News & Views
Bearish Trio Of Factors Hammering Energy Prices
A bearish trio of fundamental, technical and trade factors are hammering energy prices, with most futures down another 2% this morning, marking 5-6% losses on the week, and 12-14% losses for the month.
The DOE inventory report got the selling started in earnest Thursday morning, as US crude output regained its all-time high at 12.3 million barrels/day, and inventories held steady even though oil exports once again surpassed 3 million barrels/day last week. To put that in perspective, all else being equal, if the US wasn’t allowed to export crude oil as in year’s past, inventories would have climbed by more than 21 million barrels in a week.
Gasoline demand figures were also disappointing, holding below their seasonal 5 year average for a 3rd straight week just in time for refinery runs to start increasing across all 5 PADDs. Reports that the Ozark pipeline which feeds Midwestern refineries was back online after a brief storm-induced shutdown added to the negative sentiment for products. The good news for refiners was the distillate demand rebounded sharply last week after a dismal 2 month stretch of below-average estimates.
If the DOE stats weren’t enough, a report that the US would allow countries to continue buying Iranian oil until they’d reached a negotiated limit seemed to also contribute to the tidal wave of selling Thursday afternoon, and no one seemed to notice when that report was rejected later in the evening.
Unlike Thursday’s collapse, this morning’s heavy selling seems to be tumbling stock markets that were shocked by the latest tariff threat, this time levied against Mexico, the United States’ largest trading partner, just as the new version of NAFTA was ready to be ratified. IF Mexico chooses to retaliate, it could be bearish for refined products as the US has been steadily exporting more fuel south, whereas in years past this could be bullish for prices when the US relied more on Mexican oil.
In addition to the tariff surprise, there’s a strong technical argument for the selling today after support layers broke in Thursday’s session, creating a snowball effect to the downside. It seems likely given the size of the move this week and the volumes traded that we’re witnessing a liquidation event for a good portion of the speculative longs that have built up so far in 2019.
So, where to from here? We are nearing some new layers of technical support that helped hold up prices last winter, so it would not be surprising to see the selling end – or at least take a break – right around current levels. Then again, if we are witnessing another mass liquidation of speculative funds, those sell-offs tend to overshoot, which could mean we see another $5 taken out of crude and 20 cents or more taken out of products in June.
Energy Markets Survive Heavy Wave Of Selling
The back and forth continues for energy markets after surviving another heavy wave of selling Wednesday, as traders react to the weekly inventory reports and a slew of minor supply disruptions across the midcontinent due to storms.
The API reported a draw in crude oil stocks of 5.3 million barrels, and a drop in distillates of 2.1 million barrels, while gasoline stocks increased by 2.7 million barrels. The overnight price reaction seems to match that report with WTI trying to hold onto gains, while RBOB futures try to drag the complex lower. The DOE/EIA’s report is due out at 10am central today.
More pipeline, refinery and terminal issues are popping up around the US due to the rash of severe storms that continue to sweep across the country. Wednesday the Explorer pipeline reported plans to shut part of its line near St. Louis due to flooding, while numerous terminals in the Midwest were said to be either running out of products, or forced to close directly or indirectly due to the storms. In some cases, power losses are to blame, while in others there are suggestions that the disruptions on crude pipelines and takeaway capacity from barges is forcing refineries from IL to LA to cut runs.
Interesting timing: A new note from the EIA this morning details the race to build new oil pipeline capacity in the Gulf Coast and Midwestern regions.
Interest rates took credit for much of the pessimism Thursday that had both equity and energy prices selling off sharply early in the day. The 10 year treasury yield dropped to its lowest level in nearly 2 years, while the treasury yield curves continued to get steeper. Bulls will shrug off the yield curve warning – suggesting that metric has predicted 7 of the last 3 recessions – while bears see this as a clear sign that investors are taking money off the table and buying up treasuries in a flight to safety.
Meanwhile, the US economy continues to keep chugging along with the 2nd look at Q1 GDP readings holding steady north of 3% this morning, which seems to have given both equities and energy futures a small boost off their overnight lows.
Reports that the US was blaming Iranian mines for the sabotage on 4 tankers in the Gulf of Oman earlier in May may have stirred markets up briefly during Wednesday’s afternoon bounce, but it appears the market is largely shrugging off that news as both sides seem to have limited their saber rattling in recent days.
Strong Wave Of Selling Has Wiped Out Gains
So much for that bounce. A strong wave of selling has wiped out the gains of the past few trading sessions, and put most energy contracts on the cusp of fresh multi-month lows and potentially a more severe drop in the coming days.
The latest perceived escalation in the US/China trade war (rumors of rare earth metal tariffs) is getting much of the blame for the sell-off in equities and energy markets that started Tuesday afternoon and carried through the overnight session.
Both ULSD and RBOB futures are currently just a few ticks away from their May lows, and threatening another 10 cent drop in short order should this short-term chart support fail to hold.
Ethanol prices were spiking Tuesday, along with corn futures as the brutal stretch of spring weather continued across the Midwest – further delaying planting that’s already weeks behind schedule in several states. RIN values have not followed suit as the recent run-up should not impact blending operations with current ethanol inventory levels remaining ample for blending, and there’s no change in sight on the RFS.
That same rough weather continues to disrupt crude and refined product flows on a more limited scale, with a few crude pipelines around the Cushing OK hub reducing rates, which was helping WTI outpace Brent in the past few sessions, but now seems to be acting as those closures may prevent more oil from leaving that it will delay deliveries to the hub.
In addition to the problems with crude flow, Holly’s refinery in Tulsa also remains closed as a precaution as floodwaters come perilously close to the plant – and nearby terminals – while the CVR refinery in Wynnewood is reported to be restarting units that were shuttered due to storms last week.
The weekly inventory reports are delayed due to Memorial Day, the API will be out this afternoon and the EIA/DOE report will be out tomorrow at 10am central.
Gasoline And Diesel Contracts Trying To Lead Energy Complex Higher
Gasoline and diesel contracts are trying to lead the rest of the energy complex higher to start the first full day of trading of this holiday-shortened week. The follow through after Friday’s bounce has taken back about 40% of the losses we saw in the past week.
The early strength in refined products makes it seem like there may have been a refinery hiccup over the long weekend, although so far no reports of issues are coming to light. The Midwest continues to see basis values rally, with Group 3 UNL trading 20 cents higher than a week ago after storms knocked at least 2 refineries in Oklahoma offline last week. Products could be finding some more strength from reports that several European refineries have been forced to reduce their run rates due to the ongoing saga of contaminated crude coming out of Russia.
Speaking of refiners, an article over the weekend noted how the global shortage of heavy crudes is hampering margins for many refiners this year, while a WSJ report this morning shows that expectations for an earnings boost at year end due to the IMO spec change remain high.
Baker Hughes reported a net decrease of 5 oil rigs working in the US last week, with the Permian basin declining by 3 rigs, while the DJ Niobrara declined by 2.
Money managers were reducing their net-long holdings in most energy contracts before the big selling started last week, with WTI seeing a 4th straight weekly decline, while Brent had its 2nd, although none of the changes were large enough to suggest any sort of mass exodus was underway. Given the resilience in prices since Thursday’s collapse, it seems that the large funds have weathered another storm.
The EIA this morning takes a look at the importance of energy trade between the US & Canada, with our neighbors to the north accounting for nearly half of all US oil imports.
Biggest 1-Day Selloff Of The Year
Oil and refined products had their biggest 1-day selloff of the year so far Thursday as fear over demand slowing both domestically and globally seemed to put supply concerns from the Middle East on the back burner. The sell-off has daily, weekly and monthly charts all favoring lower prices, even with a modest recovery rally underway this morning. Unless there is a dramatic rally next week, it looks like oil prices will have their first monthly loss of the year, with charts favoring a test of $54 for WTI and $65 for Brent over the coming weeks, with another 10-15 cents of downside for refined products.
A WSJ article this morning points out how remarkable it is that we’ve had attacks on ships near the strait of Hormuz, the largest oil pipeline in Saudi Arabia, Iran and Venezuelan production is collapsing and Russia’s exports have dropped due to contamination issues, and yet prices are still falling to multi-month lows.
We will get to see the latest Commitment of Traders reports this afternoon, but that data is compiled as of Tuesday’s close of business, so we won’t get a chance to see if Thursday’s sell-off was driven by money managers heading for the exits until next Friday’s report.
Lost in the 8 cent futures losses, Midwest gasoline differentials spiked by about a nickel in both the Group 3 and Chicago hubs after HollyFrontier shut its Tulsa refinery due to expected flooding, and a segment of a Chicago-area pipeline was forced to shut for repairs.
An EIA note takes a look at gasoline prices leading up to Memorial day, which is the unofficial start of driving season in the US. The agency is predicting that retail prices will continue climbing over the next few months, which means this piece was probably written before this week’s heavy selling. That prediction also seems to contradict the chart below that shows retail gasoline prices often peak for the year right around this time.
NOAA’s 2019 Atlantic hurricane forecast gives a 40% chance of a “near normal” season, a 30% chance of an above normal season, and a 30% chance it will be below normal. That seems like a uniquely scientific way of saying they have no idea what’s going to happen.
Rising Inventory And Falling Stocks
Rising inventory and falling stocks continue to push energy futures lower this week, with WTI trading below $60 for the first time since March overnight, and on pace for its biggest weekly sell-off of the year. A flurry of concerns over European elections and the US/China trade war seem to be sparking a wave of “risk-off” selling that’s hitting numerous asset classes, and some bearish data from the DOE’s weekly report is certainly not helping energy commodities resist the pull lower.
This latest round of selling has tipped short term technical indicators into bearish territory, but unless we see a break and hold below the May lows, it’s too early to say that a trend is forming, and this could just be the latest swing in a choppy market. Both WTI and ULSD broke their May lows overnight, so there is certainly a chance we could get that breakdown yet this week, although it seems less likely since futures often tend to drift higher ahead of a holiday weekend.
US crude oil stocks reached their highest levels since July 2017 last week, even though exports of US crude are holding just under 3 million barrels/day. Refinery throughput rates remain below-average, while output remains just shy of record levels at 12.2 million barrels/day.
Total US petroleum demand is a bit troubling as well for US producers as the past 2 weeks have seen estimates below their seasonal 5 year average, as both gasoline and diesel consumption seems to be lagging in May. If we see a spike in those figures over the coming weeks, the soft reports will be written off to the challenges of estimating demand week by week, but if not, these reports could be the early warning of slowing activity in the US.
The EIA published a new note this morning detailing the issues that caused retail gasoline prices in California to spike north of $4, for the first time in almost 5 years. The good news for consumers on the West Coast is we’ve already seen basis values drop 30-40 cents as refineries come back online and imports are received. With last week’s imports r reaching an 8 year high, it seems like we might see prices continue to decline, unless of course there’s another rash of refinery trouble.
From that report:
The West Coast is isolated by both geography and a lack of petroleum infrastructure connections to the rest of the United States. In addition, California requires a different gasoline specification than the rest of the country, further narrowing resupply options. These restrictions mean that after drawing down in-region inventories, the next available resupply is through imports from refineries in Asia or Europe.
Energy Complex Struggles To Find Direction
The energy complex continues to struggle to find direction, moving lower this morning after modest gains on Tuesday, with trade-fear induced equity selling and an inventory build getting credit for the drop.
The API was reported to show another build in crude oil stocks last week, with US inventories increasing by 2.4 million barrels, while gasoline and diesel saw small estimated changes of +350,000 barrels and -237,000 barrels respectively. That build in crude stocks is getting credit for WTI leading the complex lower this morning, although distillates aren’t far behind despite their inventory draw. The EIA’s weekly inventory report is due out at its normal time this morning.
There were unconfirmed reports Tuesday that the CVR refinery in Wynnewood OK was forced to shut multiple units due to the storms rolling through the plains, although basis values in the Group 3 market failed to react, suggesting minimal impact on the market. Those storms continue moving through the Midwest today, and are likely to be the latest hiccup in a tough spring for farmers who are far behind on planting progress (which may be contributing to the softness in diesel prices) and dealing with the prospects of the trade war impacting their export capabilities.
Saudi Aramco has signed a long term agreement to buy natural gas from the US, from a new export facility being built in Pt. Arthur Texas. The idea of the US exporting any sort of petroleum to the Saudi’s is a remarkable feat in the ongoing energy revolution largely driven by the development of shale fields.
Speaking of shale fields, the Dallas Fed published a study Monday on how shale technology has driven down break-even prices for producers, and is providing an anchor for long-term oil prices.
Meanwhile, the EIA this morning published a note on how Con Edison is unable to meet new demand for natural gas consumers in parts of New York. That report is a reminder that while supplies may be ample, the logistics of getting an explosive product to consumers can be a challenge in highly populated areas, particularly when a large utility is involved.
Energy Futures Look Like They’re Stuck
Energy futures look like they’re stuck roughly half-way between their April highs and May lows, waiting for the next headline about China or Iran before making their next move. The choppy action has wiped out any technical momentum, making any sort of trend appear unlikely until we break out of this range in one direction or another.
Stock markets around the world are pointing higher after it appears the US eased some trade restrictions with Huwawei, allowing time for a trade deal to be negotiated.
Another drone attack was reported in Saudi Arabia, but seems to have been quickly dismissed as part of the long-running war in Yemen, rather than an escalation in violence that was threatening oil infrastructure last week. Speaking of which, with details remaining scarce on either of last week’s attacks that helped energy prices pull back from the brink of a major sell-off, doubts are creeping in about what really is happening, and whether or not Iran is involved.
We’re still 10 days away from the official start of the Atlantic hurricane season but just as we’ve seen in the past several years, we have an early storm as Andrea was named Monday near Bermuda. This subtropical storm is not a threat to the US, but it’s a reminder that it’s time to dust off those Hurricane preparedness plans.
Much closer to home a tornado outbreak is currently taking place across a swath of TX, OK and KS. There are a handful of refineries in the path of those storms, most of which feed the Group 3 market. No word yet on if there are any disruptions, but given the location and relatively small size, it’s unlikely we’ll see an impact on product futures if there is any damage to those plants, while WTI could be influenced if there are any impacts to the Cushing OK storage hub.
Stock Markets Continue To Bounce Around
Reports of extended OPEC production cuts and a war of words between Iran and the US over the weekend have not been enough to sustain an overnight rally in energy prices, as most contracts have now dipped into the red. Stock markets continue to bounce around in a similarly volatile pattern as trade concerns continue to linger.
The OPEC & Friends meeting Sunday brought reports that the cartel would hold its current output cuts in place through the end of the year. The group continues to leave the door open to further adjustments, which makes sense given the high levels of uncertainty surrounding production from Iran, Venezuela, Libya etc.
Just a few days after the US evacuated personnel from Iraq, a rocket was fired on the Green Zone in Baghdad, although no injuries were reported.
Gasoline prices are leading the move lower, as cash markets across the country are signaling that supplies are healing as basis differentials have dropped substantially over the past week in most US spot markets. An initial test for RBOB futures this week will be the $2 mark, which may decide if we test the May lows at $1.92, or if they can make a run back at the April highs of $2.14
Money managers remain cautious in their energy betting with WTI’s managed-money net length declining modestly for a 3rd week, while Brent snapped a 9-week streak of increases with a small reduction in the latest COT report. Speculators remain mixed in refined products as well, with ULSD contracts dropping back to a net-short position held by money managers, while RBOB saw a small increase, and continues to hold near the top end of its seasonal range.
Baker Hughes reported a decline of 3 active oil rigs last week, bringing the US total to its lowest level since March 2018 with 802 active rigs. As has been the case for most of the year, the Permian basin accounted for the majority of the change, 3 rigs being taken offline last in that region, while none of the other major shale plays changed in either direction by more than 1 rig.
The EIA this morning is taking a look at the collapse in Venezuelan oil production, predicting that the country’s output will continue its declines through 2020.
Wild Week Comes To A Close
It’s a mixed bag to start for energy futures as a wild week comes to a close. At this point, it looks like this may be looked back on as a pivotal week of trading as the bulls managed to find a floor and hold onto the longer-term bullish trend lines that looked to be broken just a few days ago. Then again, the day is just starting.
So far there’s no new news of attacks or sabotage in the Middle East today, a welcome reprieve after a flurry of action earlier in the week. Some reports suggest that the potential for a war with Iran (or it’s proxies) is still looming large, while the WSJ is reporting that perhaps the whole thing is just a big misunderstanding.
Unfortunately for stock holders, the calm seems to have ended as futures point to another heavy sell-off at the open, which seems to have sapped some of the upward momentum in energy prices as well. It’s worth noting that the correlation between energy and equity futures has turned negative this week, as oil rallies while stocks are dropping. We saw a similar decline last May, and the correlations stayed weak all summer, before the two linked back up in the fall. With trade-war and demand concerns driving stocks, while Middle East war and supply concerns appear to be driving energy, a similar pattern looks possible this year.
Diesel prices reached a new 6 month high in Thursday’s session, and were moving higher again overnight but have since pulled back and are trading slightly down on the day. From a technical perspective, if ULSD futures can break and hold above $2.13, there’s an argument that they can make a run towards last fall’s highs in the $2.30 range. Fundamentally that type of a move is harder to see near term as lackluster demand and increasing refinery diesel production both appear to be headwinds, but the closer we get to year end, the more likely it seems we’ll see a rally when the IMO 2020 diesel scramble begins.
The forward curve charts below seem to reflect a market that’s nervous short term about supply, and longer term about demand, as the recent price increases are all stacked up in the front month contracts, while further forward values stagnate.
Bulls Have Taken Back Control Of Energy Markets
The bulls have taken back control of the energy markets after a choppy start to the week, with oil prices up more than $2/barrel since Wednesday morning and products up 7-8 cents/gallon. The timing of the rally coincided with the weekly DOE inventory report, although there were plenty of mixed signals in that fundamental data. The timing of the rally also seems to match US stocks finding their footing after some signals that the US/China trade war might be taking a short term breather.
There were not any new developments on the Middle East tensions that appear to be aiding in today’s rally, so it could just be that with fear of a stock collapse no longer influencing prices, the bulls are free to run. Whatever the cause, energy futures now seem poised to test their April highs after surviving a test of longer-term support over the past 2 weeks.
The bullish reaction in products seems to be ignoring a sharp drop in total US Petroleum demand, which dropped by almost 1 million barrels/day last week, although give the volatility in those weekly estimates, it’s hard to blame anyone for shrugging off that data point. Case in point: The gasoline demand estimate for the week dropped from one of the 3 highest weekly figures on record, to a level we haven’t seen in May for the past 4 years. Given the 8 cent rally in RBOB futures since the report, it’s clear that traders aren’t yet too concerned with that estimate.
If you want to find gasoline in the US, there’s plenty in the Gulf Coast (PADD 3) but all other PADDs are below average with the Midwest (PADD 2) and West Coast (PADD 5) both seeing levels below their seasonal 5 year range. Those diverging inventory stats has been reflected in the wide price spreads between regions, and looks like it may remain for a while longer as Gulf Coast refinery runs seem to be healing faster than the other locations.
US Crude oil stocks reached their highest level since September 2017 last week, but US oil production dipped for a 2nd straight week, pulling back to 12.1 million barrels/day from the record high of 12.3.
Prices Have Gone Nowhere In Spite Of Attacks
Bearish fundamental data from the API, OPEC and the IEA, and perhaps another soft start for US equity markets, are outweighing the threat of a supply disruption in the Middle East this week, as prices have essentially gone nowhere in spite of attacks on the world’s most important shipping bottleneck for crude and one of its largest pipelines.
The US state department ordered non-emergency personnel to leave Iraq, as the tensions in the region have escalated dramatically over the past few days and due to an “…increased threat stream.” So far the oil markets are not acting as though this is the next step on the path to a confrontation with Iran, as oil and product prices did not make much of a reaction to the news overnight and are holding modestly in the red this morning.
The API was said to show across-the-board builds in energy inventories, most notably an 8.6 million barrel build in US Crude oil stocks, while diesel increased by 2.2 million barrels, and gasoline stocks ticked up by 567,000 barrels. The DOE’s weekly report is due out at its normal time of 9:30 central today.
The fears of Iranian oil export declines due to sanctions were tempered by OPEC’s monthly oil market report that showed gains from Iraq, Libya and Nigeria were more than enough to offset Iran’s decrease, with the Saudi’s still taking the role of the flywheel to balance the cartel’s production. OPEC held its global oil supply & demand estimates steady from last month
The IEA’s monthly oil market report noted a sharp slowdown in oil consumption in Q1 2019, and revised its global demand estimate lower for the rest of the year, citing weaker economic data from Brazil, China, Japan and Korea among others for the weaker outlook. The counter-OPEC agency also noted the relative calm in oil markets given the rising tensions in the Middle East, declining OPEC production and quality issues with Russian oil as new supply sources manage act to insulate the market from more volatility.
Most of the time, the OPEC monthly report gets cited only for its oil production figures, but the report had several other noteworthy items as well.
OPEC on Global Refining
“In April, refining margins globally saw a counter-seasonal positive performance, as the tightness in the gasoline market witnessed in the previous month prevailed, providing stimulus for trade flows amid limited product output. Meanwhile, the peak spring refinery maintenance season is slowly approaching its end. In all main trading hubs, markets of all other key products, with the exception of gasoline, witnessed losses, in line with seasonal trends and given the recently increasing supply-side pressure.”
OPEC on Non-OPEC oil production
“In 2018, non-OPEC oil supply experienced a robust growth of 2.91 mb/d, amounting to more than three times the increase seen in the previous year, and was led by the y-o-y gains of 2.26 mb/d in the US. In addition to the US, other non-OPEC countries, such as Canada, Russia and UK contributed to the gains. Indeed, the recovery in oil supply in 2017 and 2018, following the contraction in 2016, was driven by improving oil market conditions and rising oil prices, with NYMEX WTI increasing by around $14/b, or 27.5%, y-o-y, to average $64.90/b in 2018. Free cash flow (FCF) in non-OPEC reached to a record high of $310 bn in 2018, a jump by almost 100% y-o-y. There are several reasons to why free cash flows have improved from the low of $35 bn seen following the oil price collapse in 2015. Key among these reasons are the higher oil prices, lower cost levels and reduced investments. The non-OPEC’s FCF in 2019 is expected to decline 15%, before rising again by 23% to reach $324 bn in 2020.
Shooting War Vs Trade War Tug-Of-War Continues
The shooting war vs trade war tug-of-war continues.
For the 2nd day in a row, attacks on Saudi oil infrastructure have energy futures rallying overnight. Monday saw the early gains wiped out and most contracts finish the day lower as tumbling stock markets over-rode concerns of a military conflict near the world’s most important choke-point for oil deliveries after 2 Saudi oil tankers were sabotaged Sunday. The new reports are that explosive-laden drones attacked 2 pipeline pumping stations in Saudi Arabia, forcing a temporary closure of the East-West pipeline system to assess damage. That pipeline system has a capacity of roughly 5 million barrels/day, and was built to offer an export alternative to shipping through the Strait of Hormuz.
Speaking of which, there are many more questions than answers surrounding Sunday’s sabotage attacks. It’s still unclear what exactly happened or how the ships were damaged, let alone who committed the acts. A Bloomberg note suggests that whatever it was, it’s minor compared to issues in the past that failed to stop shipping in the Strait of Hormuz, so we shouldn’t get too worked up by this somewhat mysterious event. Based on the 8 cent reversal we saw in refined products Monday, it seems the market tended to agree with that sentiment.
As for the trade-war, the tit-for-tat tariff cycle seems to be continuing for now, with the US preparing a new list of taxes to impose following China’s list released Monday. US Stock markets had their worst day since January following the announcement, but seem to have stabilized overnight as there are still plans for the US & Chinese presidents to meet at the upcoming G20 conference. Speaking of January, the chart below shows that there has been a clear increase in volatility over the past few trading sessions for both equity & energy prices, but we are still well-below the swings that we saw from November-January. The big question for May now seems to be if cooler heads will prevail in the two “wars” or if we’re destined to see another real spike in volatility soon.
Supply Disruptions Have Energy Prices Pushing 2% Gains
A variety of supply disruptions over the past few days have energy prices pushing 2% gains this morning, even while US stock indices are facing 2% losses. Friday saw reports of several refinery issues due to storms in the Houston area, then the Houston ship channel was forced to close due to a vessel collision and spill. Sunday brought reports that 4 ships were sabotaged, 2 of them Saudi Oil tankers, off the coast of UAE, near the Strait of Hormuz. While it’s still unclear exactly how those attacks were carried out, or who committed them, it appears to be an escalation in the building tensions between Iran and US allies.
While energy prices are rallying, stocks markets are facing a steep selloff with DJIA futures down 500 points after reports that China announced a new round of retaliatory tariffs on US imports. It’s unclear what goods would be targeted, but the move suggests that any hopes for negotiators to prevent this escalation in the trade war are futile.
Although it’s clear today that concerns of a shooting war with Iran are outweighing concerns of a trade war with China, it still feels as though energy futures may be pulled lower if the sell-off in equities picks up the pace, and those two stories are likely to remain the most important influencers of prices near term.
Money managers seem conflicted on their positions in energy futures, with Brent crude seeing a small increase in speculative net length, marking 9 straight weeks of modest gains, while WTI, RBOB and ULSD all saw a decrease in the net bets on higher prices. What’s clear from the COT reports however is that the few days of heavy selling we’ve seen in the past 2 weeks has not sent money managers heading for the exits, and with tensions in the Middle East once again approaching a boiling point, it would not be surprising to see more funds get back in the game this week.
Baker Hughes reported a decline of 2 oil rigs in the US last week, with the Permian basin once again appearing to account for the total decline.
Trade Teeter Totter Continues To Dominate
The trade teeter totter continues to dominate the action in futures markets this week as US/China negotiations are set to begin again today.
After an early round of selling, both energy and US stock prices seemed to find a floor Thursday following reports of a letter and potential phone conversation between the US and Chinese presidents, providing optimism that a deal to avoid another round of retaliatory tariffs could be struck. So far this morning equity markets are less enthused about those prospects with futures pointing to losses of a little less than 1% when trading begins, while energy futures are clinging to modest gains.
After being the weakest link in the Energy chain during the heavy selling early in the week, RBOB gasoline futures have been leading the increases since the DOE report Wednesday, apparently reacting to strong domestic demand estimates, a large decline in East Coast refinery runs, and tighter than normal total inventories. While the recent strength for gasoline is welcome news for refiners, markets on the other side of the world are flashing warning signs that the good times for gasoline margins may soon come to an end.
Late this afternoon we’ll get to see how money managers are reacting to the rollercoaster ride when the COT report is released. So far the resilience of money managers betting on higher prices has been enough to stave off a technical breakdown, but when they decide to head for the exits, all bets (in some cases literally) are off.
Winners and losers: The EIA published a note this morning estimating that 2018 was the most profitable year for oil producers since 2013, and yet this week we’ve already seen one producer file for bankruptcy and another lay the groundwork to do the same. With the world’s largest oil companies all pledging dramatic increases to their operations in US shale plays, it seems there could be more small producers who get squeezed out of business even with prices holding at profitable levels.
Good luck with that: Mexico’s president was not satisfied with bids to build a new refinery, so announced that the government would partner with Pemex on the $8 billion project. Considering Mexico’s current refineries are operating at less than half of their capacity due to issue with Pemex and the government, that project now looks like a long shot at best.
Momentum Wiped Out Again
A bullish DOE inventory report Wednesday helped energy futures find a temporary floor, only to see that momentum wiped out again by a wave of selling in equity markets overnight. Trade tensions continue to take credit for the swings across several asset classes, although the correlation between moves in US stick indices and energy futures has dropped to its lowest levels so far this year.
While inventory declines in crude oil and gasoline took the headlines, it may be the resilience of domestic demand that’s the biggest story helping prevent prices from continuing their slide. The DOE’s estimate for gasoline demand was the 4th highest on record last week, and the highest ever for a week in May, which suggests we should break new all-time records once we reach peak demand season this summer. In addition, days of supply (total inventory divided by daily demand) dropped below 23 days for gasoline, for the first time since the aftermath of Hurricane Harvey.
Refinery runs continue to lag behind year-ago levels, with a 7% drop in PADD 1 runs the most notable data point of this latest report. The west coast (PADD 5) only saw a small increase in run rates last week, which was a bit surprising given the sharp pullback in basis values this week that suggested supplies are healing quickly.
Today’s interesting read: How tensions with Iran have made old enemies new friends in the Middle East.
Energy Futures Teeter On Edge Of Technical Breakdown
Energy futures continue to teeter on the edge of a technical breakdown, while spot gasoline markets across the country are crumbling, suggesting the spring rally of 2019 has finally given up the ghost. After another trade-fear-induced wave of selling in both equity and energy markets Tuesday, there was a brief attempt at a rally overnight that has already been wiped out, suggesting that there’s little conviction among buyers these days. Many technical indicators continue to point lower, with another 10 cents of downside looking likely for refined products in May.
The API was said to show a 2.8 million barrel build in crude stocks last week, while gasoline declined by almost the same amount and diesel stocks dropped 830k barrels. The DOE’s weekly update is due out at its normal time today. The softness in cash markets this week suggests we should see refinery and import rates climbing in this week’s report.
The DOE published its monthly Short Term Energy Outlook Tuesday, predicting that global oil demand will outpace supply for the balance of 2019, and also projecting higher gasoline prices for the driving season than we saw last year. The report also notes the remarkable turnaround of gasoline prices and margins in the US so far in 2019, in comparison to both diesel prices, and to international levels. The EIA’s monthly energy review also detailed how US energy consumption, production and exports all hit record highs last year.
The tensions with Iran continue to build this week after their president announced they would stop complying with parts of the nuclear treaty it was still (supposedly) operating under with several European nations. Some are suggesting that this move is just another step towards an armed conflict between the US and Iran, while others suggest it’s just more posturing to build a divide between the US and its allies on Iranian sanctions.
Tug-Of-War In Energy Prices
There’s a tug-of-war going on in energy prices, with fears over a trade war with China attempting to push prices lower, while concerns over a shooting war with Iran have been helping those prices recover. So far this morning, it looks like the trade war fears are winning, as a 2nd wave of selling kicked in overnight after most contracts (and US stock markets) staged a strong afternoon recovery in Monday’s session.
Monday’s price bounce was aided by reports that the US was sending an aircraft carrier strike group and other military assets to the Middle East in response to threats from Iran. The boy who cried wolf? This would be at least the 5th time in the past 10 years that the Strait of Hormuz became a point of threats from Iran, without any actual disruptions. That said, it’s impossible to ignore the fact that roughly 20% of the oil in the world needs to pass through that 2-mile wide stretch of water, and it’s becoming harder to ignore the chance that the US is laying the legal groundwork for an eventual military action.
Gasoline prices have taken the worst of the selling so far this week as expectations for refiners returning units from maintenance seems to be outweighing those for increasing demand as we approach driving season. We’re in the window of time when gasoline prices normally top out for the season, so this trend reversal is certainly not an uncommon phenomenon, and with chart support breaking down this week, it looks like there’s another 15-20 cents of downside potential near term, in addition to the 20 cents they’ve fallen in the past 2 weeks.
We’re a few weeks away from the official start to the Atlantic hurricane season, and the latest forecast suggests 2019 will be less active than 2018 and that Caribbean development may continue to be hindered by an El Nino pattern.
Interesting read from Reuters about how US refiners are getting creative to replace the crude oil they normally bought from Venezuela.
The EIA this morning published a note detailing how biodiesel continues to increase its share of the US soybean crop. The IEA meanwhile published a report noting that the growth rate for global renewable energy capacity stalled in 2018 after 2 decades of steady increases.
Trump Trade Twitter Tirade Spooked Markets Around Globe
Another Trump trade twitter tirade has spooked markets around the globe, with Asian stock indices down 3-7%while US and European indices are down around 2%. Energy markets were following the overnight sell-off for several hours, with refined products down more than 4 cents/gallon and oil down around $2, but have since recovered the majority of those losses.
During the overnight lows both WTI and Brent broke below their 200 Day Moving averages, and appeared poised for a technical breakdown, but have since rallied back above that layer or longer-term support. That resilience for energy contracts that were already looking like they’ve topped out for the season is notable, and perhaps a sign that the funds that have steadily been buying into contracts in 2019 aren’t giving up just yet, even though the short term technical outlook is looking more bearish by the day.
Speaking of funds, the COT reports last week showed a mixed reaction by money managers who added slightly to net length in Brent and RBOB positions while reducing WTI and ULSD positions modestly. The limited reaction to the first heavy selling in several months suggests the large speculators are willing to weather a storm or two in a longer-term bet on higher prices. The RBOB position is the only 1 of the 4 that is above its 5 year range, and is looking a bit precarious now that US refiners should be coming out of maintenance.
The relative strength for energy compared to equities and other commodities seems to be owed at least in part to Saudi Arabia announcing it would raise prices to Asian and European buyers of its oil, suggesting that the Kingdom will stick with the OPEC output cut plan. It’s worth noting that the Saudi’s lowered prices to US buyers of crude, which may be a symbolic gesture to appease the president as sales to the US have already dropped to their lowest levels in 30 years.
Baker Hughes reported an increase of 2 oil rigs put to work last week, a small rebound after the total US count reached its lowest level in a year.
Rally-Or-Else Time For Energy Futures
It’s rally-or-else time for energy futures after the 2nd heady daily sell-off in the past week has knocked 7% or more off most petroleum contracts, and left them on the verge of a technical breakdown. Brent crude dipped briefly below the $70 mark Thursday, and RBOB broke below $2 for a few minutes during the lows of the day, erasing almost all of their April gains and setting up an important technical test over the next few days.
If those levels break for good, it looks like there’s plenty of room to fall before the next layers of chart support come into play, and could easily mean another $5/barrel losses for Crude and 10-15 cents for refined products. Then again, we’ve seen this market bounce sharply after a brief liquidation plenty of times over the years, so we can’t call an end to the bull run just yet.
More bad news on the West Coast, the P66 refinery in Carson CA was hit by a another fire Thursday afternoon. No word yet on the impact to production, and it’s 5am on the West Coast as I write this so no spot trading has taken place to gauge the market reaction.
The April payroll report showed an increase of 263,000 jobs for the month, and the headline unemployment rate dropped to a 20 year low of 3.6%, while the “U-6” rate held steady at 7.3%. Equity and energy markets had a modestly positive reaction to the new that seems strong enough to keep recession fears at bay for a while longer, while not so strong as to risk the FED rethinking their stance of holding interest rates steady.
Energy Prices Under Pressure
Energy prices are under pressure this morning, with oil prices down more than $1/barrel and gasoline prices down 3 cents/gallon, in what appears to be a delayed reaction to some bearish supply data from the DOE, and/or a lack of action by the FED.
US crude oil inventories surged nearly 10 million barrels last week to reach their highest level in 2.5 years, in spite of exports holding north of 2.5 million barrels/day, as domestic oil production reached a new record high of 12.3 million barrels/day and refinery runs dipped slightly. If you’re wondering how WTI managed to end the day with minimal losses after that large of an inventory build, note that Cushing OK stocks – the delivery hub for the WTI futures contract – didn’t change. This is yet another sign that the Gulf Coast is where the action is and the old hub is less relevant as the US transitions to an energy exporter.
Total US refinery runs were down 137mb/day last week as a large decline in PADD 2 of 252mb/day (representing 6.6% of Midwest production) off-set gains in PADDs 1, 4 and 5. Total refinery utilization is holding below 90%, which is well below the average for this time of year as several plants front loaded maintenance for 2019 expecting margins to improve when the IMO deadline approaches, on top of numerous unplanned outages this spring.
The FOMC made no change to interest rates yesterday (as expected) and essentially made no change to its “patient” stance on future rate moves which seemed to disappoint US equity traders as most indices sold off following that announcement. Energy futures had already settled for the day when that occurred, so that late selling in stocks seems like it may have contributed to the weakness we’ve seen overnight.
The Iran and Venezuela stories continue to have many more questions than answers, and it seems like we could be stuck in a range-bound market with choppy back and forth action until a more certain picture on one or both emerges.
Energy Futures Struggling For Direction
Energy futures are struggling for direction to begin May trading, after a strong finish to April. A large increase in US crude oil inventories seems to have kept moderate selling pressure on WTI overnight, while refined products have alternated between gains and losses overnight, as it seems traders are content to wait on the DOE and perhaps the FED before making the next move.
Don’t adjust your dial: When May RBOB futures expired yesterday, they were almost 6 cents more expensive than the June contract that’s now taken the prompt position. So, while June RBOB is actually up slightly on the day, the net change when comparing the continuous futures codes are down more than a nickel. Cash markets so far are fairly flat on the day.
The API was reported to show a build in crude stocks of 6.8 million barrels last week, while gasoline stocks declined by 1 million barrels and distillates dropped by 2 million barrels. The DOE’s weekly report is due out at its regular time this morning. It may sound like a broken record, but watch refinery runs closely this week to see how quickly the supply network recovers from a brutal spring in terms of unplanned maintenance.
The latest in the political drama known as the Renewable Fuel Standard (RFS): As RIN values continue to languish, a new Reuters report suggests the rumored plan by the EPA to release data on small refinery exemptions to the RFS may be not get off the ground.
Speaking of political drama: The FOMC is meeting today. According to the CME’s Fedwatch tool, traders are giving a 97.5% chance that no changes to interest rates are made today so the statement – due out at 1pm central – is unlikely to move markets unless there’s a surprise change to the FED’s “patient” stance announced previously.
It’s worth noting that Fed Fund futures are giving a 64% probability that the FOMC cuts rates at least once by year-end, and a zero % probability of a rate hike. Those expectations for lower interest rates seem to be contributing to a weaker US dollar lately, although the relationship between the dollar and energy values has remained relatively weak over the past year, making the FED’s decision less likely to have an impact on fuel prices short term.