News & Views
Energy And Equity Markets Limp To Finish Line
Energy and equity markets are limping to the finish line with minor losses in the early going to end this long strange year. The table below highlights the dramatic swings, and very different outcomes for some of the most watched commodity, equity and currency contracts.
Today is expiration day for the January (21) ULSD and RBOB contracts so watch the February contracts for price direction today, and note that most rack prices published tonight should carry through the long weekend since markets are closed tomorrow.
It’s been a brutal year for many, and the energy industry has certainly taken its lumps. Record setting amounts of debt were subject to bankruptcy filings in the oil patch, but things have arguably been worse for refiners as crack spreads have only made minor improvements compared to the recovery in oil prices, and the industry saw the most permanent closures announced in more than 30 years as a result.
The pace and scale of demand recovery will be the big underlying story for 2021, as the world races to distribute vaccines and get people back to a more normal existence, while a new and more potent strain of COVID threatens to derail that progress. There will be plenty of theories about how the new administration in Washington will change the landscape for several industries – ours being one of the most noteworthy – but unless the Senate is flipped in the January runoff, it seems like major legal changes are unlikely in the near term.
The Crescendo of emission reduction plans is likely to continue to build in 2021 as more big oil and refining companies lay out plans to reduce their pollution levels during the long slow transition away from fossil fuels. The Dallas Fed issued a special report this week taking a look at what the industry is doing to battle climate change, and highlighting pipeline capacity as one of the keys to reducing emissions near term. Renewable diesel is becoming the poster child for a way forward for motor fuels to have a legitimate renewable option near term as ethanol and biodiesel have already pushed the limits of their usefulness. The EIA is ending the year by highlighting the progress made on the renewable front as US consumption of those products surpassed coal in 2019 for the first time in 130 years.
3 more drilling rigs were put to work last week, marking the 12th increase in 14 weeks. According to the Baker Hughes report, we started the year with 877 rigs drilling for oil on land in the US, which ended up being the highest count of the year. That number hit a record low in August at 172, before starting a slow and steady recovery over the past 3 months as prices got back to more survivable levels and operators faced hard decisions on whether to drill or risk giving up leases in some cases.
Week 52 - US DOE Inventory Recap
Traders Running Out The Clock On 2020
Traders are running out the clock on 2020 with energy prices hovering near their highest levels since March, but so far unwilling to make a meaningful attempt at another rally. U.S. equity markets are pointing higher again today after pulling back from record highs in Tuesday’s session, and the U.S. dollar is weaker once again, reaching its lowest level in 2.5 years as stimulus checks start rolling out and the lawmakers in Washington appear to be doing their best Oprah impression with recent updates to monetary and fiscal policy.
The API reported inventory drawdowns across the barrel last week with oil stocks down 4.8 million, diesel down 1.8 million and gasoline down 718 thousand barrels for the week. The DOE’s weekly status report is due out at its normal time. Large draws in crude inventory are common this time of year as shippers try to minimize their tax exposure based on year end holdings in Texas.
Ahead of the weekly status report, the EIA took a look back at the record setting demand drop due to COVID mitigation efforts earlier this year.
The asset shedding continues: Marathon’s midstream spinoff is selling a fractionation plant in Corpus Christi to Howard Energy as the country’s largest refiner continues to get creative in ways to bolster its cash position to survive the COVID demand crisis.
Some better news for refiners is shown in the crack spread chart below as margins have recovered over the past couple of weeks for several grades of crude, most notably Western Canadian Select. One headwind to that recovery in margins is the steady rally in RIN prices, that acts as a tax to refiners without an integrated system to blend renewables into their refined product streams.
The weaker dollar also seems to be indirectly contributing to that run-up in RIN prices as Corn and Soybean prices both reached five year highs this week, in part due to the weaker dollar/stronger commodity phenomenon adding to the cost of producing ethanol and biodiesel.
U.S. Equity Markets Rally To Record Highs
U.S. equity markets are rallying to new record highs this week, and energy markets are trying to follow them as trading winds down for this most unusual year.
The house of representatives approved an increase in stimulus checks, sending that bill to the Senate today for approval. The House also voted to override the president’s veto of the latest defense spending bill, encouraging markets that the dollar printing presses won’t be slowing down anytime soon. Extra liquidity/aka stimulus pushes down the value of the dollar, which is correlating to stronger commodity prices, a phenomenon that had gone largely dormant, but was a major force in markets for years following the 2008 financial crisis.
While the news from Washington has Wall Street in Risk On mode, the reaction so far in energy markets is relatively muted with the complex seeming to have entered a period of sideways trading after seven weeks of gains. Most technical indicators have moved into neutral territory, which should keep the action choppy but aimless until we see the range set over the past week broken. For WTI that’s a move above $49 or below $46. For RBOB gasoline that will mean a break above $1.40 or below $1.30, and for ULSD the range seems to be set from $1.42 to $1.52.
Numerous mobility tracking data sets have become popular since the start of COVID-related shutdowns and the driving-specific data points have become a decent proxy for gasoline demand. The 2 charts below show both the seasonal slowdown, and the near-halt in movement over Christmas. The second chart also shows how two major metro areas (LA and Dallas Counties) see similar trajectories, but different demand outlooks based on their stay-at-home orders, or lack thereof.
Money managers continued to increase their bets on higher gasoline and crude oil prices last week according to the CFTC’s weekly report, but cut their length in diesel contracts. The net length held by the large speculative category of traders reached their highest levels since COVID hit the U.S. In other words, hedge funds like betting on higher gasoline prices when RBOB is trading around $1.40 than they did in April when prices were trading below $.50, or at the start of November when they were sub $1.
There’s a similar bullish enthusiasm being noted in U.S. equity markets as borrowing to invest reaches new records even after many stocks are already trading at all-time highs. This type of sentiment extreme can be seen as a contrary indicator since at some point the market runs out of new money to keep pushing prices higher, and leveraged liquidation can be particularly volatile.
Energy Prices Left In Technical Limbo
After a bit of modest selling to start the overnight session, energy futures rallied following news late Sunday night that the president had signed the stimulus package he’d previously threatened to veto. Refined products were up nearly two cents for a brief time, but have since given back almost all of those gains and are trading near break-even levels.
You can see the markets fixation on stimulus in the WTI/USD correlation chart below that shows the inverse relationship between the dollar and oil prices has reached its strongest level of the past three years.
This is typically one of the quietest trading weeks of the year, with many workers around the world taking extended vacations between Christmas and New year’s. Energy prices are left in technical limbo this week, just one strong day away from breaking out to new 10-month highs, but having had their upward trend broken during last week’s sell-off. That combination of low volume and lack of direction seems to set us up for some choppy back and forth trading.
The CFTC’s Commitments of Traders report is normally released Friday afternoon, but was delayed due to Christmas and will be out later today. The ICE version of that report shows that money managers ended their streak of weekly increases to net length held in Brent crude oil contracts, mimicking the action in prices that finally saw a weekly decline after seven straight weeks of gains. Those large speculators did continue adding to their long bets in Gasoil contracts for a seventh week.
Also note the steady decline in swap dealer positions in gasoil contracts in the chart below, that suggests interest in forward hedging of diesel prices has waned since prices have normalized after the chaos witnessed in the spring.
Baker Hughes reported their weekly rig count ahead of the holiday break, showing 1 more rig was put to work in the short week, bringing the US total for active oil rigs to 264. That’s the highest level of drilling activity since the first week of May, up from a low count of 172 oil rigs in August, but still 50 rigs less than the lowest level counted during the previous 10 years.
A study from the Dallas FED details the negative impact surging COVID cases is having on job growth in the region, a phenomenon that’s no doubt playing out in other parts of the country as well, contributing to the ongoing slump in fuel demand.
Week 51 - US DOE Inventory Recap
Activities Wind Down Ahead Of Long Weekend
Energy futures are trying to bounce after two days of selling, but volumes are shrinking rapidly as traders wind down their activities ahead of the long weekend.
Both equity and energy markets saw a brief selloff overnight after the U.S. President refused to sign the Stimulus & Spending package passed by congress, but quickly recovered as it became clear that the votes to override a veto were probably available, and the changes requested may actually be approved.
Unless the buyers step in soon, the energy complex is going to snap the seven week-long string of gains, and break the bullish trend-lines in the process. That leaves the complex open to more technical selling, but we’ll need to see prices drop below Monday’s lows (roughly four cents below current values for RBOB and ULSD) before this move will look more like a trend reversal than just a correction.
Although many businesses are closing tomorrow for Christmas Eve, futures will still trade and have an early settlement. Argus and Platts will both be publishing spot prices Thursday, but OPIS will not. (OPIS Rack pricing will be published as normal) Most rack prices will be updated Thursday and run through the weekend. Since Christmas falls on a Friday this year, futures trading will not reopen as it normally does, giving traders a rare holiday without any electronic trading to keep an eye on.
Refining margins have recovered during the recent run-up, and the forward curve is showing better times ahead for those plants that can survive the COVID demand crisis. The billion dollar question is how long that demand recovery will take, and if margins can hold on once run rates start increasing once again. There is some good news coming from Asia, as Indian refiners cranked up run rates to their highest levels since COVID began, following similar increases from China and Japan as demand comes back online.
The API reported a build in crude oil and diesel stocks of 2.7 million and 1 million barrels respectively, while gasoline inventories had a small decrease of 224,000 barrels. The build in crude stocks surprised those that expected a draw down in inventories as we approach year end. We’ll see later this morning if the DOE report confirms that estimate.
Door Open To Extend Santa Claus Rally
Energy and equity markets survived a round of panic selling Monday, keeping the bullish trend-lines intact, and leaving the door open to an extension of the Santa Claus rally and higher prices to end the year.
The DJIA ended higher after selling off more than 400 points in the early going, and the S&P 500 bounced more than 80 points from its morning lows. Energy contracts saw similar moves with RBOB and ULSD both down almost 9 cents overnight, but climbing back to lose less than 4 cents by settlement.
There’s some modest selling in energy futures to start Tuesday’s session, which is largely being blamed on fears of new lockdowns (which is the easy target for all sell-offs lately) and liquidity is quickly drying up as we head towards Christmas. The complex was due for a correction after 7 weeks of gains, and yesterday’s lows set a good short term support level on the charts where buyers seem comfortable to step back in.
CVR energy (fka Coffeyville resources) announced board approval to proceed with a renewable diesel project at its Wynnewood, OK refinery (fka Gary Williams), which is expected to come online mid-2021. Unlike several other renewable diesel conversion projects announced earlier this year by Holly, Marathon and P66, this project does not appear to be a complete refinery conversion, just the hydrocracker. It’s unclear at this point how or if the remaining units at the plant will operate, but if they do manage to continue a hybrid renewable/traditional refining model that seems like it could be a template others would love to follow as plants deal with the worst operating conditions in nearly 40 years.
The spending bill making its way through Washington is reported to include a 5 year extension of the 9 cents/barrel Oil Spill tax, along with extensions of several cleaner energy credits for solar, wind, carbon capture and waste-to-heat projects.
Massachusetts, Connecticut and Rhode Island, along with the District of Columbia signed a Memorandum of Understanding to participate in the Transportation and Climate Initiative program Monday. The program will tax fuel suppliers via a cap and trade program and use the proceeds of that tax for investing in clean energy projects. 10 other states in the region all rejected the plan. At this point, signing the memo doesn’t change anything as each state will still have to formulate a plan, which is not laid out in the memo, and then get it signed into law before being implemented in 2023.
Stairs Up, Elevator Down For Energy And Equity Markets
It’s a case of stairs up, elevator down for energy and equity markets as a broad selloff overnight wiped out all of last week’s gains in just a few hours. It appears there’s a bit of “buy the rumor, sell the news” in today’s big drop as the long-awaited congressional stimulus package was finally passed over the weekend, but it came with strings attached – most notably some restrictions on the FED’s emergency lending capabilities.
The U.S. Dollar has had a strong rally as it appears the money printing press will now have to get more approval before cranking up going forward, which matters more to Wall Street bankers than the $600 checks being sent to lower-income earners elsewhere. The bright side of this phenomenon is it brings back one of our favorite news characters, the “Head-in-hands trader” who tends to make an appearance any time we get a big sell-off.
In addition, there’s a new strain of COVID reported in England, that has much of Europe and Canada restricting travel to and from the UK as a result. Fears that the new strain could offset progress made with the vaccines seems to be spooking markets, but some reports suggest that the vaccines are still likely to be effective against the new strain.
Given the huge run-up in process we’ve seen since Nov. 1, we could easily see another 10-15 cents of downside for refined products in a normal correction of that rally unless buyers are able to get prices back above the upward sloping trend lines soon. That said, we saw similar rounds of steady buying capped off by a large sell-off in June, August and September, and each time the market recovered the losses within a week or two.
Money managers continued to add net-length across the petroleum contracts last week, enjoying the seventh straight week of gains. Their reaction to this selloff, the largest in nearly 2 months, may make a big difference in whether or not this ends up being just a correction, or the end of the line for the rally.
Baker Hughes reported a net increase of 5 oil rigs drilling in the U.S. last week. The Permian basin increased by 5, while the Eagle Ford, DJ and Woodford basins all decreased by 1, which were offset by gains in other smaller plays.
The increased drilling activity is also registering on the Dallas FED’s Texas jobs forecast, as one of several positive leading indicators suggesting the employment recovery from the spring COVID collapse should continue through December.
Add another refinery to the scrap heap: Portugal’s oil & gas company announced it would shutter the smaller of its two refineries (which has roughly 100mb/day capacity) permanently due to the impact of COVID, and the regulatory environment.
U.S. Equity Markets Hold Their Breath
U.S. equity markets are holding near all-time highs and energy futures continue to trade around 9 month highs, but they all seem to be holding their breath a bit this morning as a congressional deadline approaches, and an electric car maker debuts in the S&P 500 index, both events that could create some short term volatility.
There’s been a dramatic shift in the forward curves for crude oil and diesel contracts during the 7 week rally (charts below). The flip to backwardation from contango for crude oil is seen as a sign of a rebalancing market by some, but others will note that this change will also take the storage play buyers out of the market.
The forward curve for gasoline hasn’t changed much during this time, but January RBOB futures have managed to rally to a premium over February this week, which is a bit of a head scratcher with PADD 1 inventories swelling well above their typical seasonal range. That tick higher could have been driven by traders rolling out of positions early due to the upcoming holidays, and the lack of liquidity that typically accompany them. It also could be tied to concerns over supply disruptions from the worst winter storm to hit the region in several years this week, although it appears that there were not any notable supply issues caused by that system.
D6 ethanol RIN values pushed to a new 3 year high Thursday, continuing the upward momentum since the election. Michael Regan, currently the head of North Carolina’s department of Environmental Quality has reportedly been selected to run the EPA under the new administration. While the markets seem to be making clear bets that the new administration will be tougher on refiners than the current EPA, Mr. Regan’s record, and current location seem to be a relatively neutral in the sense that neither he or his state are major players in the Big Ag vs. Big Oil battle also known as the RFS.
Energy Futures On Pace For Gains
Energy futures are once again reaching new nine-month highs this morning, and are on pace for a seventh straight week of gains, while the S&P 500 is poised to hit new all-time highs. Progress towards new fiscal stimulus in congress, a promise from the FED chairman to stand by with more monetary stimulus if needed, and some better-than-many-expected inventory data are all seeming to contribute to the rally in both energy and equity markets.
This latest breakthrough on the charts leaves little in the way of short term technical resistance, giving WTI a path to make a run at $50. ULSD charts are similarly open to a run at $1.60 after touching $1.50 for the first time since March 5 overnight, but RBOB will face an earlier test at the August high near $1.44 that’s just six cents from current values. All of the petroleum contracts have some sort of overbought short term technical indicators however, suggesting that they’re overdue for a short term correction.
A major winter storm just dumped more snow on New York City than it got all of last winter, but with most people already working from home, this system does not yet seem to be the major demand disruptor that it would have been in a normal year.
Yesterday’s DOE report had a decline in oil stocks despite a pullback in refinery run rates, as the U.S. import/export flows normalized as expected. The government’s estimate for gasoline demand was better than many predictions based on various evidence at street level of sharp declines in consumption as the lockdowns pick back up. Diesel demand also saw a nice recovery on the week, and is holding near its five-year average for this time of year, a remarkable feat given the drastic reduction in diesel-burning activities like mass transit.
Speaking of which, the EIA this morning published a look at fuel demand over the week of Thanksgiving, compared to last year, noting that gasoline consumption was down 12%, and jet fuel demand was down 42%, but distillate demand was actually 7% higher year on year.
Today’s interesting reads:
A recap of global refinery closures caused by COVID, and how China is bucking the trend.
Why today’s Capital spending reductions are setting the stage for a huge rally in commodities over the next several years.
Week 50 - US DOE Inventory Recap
Reports Suggest Stimulus Deal Is Within Reach
Oil prices managed to briefly trade up to fresh nine-month highs overnight, but have since pulled back and are moving sideways in early morning trading. Optimism for faster vaccine rollouts and more stimulus continue to be the themes getting credit for the rally in energy and equity markets, while weak supply/demand fundamentals and the threat of more lockdowns seem to be providing a dose of caution keeping the upward momentum in check.
The API reported more inventory builds last week. The largest was in distillates, which saw an increase of 4.7 million barrels, while crude oil stocks built by 1.9 million, and gasoline stocks increased by 828,000. The DOE’s report is due out at 9:30 central, and after last week’s huge 15 million barrel increase in crude oil inventories (the second largest increase in 20 years) it seems likely we may see a large headline draw as the import/export flow rebalances, and importers begin their year-end storage-at-sea to avoid taxes.
The FED’s open market committee wraps up its last meeting of 2020 today. The CME’s FEDWatch tool shows that the market is pricing in a 0% probability of an interest rate increase at this meeting. Not only do traders not expect rates to go up now, they are giving a 0% probability of a rate hike all the way through June as it’s expected the FED will do everything it can to keep the economy rolling. Speaking of which, while rate changes aren’t expected, the FOMC statement will be parsed for any clue on potential new monetary policy tools that could be used to help bridge the economy until the vaccine spreads faster than COVID itself, but with Congress gridlocked, we may see the fed put pressure on legislators by suggesting fiscal stimulus is what’s needed near term.
Speaking of fiscal stimulus, reports suggest a deal is within reach, which of course we’ve heard several times over the past month. One thing to watch closely is the numerous taxes that may be tied to the package, such as renewable energy credits, and the federal oil spill fee which is set to expire 12/31.
Speaking of the Federal Oil spill fee. It looks like we could see that tax brought before the supreme court in the coming year as a federal court has ruled that oil exporters should not be charged that tax, and the IRS appears to be ready to fight back against any refund requests.
If you need a reminder of the giant scale of a modern refinery, take a look at the article and photos of the hydrotreater being delivered to the P66 refinery outside of St. Louis this week. That plant is scheduled to undergo a major turnaround in the next few months, which apparently includes installation of this new unit.
Challenges Coming This Winter
Energy futures continue to hold near 9-month highs in spite of more weak fundamental data as the market seems to continue to care more about the chance of economic recovery 6-12 months down the road, and less about the challenges to be overcome this winter.
There is some doubt creeping in to the market, as we saw early gains in Monday’s session wiped out mid-day, which could be a sign that the bulls have outkicked their coverage with a 40% price rally when demand was on the decline. Whether or not prices can punch through last Thursday’s highs this week, which should spark another technical rally, should determine if we end the year in rally mode, or with a downward correction.
OPEC’s monthly oil market report revised its demand estimates slightly lower for 2020 and 2021, as the U.S. & Europe saw weaker than expected fuel consumption, offset largely by better than predicted demand in China and India. The report also highlighted the recovery in diesel margins for gulf coast refiners in recent weeks as inventories have drawn down and production has slowed, whereas gasoline margins continue to struggle in most regions. The cartel’s output rose by more than 700mb/day during November, almost all of which was due to Libya’s rapid resurgence, adding more than 1 million barrels/day of output in the past 2 months since a truce agreement allowed production to resume.
The IEA’s monthly report also had a small downward revision in its global oil demand forecasts from last month’s report, largely due to weak jet/kerosene demand. The report also highlighted the change in forward curves for oil from contango to backwardation due to stronger Asian demand and OPEC’s output cuts, which won’t help refiners that are expected to face a long winter.
A few interesting refinery-related headlines this week:
The refinery formerly known as Hovensa sold its first products in the past week after nearly a year delay in startup.
Exxon and P66 both outlined their intentions to improve on environmental sustainability. Exxon’s GHG reductions are focused on lowering methane flaring and other upstream avenues, while P66 laid out its reduced spending plan including the conversion of its Rodeo, CA refinery to renewable production in 2024.
Last, Marathon is starting a new program to deter birds from its Robinson, IL facility (you’ll need a subscription to access that article).
Energy Assets Attacked Again
Energy prices are ticking higher again to start the week, after taking a break in Friday’s session. Prices are holding just below the nine month highs set last Thursday, with a trio of fundamental, technical and sentimental factors all suggesting we may see another breakout today.
U.S. equity markets are moving higher this morning in what appears to be at least somewhat driven by optimism over the initial rollout of the first FDA approved COVID vaccine over the weekend. Of course, anytime the market rallies these days, stimulus package hopes also are given credit, even though there’s no clear signs of progress at the moment.
An oil tanker was apparently attacked off the coast of Saudi Arabia early this morning. That’s the fourth time energy assets in the region have been targeted, and this has the potential to be by far the most meaningful of those attacks as it temporarily shut operations in the country’s busiest port, and reminds the market that we won’t always be able to only worry about an overabundance of supply as we’ve done for most of this year.
Baker Hughes reported 12 more oil rigs put to work last week, five in the Permian Basin, three in the Eagle Ford, one in the D.J. and the rest scattered in smaller basins. While the rig count has increased in 11 of the past 12 weeks, and the nine month highs for oil prices are likely to continue this trend of modest expansion, it’s worth noting that the total U.S. rig count is still below the lowest level set in the previous price crash five years ago.
Money managers continue to add to their bets on higher energy prices, with Brent, RBOB, ULSD and Gasoil all seeing weekly increases in large speculative net length, although WTI length dropped slightly after five straight weeks of gains. A Bloomberg article suggests this trend could continue as the oil trade has become a popular way to bet on COVID recovery, which could draw in the bandwagon jumpers who missed out on a 40% increase since November 1, and keep pushing prices higher.
Today’s interesting read: The independent traders who made big money when WTI went negative in April, and how they’re now fighting to prove they did nothing wrong, and hold onto those gains.
Petroleum Futures Catch Their Breath
It’s a quiet start to end the week with petroleum futures catching their breath after a breakout rally. Most contracts reached nine month highs in Thursday’s session, finally erasing all of the record-setting losses that took place this spring. For WTI, Brent and ULSD, barring a large selloff today, this will mark a sixth consecutive week of gains that have added roughly 40% to prices since the overnight lows set on November 1.
There’s not much news to drive the price action this morning. We will get to see OPEC’s monthly oil report Monday, and the IEA’s on Tuesday, but just as we saw from the EIA’s report this week, any forecasts are subject to elevated levels of uncertainty due to the unknowns surrounding COVID. For now, it seems that the energy bulls are content to climb the “Wall of Worry” and shrug off the slowdown in demand and building inventories that are taking place across most of the U.S.
Although the correlation between currency movements and energy prices has been relatively weak for some time, the threat of a “No Deal” Brexit seems to be creating some negative sentiment that’s spilling over into equity markets this morning, and may be contributing to the cautious start for petroleum futures as well.
From a technical perspective, there’s still room to run on the weekly charts. The March highs appear to be the next target on the weekly charts that would add roughly $3/barrel to crude and about a dime to refined products. The rally has moved several shorter term indicators into overbought territory, meaning we’re due for at least a short term correction in the next week or so.
A couple interesting reads from the WSJ this morning:
Bulls Own Control Of Energy Prices
The bulls have control of energy prices this week as Brent crude is making a run at $50, while WTI and ULSD futures are both threatening eight month highs, despite some of the most bearish inventory we’ve seen since the spring.
Yesterday’s DOE report showed the second largest weekly inventory build for U.S. crude oil stocks of the past 20 years, but after a few minutes of selling, the market resumed its slow and steady march higher, keeping the bullish trend intact. While the momentum clearly favors more upside near-term, as the market seems focused on where the economy should be next year rather than looking at the struggles it faces today, we’re approaching some critical technical resistance that will prove pivotal in the weeks to come.
The 15 million barrel build in crude oil stocks was shocking at first, but quickly shrugged off as an anomaly due to exports hitting a two year low last week, while imports surged by more than a million barrels a day, accounting for an 18 million increase in domestic stocks. Refinery rates were actually up, and trade flows are expected to normalize, suggesting this huge build will not last long. In addition, we’re approaching the 12/31 property tax deadline in TX, where a huge proportion of the country’s oil is stored, and companies will hold what they can off shore to avoid getting hit with extra taxes, so we may see a dramatic reversal in the import/export flows in the coming weeks.
Perhaps even more bearish than the crude oil build was the drop in demand for refined products, and the corresponding inventory builds. It’s not unusual to see gasoline stocks rise this time of year, but the pace of the increases, and the rapid demand destruction of the past two weeks, suggests we’ll soon reach another breaking point where refiners will be forced to make more rate cuts. Speaking of which, lost in the big headline builds, was a decline in U.S. refining capacity of 230mb/day, which dropped the country’s total to the lowest level in four years. This was the second decline of this size so far this year (the first was when the PES capacity was finally removed from the weekly report) and marks the biggest annual decline in over a decade. This decline is not over however as there are still several more plants scheduled to be taken out of service in the coming year.
Another parting shot in the political battle over oil drilling: The outgoing White House administration is opening up California oil leases for the first time in eight years. The question is, given the current price environment, and the Golden State’s war on refiners, will anyone be interested in buying?
Week 49 - US DOE Inventory Recap
Energy Prices Climb Once Again
Energy prices are climbing once again after technical support held up through the attempted sell-offs earlier this week, keeping the bullish trend intact. ULSD futures reached a fresh eight month high overnight, while WTI and Brent are less than $.50/barrel away from doing the same, despite some bearish inventory data and more signs that consumption is ticking lower.
Some of the early strength is being blamed on ISIS attacking two oil wells in Iraq, a week after they attacked an Iraqi oil refinery. While the output losses from these events are minimal, and don’t move the needle on a national or global level, they are the biggest threat to supply in Iraq since ISIS was largely wiped out three years ago.
Stock markets are also pointing higher again, after the S&P 500 settled above 3,700 for the first time ever on Tuesday. It appears that equity markets continue to focus more on the optimism for a better 2021 thanks to vaccine rollouts, and less on the struggles that remain over the next several months. The correlation between daily moves in the S&P500 and energy futures is nearing its highest of the year as economic activity and consumption are closely tied together in the race between a COVID vaccine and further shutdowns.
The API reported inventory builds across the barrel last week. Gasoline stocks saw a 6.4 million barrel increase estimated, another sign of the demand slump post-Thanksgiving. Diesel stocks increased by 2.3 million barrels and crude stocks increased by 1.1 million barrels. The DOE’s weekly report is due out at its regular time this morning.
The EIA increased its oil price forecast in the latest Short Term Energy Outlook, owing in large part to the OPEC agreement to limit production increases next year. The report also highlighted the ongoing struggle with refinery margins. For gasoline, it notes that margins have been declining in the U.S. over the past two months, but are still better than crack spreads in Europe and Asian markets. Diesel cracks have recovered over the past two months, but remain well below previous years, and with net exports for diesel dropping sharply, there’s a risk we could see more weakness in the months ahead.
The EIA is also highlighting the declines in energy-related CO2 emissions in the U.S. in both the STEO and a new note published this morning. Emissions had been on the steady decline since 2005 – primarily due to reduced consumption of coal, and stricter fuel standards - and then plummeted this year due to the COVID shutdowns. Expectations are that emissions will rise again in 2021 as activity picks up, but will continue to move modestly lower longer term.
RIN values continue to hold near two-year highs although they did pull back from an early spike in Tuesday’s trade. Several renewable fuel groups filed an appeal to challenge the EPA’s approval of 31 small refinery waivers to the RFS from 2018.
Pause Continues As Markets See Small Losses
The pause continues as energy and equity markets see small losses for a second straight day following a strong rally. The pullback is minor so far, and has not yet threatened the upward sloping trend-lines in either asset class.
There’s little in the way of news driving markets this morning, and considering the demand concerns growing along with new shutdown orders, it’s fairly remarkable that we haven’t seen more of a pullback – particularly in gasoline prices.
RIN prices continue to rally even as crop prices move sideways, suggesting the market continues to bet on the regime change in Washington being more favorable to renewables than refiners. The extra cost associated with the surge in RIN prices for the refiners who don’t have their own renewables to blend could be the breaking point for some plants that have been barely hanging on through the pandemic. There have not been any new refinery closure/conversion announcements yet this week, but we still have three days to go.
A federal court ruling threw out a lawsuit against Colonial pipeline and its subsidiary for blending butane into gasoline along its system, because the shipper is receiving the quality of gasoline it was promised at the destination. While that decision flew under the radar last week – which is just the way I’m sure most pipeline operators would prefer it – it is a big win for pipeline systems that supplement their income via blending operations, and a big loss for traditional blenders that are losing their ability to do so.
More details are emerging in the corruption and bribery case that ended with Vitol agreeing to pay a $160 million fine to regulators in the U.S. and Brazil. The Bloomberg article suggests Glencore and Trafigura are currently under investigation as well for similar allegations.
Meanwhile, the CME group has launched trading in its California Water Futures contract that offers the ability to hedge (or speculate) on the price of water in the largest (and one of the most drought-prone) U.S. markets.
Race To Build Economic Stimulus Bridge
The rally in energy prices is taking a breather this morning, with most contracts down around 1% after oil and diesel prices reached new eight month highs last week. Broader financial markets are also pulling back modestly into the red, after several major indices reached all-time highs last week, as the world seems to be fixated on the race to build an economic stimulus bridge until a vaccine can start the world back on the path towards normalcy.
There was an explosion and fire at a crude oil storage tank in Corpus Christi that sent seven workers to the hospital. The incident happened at a Magellan terminal, on a tank that was being cleaned. As of this morning, two of the workers had been released from the hospital, and the other five were reported to be in stable condition. Given that the tank was already out of service, and no other facilities in the area reported upsets, it appears this incident won’t have an impact on supplies to the refineries in the area.
Baker Hughes reported a net increase of five oil rigs drilling in the U.S. last week, three of which came from the Permian basin. We’ve seen increases in 10 out of the past 11 weeks as prices have recovered, pushing the U.S. total to a fresh six month high, although we’re still seeing drilling rates well below the trough of the previous price collapse.
Money managers continued to add to their net long positions in oil and diesel contracts, driven primarily by covering of short positions as prices rallied to eight month highs. The large speculative category of trader (made of largely of hedge funds) is not so optimistic on the price outlook for gasoline however, cutting out 10% of the net length last week with new shorts betting that we’ll see lower prices and old longs liquidating.
Two interesting reads this morning from the WSJ:
Why low prices and a new administration could mean good news for pipeline operators as the barrier to entry for new lines is growing.
The rapid expansion of EG Group, and the risks associated with its leveraged growth strategy.
Upward Trend Intact For Oil And Diesel Prices
Oil and diesel prices are trading at eight month highs this morning, after chart support held earlier in the week, keeping the upward trend intact. Global equity prices were moving higher overnight, as the U.S. looks closer to passing a new stimulus package, which seems to be outweighing the concerns of COVID counts reaching new record highs. Gasoline prices aren’t far behind, but have not yet broken their November highs as there are more signs of demand destruction both due to normal seasonal factors, and stay-at-home orders.
The bounce this week (assuming prices don’t reverse lower later today) leaves the door open on the weekly charts for WTI to make a run at $50 before year end, which should add another 10-12 cents on refined product prices if that rally materializes.
A new deal: OPEC & friends made a new agreement this week that will allow for a gradual increase in oil production in 2021, but on a smaller and slower scale than what had been previously rumored. The deal also limits the timeline on producers who need to make up for previous failures to limit their production to agreed-upon levels, which could keep actual output lower for longer.
D4 RIN values surged to a new multi-year high yesterday as soybean prices rallied following a recent pullback. Ethanol RINs were also rallying, but have not yet made it back to the $.70 mark they hit a few weeks ago. The EPA let their statutory deadline pass without releasing a final renewable volume obligation for 2021 (something that was common prior to 2017) which suggests those targets could be set by the new administration’s appointees who will presumably be less friendly to refiners.
The rally in D4 RINs is helping the value of Renewable Diesel (which receives 1.7 RINs for every gallon blended vs 1.5 for biodiesel). A NYT article yesterday highlighted why RD is becoming the new big thing for US refiners, while also discussing how it remains dependent on government incentive programs, and the risks of a feedstock shortage in the coming years.
Energy Futures Cautiously Coasting
Energy futures are cautiously coasting while OPEC+ closes in on a deal to either extend or ease output curbs into 2021. Today’s meeting should break the four-day impasse with some hinting at a compromise for a small production increase of 500,000 barrels-per-day (bpd).
Shell announced yesterday that the phased shutdown of its 240,000 bpd Convent, LA refinery began Monday evening. The permanent shutdown is anticipated to be completed by Christmas. The refiner plans to reduce its refining portfolio from 14 to around 6 plants by 2025 in an effort to reduce its carbon footprint and focus on products with lower emissions and alternative fuels. Shell is not alone in the pivot to lower carbon fuel, as other refiners are increasingly investing in renewable diesel.
Yesterday’s DOE report showed a moderate decline in crude stocks while distillate and gasoline inventories swelled as fuel demand continues to slide. Last week’s rise in distillate stocks broke its ten-week streak of drawdowns.
PADD 5 (West Coast) diesel inventories rested below its seasonal five-year range seemingly due to a surge in eastbound truck freight as more consumers choose to shop online versus brick-and-mortar stores.
Week 48 - US DOE Inventory Recap
Heating Oil Futures Hold On To Overnight Gains
Heating oil futures seem to be the only contract of the big three energy benchmarks attempting to hold on to slight overnight gains as prices drift lower for a fourth day in a row. If sustained, the gasoline’s relative strength compared to its distillate counterpart will hit fresh multi-month lows - a downward trend that increased shutdowns due to the virus will likely exacerbate.
A lack of activity from the world’s largest oil cartel seems to be taking the blame for the selling pressure this morning. Discussions between OPEC & Friends on next year’s production level stalled for a third day, with the apparent snag coming from a disagreement between the UAE and Saudi Arabia over how historically non-compliant countries should remediate their overproduction in 2021.
Our friends across the pond became the first country to approve one of the new COVID-19 vaccines. Just under a million doses of Pfizer and BioNTech’s shot will be available to the most at-risk patients in the UK next week. Equities markets don’t seem to be reacting this morning, perhaps due to most players already pricing in accelerated approvals for coronavirus inoculations.
The American Petroleum Institute published national inventory builds across the board yesterday, with the biggest bumps showing up in crude oil and gasoline stocks (+4.15 million barrels and +3.4 million barrels respectively). Diesel stocks lagged with an estimate 300k barrel build last week. The EIA’s report is due out at its regular time this morning (10:30 EST) and will likely be looked to for price direction for the rest of the day, if not the rest of the week.
While month-old upward trend lines on daily refined product futures charts have been broken this week, the bullish weekly trend line still has a chance to extend this fall’s rally. Gasoline futures will need to end the week above the ~$1.22 level, diesel futures above ~$1.36, in order to maintain upward momentum.
Energy Futures Are Moving Modestly Lower For A 3rd Trading Session
Energy futures are moving modestly lower for a 3rd trading session (Including last Friday) as indecision from OPEC and concerns of a post-Thanksgiving slowdown in demand combine to keep buyers at bay.
The upward sloping trend lines started when prices bottomed out November 1st (some 30% below current levels) are still intact, and if the bulls can hold on, there’s still a strong technical argument for higher prices in the weeks to come. Peg the $1.20 range for RBOB and $1.35 range for ULSD as must-hold levels for the bulls this week. A break of below those levels suggests we could see a quick 10-15 cents of downside as a correction of the furious November rally.
OPEC & friends were unable to come to an agreement and delayed an official announcement to Tuesday, and then again until Thursday, which seemed to spook the market and encouraged sellers to step back in Monday afternoon. Prior to the meeting it seemed inevitable that the cartel would at least extend its production cuts, but suddenly that “no brainer” option appears easier said than done.
There weren’t any new refinery shutdown notices in the past 24 hours, but there was some more bad news. A multiyear study done on Texans living near oil refineries suggests that cancer risks increase notably. That’s not necessarily a surprise given the volatile organic compounds involved in the refining process but a long term study of this type does add another argument for the anti-fossil fuel movement in addition to the climate change arguments that are becoming more mainstream. Meanwhile, a separate report suggests the EPA and other air-quality-monitoring agencies are under-estimating the pollution caused by refineries.
Similar to what we saw with European contracts in Friday’s report, the CFTC is showing money managers made increases in net length for WTI, RBOB and ULSD last week, jumping on the bandwagon as prices rallied to 8 month highs. WTI saw a mix of new long positions and short covering both contribute to those increases, but open interest remains near a 4 year low, as new competing contracts for oil based in Houston and in a few Asian markets makes the Cushing OK based contract less appealing, and the general enthusiasm for oil around the world continues to be subdued.
An EIA report this morning highlights the impact COVID shutdowns last spring had on the US petroleum trade as the country briefly reverted to a net importer of fuel, after reaching record high export levels in February.