week. Philadelphia Energy Solutions’ 335mb per day refinery, one of the largest of its kind in the region, caught fire in a series of dramatic explosions early Friday morning. The fire, originating from a leak in the complex’s alkylation unit, has been controlled and contained but repair time estimates remain elusive. Aside from the massive fireball and pollution concerns, this latest setback is bringing the refinery owner’s looming insolvency back into question.
July 4th is coming up next week, a popular driving holiday, exacerbating supply worries in the Northeast. While it seems most attention is focused on short term price increases at the pump, traders’ concerns lie more with what the unexpected supply disruption will do to gasoline stocks in the area. We will get our first look at PADD 1 inventory levels this afternoon when the API publishes its estimates, and again tomorrow morning via the EIA’s weekly report. However, the full weight of the downtime won’t likely be seen until the following week.
Big Week For Energy Prices
It was a big week for energy prices with both gas and diesel futures adding around 10 cents on the prompt month contracts through the 21st. West Texas Intermediate crude oil futures lead the pack, however, with gains of $5 per barrel, Brent futures followed closely behind with gains of over $3.
Tensions in the Middle East, which seem to be heating up or cooling down depending on who you ask, are taking credit for the early buying pressure we are seeing this morning. With American crude up almost 50 cents and European crude flat, the latter is more likely the general consensus among traders. With prompt month RBOB up almost 3 cents and HO up 50 points, the early buying could be leftover bullish sentiment from last week’s FOMC meeting which pushed stocks to all-time highs.
Managed money in WTI saw a bump in net position last week, pulling their collective net length back from seasonal 5-year low. “Smart” money also added some length in refined product positions but continued consolidating in Brent crude futures, placing their position firmly below the 5-year average.
Baker Hughes reported an increase in national oil rig counts for the first time in 3 weeks. With 789 oil exploration rigs active as of last Friday, the total count is still 73 rigs shy of last year’s total, which makes sense given the big pullback in prices we’ve seen in WTI prices since October’s peak at $77.
Smorgasbord Of Bullish Headlines Pushed Energy Complex Higher
A smorgasbord of bullish headlines has pushed the energy complex higher this week, this morning being no different. Rising tensions with Iran, the last update having the White House call an air strike then cancel, equities reaching record highs on dovish monetary policy, and now a massive explosion and fire at PES’s south Philadelphia refinery has prices rallying to monthly highs.
So far there are no injuries reported as a result of the malfunction which is quite surprising given the sheer size of the explosion. Philadelphia Energy Solution’s complex is the largest of its kind on the East Coast, capable of producing 335mb per day, and NYMEX prices are reacting accordingly. There hasn’t been any physical product trading reported so far this morning but prompt month gasoline futures have rallied over 7.5 cents in early morning trading with diesel futures ‘lagging behind’ and only adding 4 cents.
The three alarm fire is reported to have been contained, no update yet on damage or estimated repair time. Since the issue originated in the complex’s butane vat, the refinery’s downtime might not be as long as one would imagine with an explosion that could be felt in neighboring states.
Prices have pulled back slightly from their highs today but have blown through yet another technical resistance level this week. Both gas and diesel settled higher than their respective 20-day moving averages yesterday and have overtaken their more significant 100-day averages with this morning’s buying. Finishing the week above that level leaves prompt month contracts technically open at add another dime next week. However, bearish fundamentals, especially if this morning’s events turns out to be more bark than bite, could temper buyer enthusiasm.
Drawdown Across Board In Energy Stockpiles
A drawdown across the board in energy stockpiles as published by the Energy Information Administration, which came as a surprise to traders, took credit for the modest buying seen yesterday in refined products. Although crude oil posted a net decrease in national inventories, the build at Cushing, the delivery point for the WTI futures contract, actually added barrels last week, keeping the crude benchmark in the red for the day. Gas and diesel both posted gains on Wednesday with stocks moving lower by 1.7 million barrels and .6 million barrels respectively.
Lower crude oil prices seem to be weighing on producers as national crude output was down for a second week in a row for the first time since April. Whether or not increased military activity by Iran, the latest of which resulted in a downed US drone, will boost oil prices to the extent that seems to be their motive is yet to be seen. The aerial property damage is only the latest installment of the DC vs Tehran saga with previous episodes touching on increased US troop presence in the area, apparent sabotage of crude oil tankers, and Iran speeding up the production of nuclear materials.
The increased international tensions seems to be working today however, sending bout American and European crude prices higher by almost $2 per barrel. Refined product futures seem to be following the upward move with gas prices adding +$.03 per gallon and diesel rallying almost 4.5 cents.
Refinery runs in PADD 2 stole the show yesterday and toted a 10% bump in production rates last week. This latest bump out of a waterlogged Midwest boosted throughput to a seasonal 5-year high amid regional flood warnings that seem almost commonplace as of late. Furthermore, Ethanol stocks have seen their 5th consecutive weekly decline, as the entire farming industry struggles with the abnormally wet summer.
Crude and diesel futures have broken through their respective 20-day moving averages this morning, a technically significant resistance level that hasn’t been touched since late May. For both contracts, higher prices could be expected should prices settle above said level after today’s trading.
Refined Product Prices Taking A Breather
Refined product prices are down slightly so far this morning, taking a breather after seeing some buying pressure Tuesday. American gasoline and diesel and European crude oil futures are all down around half a percent this morning while American crude is up just a couple cents per barrel.
The American Petroleum Institute published their weekly national inventory levels yesterday afternoon with a limited market reaction. The trade association estimates a net build in crude oil inventories of .8 million barrels of crude oil and gasoline stockpiles at 1.4 million barrels. Diesel stocks are expected to be about the same as last week, with a drawdown of only 50 thousand barrels. The Department of Energy will publish their weekly report at their regular scheduling this morning at 9:30 CDT.
All quiet on the hurricane front so far this season: a combination of warmer-than-average sea temperatures in the Pacific ocean (AKA El Niño, or The Niño) and plumes of transient, windblown dust from the Saharan desert are keeping tropical development to a minimum so far this year. The National Hurricane Center expects no cyclonic activity to develop for the next couple days, at least.
The dovish signals from the European Central bank incited buying on Wall Street yesterday, bringing the energy complex along for the ride. The US Federal reserve will publish its monetary policy summary later this afternoon and most expect a more hawkish outlook. However, traders also expect the Fed to cut rates at least one more time this year, most likely next month, in an effort to keep the American economy chugging along.
Energy Prices Survive Sell-Off Attempt
Energy prices are treading water this morning, after surviving another sell-off attempt overnight. The headline battle between trade war and shooting war fears seem to have reached a temporary stalemate, although we’re hovering just a few percentage points near the June lows that will need to hold up to avoid another wave of selling.
The FED’s Open Market Committee (FOMC) starts a two day meeting today. The CME’s FedWatch tool shows only a 25% chance of an interest rate cut announcement in tomorrow’s statement, but traders are giving an 89% probability of a cut in July, so we should expect some foreshadowing from this meeting.
We don’t talk about biodiesel RIN values often, but they’ve increased by 50% in the past few weeks as diesel values have dropped, eroding the economic incentive to blend bio into traditional diesel. Ethanol RIN values have also seen a bounce, albeit a much more modest one, as crop concerns sent corn prices to 5 year highs, and ethanol prices to 2 year highs.
The WSJ is also reporting that after a trip to Iowa, the President has asked the EPA to consider further changes to the RFS to help farmers that don’t think the recent E15 ruling went far enough to stimulate demand for ethanol.
Energy Futures Moving Modestly Lower
Energy futures are moving modestly lower this morning as global petroleum prices continue to teeter totter between trade tantrums and tanker threats.
This time it’s India announcing retaliatory tariffs against the US that’s getting credit for the trade fears. An interesting side note is that India has been one of the key buyers of Iranian crude, so these trade negotiations could have a direct impact on the flow of oil.
Speaking of which, the Saudi’s are leading the push to create an international coalition to protect shipping lanes that have come under attack in recent weeks.
Money managers continue to bail out of their bets on higher energy prices, with net length being slashed across the board again last week. At this point, the majority of the liquidation seems like it has been done, meaning speculators heading for the exits may no longer be a catalyst for lower prices. If the June lows can hold, there’s a growing technical argument for higher prices in the next few weeks, which could draw some of those funds back into the game.
Ethanol prices continued to rally along with corn futures on Friday, as the outlook for crops in 2019 continues to go from bad to worse. RIN values have also rallied in sympathy with renewable fuel prices, reaching their highest levels in 3 months.
Baker Hughes reported a decrease of 1 in last week’s oil rig count, bringing the US total to its lowest since February 2018. The Permian basin continues to lead the decline with 5 fewer rigs counted last week, while the “other” basin category saw an increase of 5, and the other major plays held steady.
According to a filing with the TCEQ, Exxon’s Baytown refinery had an FCC unit unexpectedly shut down last night. So far there does not appear to have been any reaction in cash markets, and with PADD 3 gasoline stocks holding above their 5-year seasonal range, the impact may not be noticeable.
Demand Fears Stronger Than Supply Fears
Demand fears appear to be stronger than supply fears this week as energy prices stagnate even though it appears that the Iranian military has been placing bombs on oil tankers near the world’s most important shipping lane. The 2nd week of each month brings a data deluge as various global agencies publish their monthly reports, and this week’s theme was that oil demand is softening, and that appears to have kept buyers on the sidelines despite the drama playing out in the Gulf of Oman.
The battle of words between the US & Iran appears to be staying just that, which is a great relief for many – not just energy consumers – even as video evidence suggests a clear link to Iranian forces and yesterday’s tanker attacks. That lack of escalation – coupled with ongoing demand worries – tempered the market reaction to the attacks, with the big 4 petroleum contracts all still holding losses for the week. I would not be surprised to see a price rally this afternoon however as traders tend not to like being short heading into a weekend with this type of geopolitical tension looming.
The IEA’s monthly oil report was the third this week to note the negative effects of various trade issues on global oil demand. The report that demand growth in the first quarter grew at the slowest rate since the financial crisis, offsetting ongoing supply issues in Iran, Venezuela, Libya etc. While global demand continues to grow, OECD nations are seeing a decline in oil demand, with a petrochemical slowdown in Europe and “tepid” gasoline & diesel demand in the US both cited. The other particularly relevant point made in the monthly report was that the benefit of OPEC supply cuts is that it also increases the world’s spare production capacity.
With US production capabilities soaring, the total global spare oil production capacity may be at levels we haven’t seen in decades, and certainly appears to be acting as a speed bump for prices considering how they’ve barely moved even though the world’s most strategic waterway has hosted numerous ship attacks in the past 2 months.
The EIA reported yesterday that US crude imports from OPEC members dropped to a 30-year low in March.
The Dallas FED’s June energy indicator report showed that support activities for mining operations in Texas have fallen sharply as rig counts have dropped in the past few months. Like the monthly reports from the EIA, OPEC and IEA, this report also noted a slowdown in oil consumption across developed nations.
While petroleum prices are stagnating, corn and ethanol prices have reached multi-year highs this week as more heavy rain is forecast across the mid-continent, threatening to take this year’s crop progress from bad to worse.
Energy Futures Spent Week Recovering
Energy futures had spent a week recovering from multi-month lows, only to see those gains evaporate in Wednesday’s session following a disappointing DOE report. Then, another round of attacks on tanker ships near the Strait of Hormuz sent prices sharply higher, and wiped out most of Wednesday’s losses.
The attacks on a Japanese-flagged ship as the Japanese prime minister is making a rare visit to Iran to try and promote peace in the region, is a strange twist, that’s already being called suspicious. While that certainly adds to the intrigue, all that will really matter for oil markets is whether or not the tensions continue to escalate in an area that accounts for around 20% of the world’s total supply.
The DOE’s weekly demand estimates spiked last week, with US gasoline consumption listed at the highest level of the year, and the 3rd highest weekly total on record. Diesel consumption estimates continue to whipsaw, increasing by nearly a third last week from 3.3 to 4.4 million barrels/day.
As refinery rates start to crank up for peak driving season, and plants come back online after an unusually busy maintenance season this spring, another 40,000 barrels/day of capacity was added last week, bringing the US total to a new record high north of 18.8 million barrels/day. PADDs 4 & 5 have both moved to the top end of their seasonal range for refinery runs, while PADDs 2 & 3 still have room to increase, so we should see run rates smash all-time highs this summer.
OPEC’s monthly oil report showed its production dropped by 236,000 barrels/day in May, primarily due to Iranian exports dropping rapidly as sanctions once again took hold. Saudi Arabia dropped its production by 76,000 barrels/day, helping to offset an increase in Iraqi production, and proving that the Kingdom is still willing to hold back production as needed, even if it is already below its agreed-upon quota. The report also noted a small decrease in demand forecasts as economic growth in OECD countries continues to slow.
Refined Product Prices Bounced
Refined product prices bounced yesterday, nullifying Monday’s losses. RBOB lead the fuel benchmarks adding over 2.5 cents on the day, ULSD futures bumped just over 1.5 cents. WTI futures broke away Tuesday and posted slight losses along with the European crude benchmark.
The American Petroleum Institute published its national inventory estimated yesterday, pegging a ~5 million barrel bump in crude oil inventories for last week, adding to the 35 million barrel net build we’ve seen so far this year. Diesel inventory drew down about 3.5 million barrels while gas built a small 83,000 barrels. The Department of Energy’s official report will be published at its regular time this morning at 9:30 Central time.
Concerns over decreased demand growth reported by the EIA yesterday are taking the blame for this morning’s selloff with crude oil leading the complex lower with a 3% loss. Gas and diesel seem to be following along but in limited capacity falling only 2% and 1.5% respectively.
A confirmation of the API’s inventory estimates could send prices sharply lower this morning and only the weekly futures charts seem to have a support level that could temper the fall. A loss of 5% is not out of the question should we see unexpected builds in the nation’s refined product stocks.
Back And Forth Intraday Action
After a lot of back and forth intraday action the energy complex finally decided to end the day down slightly; although it didn’t feel like lower prices were agreed upon, more like that’s where they happened to be when time ran out. The benchmark crude grades WTI and Brent lead prices lower, both shaving a dollar off during formal trading hours Monday, with American gas and diesel prices lagging behind, down 86 points and 1.85 cents respectively.
In what seems like a more intentional move this morning, refined product prices are bouncing, erasing earlier losses and challenging yesterday’s highs. Monday’s conversations between Russia and OPEC on the possibility of the non-cartel member collaborating in further production cuts present the market with mixed outlooks: Russia’s Energy Minister leaving conversation and options open while watching how June unfolds, hinting that cuts on their end could still happen, opposite the Russian President asserting cuts are not necessary due to the country’s economic makeup. Whether decisions on oil production will be made based on the economic principles or back room political bargaining has yet to be determined.
Regional flooding had temporarily shut down one of Colonial’s major spur lines on Saturday, branching off of the main pipeline to service the southern half of Georgia, but it has since been restarted, limiting a potential supply shortage. Although the National Oceanic and Atmospheric Administration is predicting a “normal” hurricane season this year, consisting of 9-15 named storms including 4-8 hurricanes, this is hardly good news for saturated East Coast and Midwest regions. With no hurricane activity forecasted in the near term, how and if these regions can dry out before being subjected to tropical downfalls is the biggest question facing physical prices.
After a two month long selloff in energy prices, futures are trending higher the past 5 trading session, challenging their first level of support-turned- resistance. NYMEX HO contact will see its first hurdle to higher prices at the upper end of 1.83, which if broken will allow prices about 7 cents of legroom. RBOB on the other hand has resistance levels all huddled around 1.79, making a run at the higher 1.80s seem a little more daunting.
Energy Futures Treading Water To Start The Week
Energy futures are treading water to start the week as another round of good & bad news made its way through the markets overnight. A strong Friday finished eased some concerns of a pending price collapse, although most technical indicators remain in bearish territory.
No new deal yet. OPEC seems to be willing to extend output cuts, but so far the Russians are holding up the deal according to reports this morning.
Good news on trade: The US suspended its plans to place tariffs on Mexican goods after the country’s reached a new agreement on immigration policy Friday, which is helpful for US oil imports and refined product exports.
Bad news on trade: no progress in the US/China talks, and Chinese import data just released shows the lowest import level in 3 years, increasing concerns for the global economy and global energy demand. The IEA gave a bit of perspective on China’s importance in a Friday report on global natural gas, predicting the country will account for 40% of global demand growth in the next 5 years.
Baker Hughes reported a decrease of 11 oil rigs working in the US last week, reaching a 16 month low at 789 total rigs. As has been the case for most of the year, the Permian basin accounted for the majority of the decline, with 6 fewer rigs last week, while the Eagle Ford dropped by 2 rigs, and the Williston (Bakken) dropped by 1.
As expected, money managers continued bailing out of their bets on higher energy prices during the heavy selling of the past 2 weeks after steadily adding to those wagers in the early part of the year.
Energy Prices Fight To Find Bottom
There’s been a battle of conflicting headlines this week as energy prices fight to find a bottom and extend a recovery rally for a 2nd day after reaching 4-month lows on Wednesday.
Russia and Saudi Arabia seem to be having a difficult time agreeing on what to do with their output cut agreement. The Saudis seem to think a deal to extend the cuts will be made (which is getting credit for the bounce in prices) while others are saying Russia intends to increase its output once the current deal ends in June.
Speaking of conflicting stories, energy and equity markets got a sharp afternoon bounce Thursday on reports that the US would not be placing new tariffs on Mexican goods, only to give up some of those gains when the White House was reported to still be moving forward with the new taxes.
In addition to the bounce in futures, Gulf coast basis values were also finding a bid Thursday after Motiva reported an upset on an FCCU unit at its Port Arthur plant (the country’s largest refinery) a day after Exxon reported issues at its Baytown facility. It’s still not clear exactly what operational impacts those two events will have – or what part the storms in the region played in causing them – but to have 2 of the largest facilities have issues in 2 days should keep traders on edge for a while.
Bad news is good news? The May non-farm payroll report showed only 75,000 jobs added in the US (the 2nd worst monthly gain in the past 2 years) along with sharp reductions in both the March and April estimates. Treasury yield rates dipped immediately after the report as it seems the weak economic news gives the FED another reason to cut interest rates. The question is whether that expectation for lower rates will boost equity & energy prices as it has in years past, or if this bad news will just be seen as another sign of an economy on the verge of recession sparking another flight to safety by investors.
We finally know more of the story with the 4 oil tankers sabotaged near a UAE port last month. Preliminary findings are that divers placed mines on the hulls of each ship. Both the US and Saudi Arabia are publicly blaming Iran for the attacks, while the other nations in the region aren’t placing official blame – apparently in hopes of reducing tensions in the world’s most valuable waterway.
A new note from the EIA Thursday detailed how rapidly horizontal well production has surpassed traditional vertical well output.
It’s no secret that Texas produces more oil than any other state in the US, but did you know it’s also the highest wind-electricity producer as well? According to a new EIA report, the state has produced more than 25% of the country’s total wind-generated electricity over the past several years.
Bleeding Has Stopped For Energy Prices
The bleeding has stopped for energy prices, temporarily at least, after another DOE-inspired tidal wave of selling knocked prices to fresh multi-month lows Wednesday. If the tentative early gains can hold, it would snap a 6-day losing streak for gasoline futures that have wiped out more than 25 cents/gallon. (As I was about to hit send, the 2 cent gains from 30 minutes ago have turned into losses, which suggests it’s too soon to declare an end to the meltdown.)
Stock markets seem to be happy that negotiations are underway between US & Mexican representatives in an effort to avoid another tariff battle. Although energy and equity prices have detached from one another recently, those discussions could have direct impacts on US refiners who are weighing in to try and avoid paying more for imported crude, and for exported products should a retaliatory tax battle break out.
US Oil production reached a new all-time high at 12.4 million barrels/day last week, that’s 1.5 million barrels/day more than 1 year ago, and more than 3 million barrels/day more than 2 years ago.
Diesel demand remains dismal with last week’s estimate from the DOE marking the lowest level for May in the past 7 years.
Gasoline stocks continued to build, led by the largest weekly increase in PADD 5 (West Coast) inventories in more than 20 years. The past 3 weeks have seen PADD 5 gas stocks move from below their 5 year seasonal range to the top end of it as record imports flooded the market to take advantage of the high prices created in the wake of numerous unplanned refinery issues. Based on the industry’s uncanny knack for over-healing its wounds, it would not be surprising to continue to see builds in the coming weeks even though supplies are now ample.
You know a market is bearish when…one of the country’s largest refineries reports operational issues due to storms and prices barely flinch.
The heavy rains sweeping across the country continues to threaten many states already fighting flood waters. Reports Wednesday indicated that Exxon was facing multiple unit shutdowns at its Baytown TX plant, one of the country’s largest refineries. Gulf coast gasoline and basis values moved modestly higher on the day, and it did not seem to move the needle in futures markets, but it’s another reminder that we’re starting off the hurricane season with refineries in an unusually vulnerable spot due to the spring rains.
Rising Fuel Stockpiles Outweighing Rising Stock Markets
Rising fuel stockpiles are outweighing rising stock markets as RBOB gasoline futures trade lower for a 6th straight session and the rest of the energy complex continues to hover near multi-month lows.
US equities had a huge rally Tuesday, which seemed to help energy prices pull back from the multi-month lows, after the FED Chairman Jerome Powell suggested that an interest rate cut may be coming to help offset potential impacts of the trade wars. The CME’s fedwatch tool is showing a nearly 70% probability that the FED will cut rates by at least 25 points by the end of July following those statements, up from less than a 30% probability just a week ago. With expectations changing that rapidly, it seems like the market may be setting itself up for disappointment if that rate cut doesn’t come soon.
Unfortunately for the beleaguered bulls in energy contracts, the equity-induced bounce didn’t hold up after the API was said to report across-the-board builds in inventory last week. Diesel stocks were estimated to have the largest increase of 6.3 million barrels, while crude stocks were up 3.6 million and gasoline supplies increased by 2.7 million barrels. The DOE/EIA’s weekly report is due out at its normal time of 9:30 central.
The storms moving across the Gulf of Mexico are not expected to develop into a tropical system, but they are expected to bring flooding rains to refinery country. The majority of gulf coast refineries, and more than 1/3 of the country’s total, and are covered by the flood alerts through the end of the week. While major refinery damage from a disorganized system like this seems unlikely, it is certainly possible that it could further disrupt pipeline and/or marine vessel traffic and perhaps back up barrels destined for export, leading to more inventory builds in next week’s reports.
The additional rains are even less welcome in the Midwest, as it looks like a record amount of farm land will go unplanted this year. The charts below show how that continues to put a bid under ethanol prices, while diesel differentials in the region are collapsing.
A Wall Street journal survey of 10 investment banks suggests the latest price plunge hasn’t changed their outlooks for oil prices in the back half of the year, with most still targeting Brent around $70. The bulls will find solace in their predictions that fundamental supply tightness will eventually outweigh trade fears in sending prices higher, while the bears will find solace that these predictions come from the same institutions that made up credit default swaps on mortgage backed securities.
Meltdown Continues For Energy Futures
The meltdown continues for energy futures as Brent crude and ULSD are trading at their lowest levels since January, and the rest of the complex isn’t far behind as we mark a 5th straight day of heavy selling. RBOB gasoline is once again the weakest contract to start, and is closing the gap in its chart left behind from the Spring RVP transition, trading 38 cents below where it was less than 3 weeks ago.
Recession concerns continue to take blame for the recent weakness in energy markets, along with a statement from Russia that it’s not yet ready to commit to more output cuts – contradicting a statement from the Saudi’s that helped prices find a short-lived bid Monday morning. This sell-off has reached the point where numerous short term technical indicators are in over-sold territory, meaning we’re due for a corrective bounce whenever fear stops driving the train. On the other hand, there was still a large amount of speculative longs – particularly in RBOB and Brent – that may be getting forced out as we speak, which could extend the slide much further.
The tropical system churning over the western edge of the Gulf of Mexico is now given only a 40% chance of developing into a storm this week, although it could still bring heavy rain to Texas and Louisiana.
Ethanol & RIN values did not react much to Friday’s news that the EPA was officially allowing an RVP waiver so that E15 blends could be sold through the summer, and that new RIN reporting requirements would be put into place. Both changes had been widely expected based on preliminary notices, and the RIN requirements were less stringent than some other proposals that would have limited who could trade and how long RINs could be held. Ethanol prices are holding near their highest levels in a year as the outlook for farming this year looks pretty dismal, but prices have actually dipped since the EPA announcement.
An EIA note this morning details the growth of hydrocarbon liquids like Propane and Ethane in recent years, coinciding with the rapid increase in natural gas and oil production, and shows how these “other” liquids are becoming the unsung hero of US energy export revolution.
Energy Markets Dig In Heels After Brutal May
Energy markets are attempting to dig in their heels after a brutal May that knocked 12-16% off of prices. Overnight it appeared that the May sell-off would carry over through June as oil futures were down $1.5 and refined products were down another 3+ cents, but they managed to find a bottom around 3am and have been rising steadily since. The rebound coincided with comments from the Saudi energy minister pledging to draw down global inventories from elevated levels.
With most of the year’s gains wiped out in the past 2 weeks, there is little doubt that the 2019 bull market for energy prices has come to an end. The big question now is whether a new bear market is just beginning, or if we’ll enter another extended period of sideways trading. The first test in determining that looks to be chart support near the overnight lows at $60 for Brent & $52 for WTI, while RBOB faces a good test at its March lows of $1.71, and ULSD looks like it has room to fall all the way to its January lows of $1.64.
The 2019 Atlantic Hurricane season officially started on Saturday, and already there’s a storm system in the Gulf of Mexico that has a chance at becoming a named storm heading towards the Texas coast this week. Currently the National Hurricane Center is giving this storm a 60% chance of development (it will be named Barry if it reaches storm status) and while it may not have enough time over the water to develop into anything major, there’s a decent chance this storm will bring more flooding rains to a swath of TX, AR and LA that are already fighting high water levels.
The latest COT data (collected as of Tuesday May 28) shows that the liquidation in the managed money category picked up in earnest, with WTI, Brent and RBOB all seeing their largest weekly reductions in net-length of the year, while ULSD contracts fell back into a net-short position. Based on the price drops we saw in the back half of last week, it seems likely we could see an even larger reduction in speculative bets on higher prices in this week’s COT report.
Baker Hughes reported an increase of 3 oil rigs drilling in the US last week, with the total count regaining the 800 rig mark after dipping below that level last week for the first time since March 2018.