News & Views
Taking A Trip To The Edge Of A Technical Cliff
Energy futures took a trip to the edge of a technical cliff Thursday morning, but managed to pull back and return to safer territory, keeping the sideways trading pattern intact. All of that excitement happened in just over an hour of trading as product prices started plunging just before 9 a.m. Central Time, and were trading some eight cents lower by 9:20 – setting new lows for the month in the process - only to take back most of those losses by 10 a.m.
The move coincided with a similar short-lived wave of selling in equity markets that suggests fear control for a while following some shocking headline drops in GDP & Q2 earnings releases. As those numbers were digested, and it became more clear that the numbers weren’t as bad as many were predicting, prices quickly recovered. If prices can hold on near current levels today, July should be seen as a modest victory for energy bulls as crude & products all managed gains despite the setbacks in reopening plans as COVID cases surged.
Today is expiration day for August ULSD and RBOB contracts, so watch the September (HOU/RBU) contracts to see where rack prices are heading tonight. September is the last month of summer-spec RBOB, which typically means increased volatility in spreads as inventory holders try to minimize their annual write-down of more expensive grades. Given the depressed demand environment and near-record inventory levels, this annual transition could be even more interesting than normal this year.
While refined product prices have been stagnant for most of July, ethanol values have been on a roller-coaster ride, which is pointing lower this week. After reaching multi-year highs early in the month, values are now hitting two month lows as tight inventories in regional hubs appear to be healing.
No surprise here, Isaias was upgraded to hurricane status even though early models suggested it would not reach that strength. The good news is the storm’s path continues shifting east, which should limit the impact to Florida and the SE coast as long as it doesn’t shift back in the next couple of days. There are two new systems being monitored right behind this storm, as the record-setting pace of Atlantic activity shows no signs of slowing.
This morning, ExxonMobil reported a $1.1 billion loss for the quarter, even after adding $1.9 billion in inventory gains due to rising prices during the quarter. It’s worth noting that Exxon released the report on its website this morning as the SEC’s filing system appears to be having technical difficulties on one of the busiest days for quarterly earnings reports.
Valero had a similar report yesterday, with a large inventory write-up offsetting operational losses. Valero’s refineries ran only 2.3 million barrels/day in Q2 this year, vs. 2.9 million last year, and only its mid-con plants had positive earnings of its four refinery regions.
Market Players Grapple With Numbers Never Seen Before
We’re seeing a modest round of “risk off” selling in energy and equity markets to start Thursday’s session, as recovery doubts appear to be growing and market players grapple with numbers they’ve never seen before.
This latest round of selling is pushing petroleum futures towards the lower end of their July trading range, which could mean sharp losses if support breaks down, but until it does these relatively small moves aren’t changing the neutral outlook. Peg $1.20 for products and $40 for WTI as must-hold levels this week to keep the sideways pattern intact.
The DOE’s weekly status report was highlighted by a 10 million barrel draw in U.S. crude oil inventories, and a tick higher in domestic fuel consumption. Seven million barrels of the crude draw was accounted for by a plunge in imports and stronger exports, with the balance made up for by a strong increase in refinery runs. The muted market reaction to that large draw suggests there is plenty of doubt that any of those three factors are sustainable as long as reopening plans continue to be delayed.
The rest of this week will be heavy on Q2 earnings reports, which are expected to be the worst in more than a decade for most oil producers and refiners. Shell reported an $18 billion loss for the quarter, as the demand slump wiped out its operational earnings and the company took at $16.8 write down of its assets, and cut its dividend for the first time in over 70 years.
Tropical Storm Isaias’ path shifted East over the past 24 hours, now threatening the eastern half of Florida, and the SE Atlantic coast. The NHC predictions continue to suggest that this system will not reach hurricane strength, but don’t be surprised if that changes quickly in the next several days as it reaches warmer water. Although Isaias currently looks like it will not threaten energy supply infrastructure in the gulf of Mexico, given that we’re still five weeks away from the peak of hurricane season, and there’s yet another system moving off the African coast this week, it’s feeling like just a matter of time before we see a system that creates a meaningful supply disruption.
Week 30 - US DOE Inventory Recap
July Purgatory Trading Pattern Continues
The July purgatory trading pattern for energy markets continues this week as prices struggle to break out of their neutral pattern. WTI has landed on a $41 price for the past seven trading sessions, while Brent has ended the day with a $43 for the past five sessions.
If you are getting bored with energy prices going nowhere, take a look at the Gold market that has rallied to a record high as investors seek a safe haven in a money-printing-gone-wild environment with extreme levels of economic uncertainty.
The API was reported to show a decline in U.S. oil inventories of 6.8 million barrels last week, that immediately put a bid under WTI prices that’s lasted through the overnight session. Refined product inventories had slight builds (one million barrels for gasoline and 187k barrels for diesel) that are keeping the optimism in check. The EIA’s weekly report is due out at 9:30 Central Time.
The Fed’s Open Market Committee (FOMC) has another meeting today, and will release their statement at 1 p.m. Central. The CME’s Fedwatch tool shows that not only is there no chance of an interest rate change expected today, there’s a zero percent probability of a change in the next eight months priced into the market currently. That means the market reaction to the statement should be minimal today, and that the press conference following the official statement may have more influence on prices.
The record setting Atlantic hurricane season continues. The national hurricane center is predicting a new tropical storm (Isaias) will form in the next day and is heading towards Florida. The current forecasts suggest it will stay at “only” tropical storm strength, but as we just saw with Hanna – and as has been a pattern the past few years – don’t be surprised to see additional strengthening beyond what the current models show before it reaches the coast. On its current path, the storm does not appear to be a threat to any refineries, but the port of Tampa may need to close as it passes.
Petroleum Futures Shrug Off Another Attempted Selloff
Petroleum futures shrugged off another attempted selloff Monday, continuing the July sideways trading pattern as uncertainty seems to be taking some of the risk appetite out of this asset class.
Volatility has been declining steadily for both energy and equity markets over the past few months, and the correlation between the two remains elevated. This suggests that any one of the major geopolitical issues happening at the moment (COVID-19 case counts and reopening plans, a new trillion dollar stimulus bill struggling to make it through Congress, and some less than neighborly theatrics from the world’s two super powers) have the potential to shock prices out of this range.
Unfortunately for refiners, this price (and demand) stagnation in July aren’t improving their margin situation, and the forward look remains bleak for many. Total announced yesterday it was selling its UK plant, and there are unconfirmed reports that another U.S. plant – this one along the Gulf Coast - is planning to idle its facility in the next few weeks, adding to a growing list of shutdowns.
Not everyone is looking to exit the business however, as Meridian Energy Group cleared a major regulatory hurdle to build a new refinery in North Dakota to attempt to take advantage of the U.S. glut of light sweet crude from shale plays. Although several reports suggest this plant would be the first built in the U.S. since the 1970's, they would be forgiven for forgetting the small refinery built in North Dakota in 2013 that was sold at a loss less than three years later.
Meanwhile, there have been a rash of operational issues at Gulf Coast refineries reported in the past few days, with some indication that power and other weather-related issues from Hurricane Hanna’s remnants may have been a contributing factor even though that storm made landfall hundreds of miles away. So far USGC basis markets have not reacted much, suggesting that the lack of demand continues to act as a buffer to any supply shock.
The Dallas Fed released its Texas Manufacturing survey for July, showing that the state continues to recover rapidly from the COVID shutdown. That said, comments that the recent resurgence point to the recovery taking longer than previously estimated, and 3/4 of respondents indicating that revenues are below normal July levels, making it clear there’s still a long way to go.
Energy Markets Trade Sideways
Energy markets continue to trade sideways to start the week as traders seem to be content to wait and see how the numerous geopolitical issues and COVID-19 counts play out before making any major moves.
Hanna strengthened into a hurricane before making landfall Saturday. While the storm brought damaging winds and rain, it shifted far enough south that it appears to have limited impact on the terminal and refinery operations in the Corpus Christi area. Gonzalo has dissipated but the NHC is giving 90 percent probability that we’ll see another storm this week, with an early path suggesting a possible threat to Florida or the south east coast.
Money managers added small amounts of length across the energy complex last week, with RBOB contracts seeing the most notable shift higher, although most positions are well below typical levels and open interest in U.S. contracts continue to be below normal levels as well. Ordinarily, the uptick in long bets on RBOB would be seen as counter-seasonal, as we’re wrapping up the driving season and start to prepare for the fall RVP transition. This year all seasonal norms seem to be thrown out the window.
Baker Hughes reported U.S. oil rigs increased by one last week, snapping an 18 week streak of declines that slashed drilling activity in the country by nearly 75 percent. Both the Permian and Eagle Ford basins saw two new rigs put to work last week, offset by drops in other locations. While oil rigs increased, the combined Oil & Gas total declined again, setting a new record low for the 33 years that this data is available.
The EIA this morning took a look at the nearly $50 billion in asset write-downs by U.S. oil producers in Q1, which was record setting but may be small in comparison to what we’ll see when the Q2 earnings statements are complete.
Petroleum Futures Tread Water This Morning
Petroleum futures are treading water this morning, shrugging off weaker global stock markets that are being blamed on the brewing cold war between the U.S. and China, which has suddenly placed the U.S. energy industry in a central role of the drama.
Tropical Storm Hanna is heading towards the Texas coast line, and is expected to make landfall south of Corpus Christi tomorrow. The storm’s path shifted significantly to the south in the past 24 hours, lessening any potential impact on the Houston area, while putting the three Corpus-area refineries on the more dangerous side of the storm. Given its relative lack of size, intensity and steady speed, it appears this will be a minimal-impact event for the fuel supply network. Remember; the Corpus area refineries took Harvey’s hard hit three years ago, so they are no doubt well prepared to handle Hanna. Meanwhile, Gonzalo is still expected to become a hurricane but right now appears unlikely to become a threat to the U.S.
As the forward curve charts below show, the major gasoline spot markets across the U.S. are all back in their typical late summer backwardation patterns as we approach the typical end of driving season and the winter RVP spec change. Diesel markets meanwhile all remain in a healthy contango curve as inventory levels are holding at 38-year highs and consumption continues to lag.
West Coast spot markets have seen the most action so far this week as reported refiner buying has sent diffs higher in both the LA and Bay-Area gasoline and diesel space, while the Gulf Coast spots seem unimpressed by the latest storm threat.
The EIA this morning took a look at the rapidly growing bio-diesel production and consumption in the U.S. It may surprise you to know that Texas is the largest bio-diesel consumer in the country by a wide margin – accounting for 17 percent of the country’s total.
Black Cloud Hangs Over Energy Arena
After shrugging off an attempted selloff in Wednesday’s session, energy futures are coming under some modest selling pressure again to start Thursday’s trading, although prices remain stuck in their sideways range for now. Dropping demand and swelling inventories are once again becoming the black cloud hanging over the energy arena as yesterday’s DOE report painted a bleak picture for producers and refiners over the coming months.
U.S. diesel inventories reached a new 30+ year high last week, as demand estimates dropped sharply once again. See the PADD 3 Diesel chart below to see how that glut of supply is primarily found on the U.S. Gulf Coast, which is creating some unique logistical challenges for refiners. The good news is that diesel exports are increasing and were almost back to pre-COVID levels last week. If that trend can hold, then perhaps the glut of diesel isn’t as big of an issue as it currently appears. One unusual wrinkle to watch for: ordinarily, hurricane season threatens supply shortages and basis value spikes, but in this new environment if the export ships can’t move, we could actually see the opposite effect.
Oh by the way, we might see this theory get put to the test sooner rather than later, as two storm systems are moving towards land. The first is expected to be named Tropical Storm Hanna, expected to hit in the next day or two on the Texas coast some time over the weekend. The current path keeps it away from any direct hits on refineries or ports, and likely does not have enough time to strengthen into a hurricane. Meanwhile, TS Gonzalo will likely become the year’s first Atlantic Hurricane as it reaches the Caribbean next week, and will be watched closely for direction as it starts to turn north.
Week 29 - US DOE Inventory Recap
Energy Prices Pull Back To Start Wednesday's Session
Energy prices are pulling back to start Wednesday’s session after WTI, ULSD and the S&P 500 all hit new four-month highs Tuesday. Yesterday’s gains were fueled by optimism after European leaders worked out a stimulus package agreement, while today’s selling is being blamed on the latest dust up between the world’s two largest consumers.
The U.S. ordered China to close its consulate in Houston due to intellectual property concerns, which caused China to threaten retaliation. Video of people burning documents in the courtyard of the consulate adds to the intrigue of this event, as does the Houston location which happens to be the heart of the U.S. energy industry, although if the issue is related to energy markets in any way.
The API was reported to show a build in crude oil stocks of 7.5 million barrels last week – which is also getting credit for some of the early selling in energy futures – even though gasoline and diesel stocks both saw inventories decline by two million and 1.3 million barrels, respectively. The DOE’s weekly report is due out at its normal time this morning.
From a technical perspective, if WTI can weather this latest storm and hold above $41 and ULSD can hold above $1.24, the charts suggest more room to run to the upside, with the first big test at the 200 day MA for WTI just above $43. If prices fail to hold above those levels however, it seems we may return to the aimless sideways pattern that’s held prices for all of July. RBOB futures have been unable to keep up with ULSD and WTI lately, failing several times just below the 200 day moving average over the past four weeks, as buyers seem cautious to bet on higher gasoline prices now that the peak of driving season is in the rear-view mirror.
It’s already been a record setting season for tropical storm systems in the Atlantic, and now there are two more threats this week. One system in the Gulf of Mexico is given a 40 percent chance of development by the NHC as it heads towards the Texas coast, while another is expected to become Tropical Storm Gonzalo as it makes it way to the Caribbean, and could become a Gulf Coast threat next week.
EU Agrees To Recovery Plan To Ease Economic Downturn
Energy bulls should thank our friends across the pond for today’s early buying action. The EU has agreed to a €750 billion recovery plan to ease the recent economic downturn. The combination of grants and loans are mainly aimed at member countries that were already in a pickle hit the hardest by COVID-19 such as Italy, Spain and Greece.
Not to be outdone by its former Union mates, news out of the England breathes new hope in the hunt for a viable vaccine. The University of Oxford has taken a big step in the way of developing an injection that triggers an immune response in humans. While they say it is too soon to gauge its widespread viability, the UK has already ordered 100 million doses.
There are two tropical disturbances we will be keeping our eye on for the next few days. The closest is just over Havana but only has a 30 percent chance of cyclonic formation over the next 48 hours. The second, this one with a 60 percent chance in the next two days, is churning in the mid-Atlantic, just north of the Equator. The later we get into the year the more popular this area becomes as a starting point for hurricanes.
Risk-on sentiment fueled by hope has caused some promising technical action in refined product futures prices this morning. RBOB and HO futures have both broken through their respective 10-day moving average, with RBOB busting its 20-day as well and HO setting new monthly highs. Both contracts, however, have about a dime left to climb to close the chart gap set back in early March, a significant test of recovery for energy prices and overall trading sentiment.
RBOB Futures Lag Behind The Rest Of The Energy Complex
RBOB futures are lagging behind the rest of the energy complex this morning as the market digests the possibility of a new round of widespread lock-downs. Several of the nation’s big cities are considering/proposing two week lock-down orders to help curb the spread of the virus including L.A., Houston, and Atlanta.
The CFTC’s Commitment of Traders report aptly reflected last week’s slow trading showing little change in Managed Money (speculative) positions. The most notable takeaway is the uptick in length of the managed RBOB position, showing increased bets in rising gasoline prices despite its weak performance last week.
Baker Hughes reported yet another decrease in total active oil rigs last week. The net decrease of five active platforms brings the total to 253, a new all-time low.
Click here to download a PDF of today's TACenergy Market Talk.
Bullish Inventory Report Fails To Sustain A Rally
Wednesday’s bullish inventory report failed to sustain a rally for a second day as energy futures saw moderate selling yesterday. Gas and diesel prompt month futures were off over three and 1.5 cents per gallon respectively, while American crude oil shaved off nearly 50 cents per barrel.
Coronavirus concerns seem to be taking most of the blame for the selling, as the U.S. hit another high in confirmed cases in a single day yesterday. California, Texas, and Florida accounted for more than half of Thursday’s new cases.
It looks like the supply squeeze in ethanol’s Argo trading hub has ended. With demand down and production hitting four-month highs, ethanol spot prices have cratered over the past week, dropping over 25 cents from this year’s highs.
While it looked like WTI was going to make a break for it on the daily charts, Thursday’s price action pushed futures back into the sideways range we’ve been stuck in for the past month and a half. The rally we’ve seen in all three of the main petroleum futures contracts since late April seem to have lost steam this month, likely waiting to see what else 2020 has to throw at us before continuing its recovery or retracing.
Largest Drop In Crude Oil Inventory Levels Of The Year
Surprise! Across-the-board draw-downs in the headline inventory levels pushed the energy complex higher yesterday morning. The uptick in demand estimates resulted in gains of around 1.5 percent to two percent for prompt month refined product contracts and 2.2 percent for the American crude oil benchmark.
The decrease in imports and increase in exports caused the largest drop in crude oil inventory levels of the year. WTI futures likewise hit four month highs yesterday morning and are now just under one dollar away from closing the six dollar chart gap caused by pandemic concerns back in March.
Diesel days of forward cover (i.e. how long current stockpiles could cover current demand if supply went to zero) have almost returned within their five-year seasonal range after setting new seasonal highs for the past 14 weeks.
The fundamental question going forward is whether or not the increase in demand, if sustained, can absorb the additional supply that is expected to hit the market once OPEC+ trims down their production cut. A sizable uptick in supply amid renewed economic closures could be enough to fizzle the three-month long recovery in energy prices.
Week 28 - US DOE Inventory Recap
Gasoline Futures Lead The Complex Higher
The American Petroleum Institute’s inventory report published yesterday afternoon is taking most of the credit for this morning’s positive sentiment in energy markets. Despite an estimated drop in crude oil stocks of around eight million barrels, gasoline futures are leading the complex higher with its 3.5 million barrel draw-down, easing COVID-induced demand fears.
The Department of Energy’s inventory report will be published at its regular time today, but may take a backseat, in terms of price impact, to news surrounding the OPEC+ meeting. While the general expectation is that the cartel stick to trimming supply cuts, rumors are gaining steam that “cheater” nations will be held to their production limitations going forward. A simultaneous increase/decrease in compliant/defiant member’s production could leave the global oil market with a net neutral change.
Hope may be on the horizon: Moderna’s COVID-19 vaccine showed positive responses from the first 45 volunteers it was tested on. Even though a vaccine viable for widespread use is still a long way off, as far out as 2021, equity markets are jumping on the good news and are set to open up big this morning.
Gasoline Prices Take A Tumble
Gasoline prices are taking a tumble after several states announced new business closures, threatening the recovery in U.S. fuel demand. News of those rollbacks in reopening wiped out solid gains in U.S. equity markets Monday afternoon, which sparked a post-settlement sell-off in energy futures that carried through the overnight session.
So far crude oil and ULSD prices are lagging the declines in gasoline, each down around one percent compared to three percent, based on apparent expectations that gasoline demand moves much faster than distillates.
Now that gasoline prices look like they’ve peaked near term, the first test on the charts looks to be last week’s low around $1.22. If that support holds this bit of selling may mean nothing as we extend the sideways summer trading pattern. If it breaks, however, it looks like we’re set for 10 cent losses in short order, with a potential test of the $1 mark as fall approaches.
OPEC’s monthly oil market report had some positive notes for oil producers as the cartel’s output dropped 1.9 million barrels/day in June, and expectations for global demand ticked modestly higher. The bad news for refiners is that while oil prices are rising, refined product demand appears to be stalling out in many regions, putting more pressure on crack spreads that are already struggling to stay above break-even levels.
The EIA this morning took a closer look at the rapid drop in oil and natural gas production in April, events last seen in the wake of major hurricanes.
Energy Futures Face Modest Wave Of Selling
After a strong Friday finish, energy futures are facing a modest wave of selling to start trading this week, although prices remain stuck in their sideways pattern for now. Reports that OPEC and friends will be pushing for easing oil output cuts at their compliance meeting this week are getting most of the credit for the early sell-off in energy contracts, as U.S. stocks are pointed to a higher open.
Tropical Storm Fay made landfall in New Jersey Friday, the first tropical storm to hit the state in 9 years, dumping heavy rain and causing some flooding in the region before quickly moving on and losing strength. Although there’s some expectation that vessel traffic was delayed by the storm, there have not yet been any major impacts on energy infrastructure reported.
The P66 Bayway refinery had been shut down due to unrelated power issues before the storm hit, and workers were attempting restart just as the storm was making its way onshore. It’s unclear at this time whether the plant has been able to successfully restart, and those results are likely to move product prices this week. News of the shutdown helped NYH cash RBOB prices rally more than four cents on Friday.
Losing interest: Open interest in WTI contracts have fallen to their lowest level in almost a year, while the OI in Brent contracts dropped to pre-COVID levels last week. The mass exodus from the U.S. Oil fund and other retail investor scams products investing in “oil” are likely a key contributor to those declines. Money managers continue to be unenthusiastic about petroleum holdings in general with minimal changes in any of the big 4 petroleum contracts last week.
Another week, another record low for drilling activity. Baker Hughes reported an 18th straight week of declines in their drilling rig count. Texas shale basins appear to account for the entire drop last week, and make up more than half of the total decline this year. A WSJ article takes a deeper look at what that rapid decline has meant for the economy in West Texas.
Market Seems Fixated On The Slowdown
Several refinery issues and a tropical storm haven’t been enough to spark a rally in refined product prices this week, as the market seems fixated on the slowdown in reopening that has caused demand to dip in several regions.
The IEA’s monthly oil market report highlighted new threats to demand in North and Latin America due to the rising COVID case count, suggesting the risk in the back half of the year is now heavily favoring more downside, and that sentiment seems to be outweighing the impact of several supply issues.
RBOB futures dropped seven cents in the past two days, despite the Bayway, NJ refinery being forced to shut several units unexpectedly due to a power outage and potential lightning strike this week, the second largest plant having to extend maintenance longer than anticipated, and Canada’s largest refiner (and the biggest importer to the East Coast) announcing it was laying off six percent of its workforce due to the challenging margin environment for refiners.
On top of all those issues Tropical Storm Fay is heading straight for the NY Harbor, and should hit land sometime later today or early Saturday morning. The good news is the storm is moving fairly quickly, and is not expected to strengthen before hitting land, which should limit its impact on the region.
Just in the past few moments August RBOB futures have turned positive, so don’t be surprised to see some short covering ahead of the weekend just in case there is lasting damage from the storm or extended downtime at Bayway.
Good news for several Midwest refiners: inspections on the West Leg of Enbridge Line 5 found no damage, which should keep oil flowing through that segment, while the East line remains shut.
The EIA took a closer look at the drop in U.S. fuel demand yesterday, noting the drastic changes the industry had to make as gasoline and jet fuel consumption dropped to levels not seen in more than 40 years.
Bad News For Diesel Fans
WTI prices have traded in a range of less than two dollars/barrel for the past seven trading sessions, as volatility and interest in energy contracts have dwindled after several months when four to five dollar daily swings were the norm. So far in today’s trading session, that high-low range is just 38 cents/barrel, setting a new bar for apathy. Equity markets have seen a similar but less dramatic drop in volatility in recent weeks.
Bad news for diesel fans: The DOE’s weekly report showed inventories reached a new 30+ year high as estimated U.S. consumption was off 20 percent last week. While sharp drops in diesel demand are common following holidays, this report data was compiled prior to July 4, which suggests the numbers could get even worse next week. Gasoline demand saw another slow but steady gain in its weekly demand – disappointing some anticipating a pre-holiday surge – but remain roughly 15 percent below where it would normally be this time of year.
Although it’s well known that the government estimates on a weekly basis are unreliable – which is why many analysts rely on a four week rolling average – it’s easy to understand why gasoline demand is recovering faster, as personal vehicles that drive its consumption are the socially distant mode of transport compared to the diesel-driven buses, trains and other commercial vehicles, not to mention the lack of demand from drilling rigs. Adding to that negative sentiment for diesel, with air travel remaining at extreme lows, refiners are forced to blend more diesel that would normally go to jet production, adding to the glut on that side of the barrel.
There looks to be a silver lining in the court-ordered shutdown of the Dakota access pipeline for some U.S. refiners. Plants on the East Coast that had built out crude-by-rail infrastructure when pipeline capacity was scarce five to ten years ago should now benefit as the DAPL barrels need to find a new way to market. There seems to be plenty of rail capacity given an overhang of rail cars in recent years, and those buyers should enjoy deeper discounts. On the other hand, plants on the eastern half of PADD 2 are getting squeezed in multiple directions as they were already dealing with the Enbridge Line 5 shutdown.
Total U.S. refinery runs increased for an eighth straight week, with the Gulf and West Coasts leading the move higher. With refined product inventories holding near record highs, and exports still not quite strong enough to balance the supply/demand equation, we may see run rates plateau in the next few weeks if reopening plans continue to stall.
Week 27 - US DOE Inventory Recap
Oil Prices Aren’t Going Anywhere
Grab a snickers because oil prices aren’t going anywhere for a while based on the lackluster trading this week.
A period of summer doldrums is not uncommon for trading in the energy futures complex, particularly following a holiday. This year, it appears that uncertainty over the next phase of the COVID pandemic is overshadowing what would ordinarily be major stories such as the showdown on the high seas between the U.S., Iran, and Venezuela, or the ongoing saga of Libya’s oil output, and keeping some traders on the sidelines.
The API reported crude oil stocks built by two million barrels last week, while gasoline stocks declined 1.8 million barrels and diesel declined by 847k barrels.
The EIA’s monthly Short Term Energy outlook estimated June consumption globally was up 10 million barrels/day from April’s levels, and increased oil price forecasts for the next 18 months due to that rapidly improving demand. Despite the recovery, the report still predicts WTI will be below $50/barrel through 2021, and expects U.S. consumption of gasoline and distillates to still be lower in 2021 than it was in 2019.
The STEO also highlighted its expectation for a rapid increase in renewable diesel imports in the U.S. next year, expecting biomass-based diesel imports to nearly double from 2019-2020 to comply with CA LCFS requirements and the increased RFS targets that would be unattainable through traditional blending of ethanol and bio-diesel.
The 2020 Atlantic Hurricane season is already setting records for the number of named storms and there’s a 60 percent chance we’ll see another storm named this week, that could be headed near the NY Harbor. While this system doesn’t look like it would be anything close to Sandy or other storms that disrupted traffic in the NYMEX delivery hub, it could have some limited impact on vessel traffic.
Today’s interesting read: Why this week’s pipeline rulings may disrupt investment in future energy infrastructure projects.
Prices Consolidating While The World Waits For Recovery
Energy contracts are having a hard time getting on the same page this week, as prices seem to be consolidating while the world waits to see if economic activity will continue to recover even as COVID cases rapidly rise.
Diesel prices are seeing a modest pullback after reaching a four-month high Monday, joining the rest of the complex in neutral technical territory, that looks like it could maintain the back-and-forth while going nowhere with trading pattern in place for a while.
While gasoline prices slipped in Monday’s session, ethanol prices surged by 14 cents, to their highest levels since December, as tight supply in the Argo trading hub and reduced corn planting overshadowed an 18 percent increase in domestic ethanol production over the past month.
Monday had a trifecta of major new for U.S. pipelines. A judge ordered the Dakota Access pipeline be closed and emptied in the next 30 days, the Supreme Court refused to allow construction of the Keystone XL line, and the Atlantic Coast pipeline project was cancelled, even as Berkshire Hathaway announced it was acquiring one of the owners of that project. While those three stories are certainly interesting in the future of fossil fuels debate, near term only the Dakota Access shutdown appears that it might have impacts on refinery operations, as Midwestern plants that rely on the Patoka IL crude oil hub may need to scramble to find replacement supply options, and may put a temporary end to the niche business of exporting North Dakota crude from Gulf Coast ports.
Money managers (AKA large speculators, AKA hedge funds) continue to be unenthusiastic about NYMEX petroleum contracts, with minimal changes in their holdings of WTI, RBOB and ULSD contracts last week, while total open interest in those contracts remains well below historical levels.
Energy Markets Try To Keep Upward Momentum
Following a strong rally ahead of the holiday weekend, energy markets are trying to keep their upward momentum, with limited success in the early going. U.S. stock indices are pointed to strong gains at the open, following a big rally in Asian markets, as optimism for recovery continues to outweigh fears of surging case numbers.
After lagging for most of the recovery rally, ULSD futures are now leading the move higher, reaching a four month high this morning. The near term technical test for distillates will be to close the chart gap between $1.30 and $1.38.
Baker Hughes report three more oil rigs were taken offline last week, bringing the total U.S. drilling count to a fresh record low. The Permian basin actually saw five rigs taken out of service last week, while other basins added two rigs in total.
The CFTC’s commitments of traders report was delayed due to the holiday last week. The ICE report showed money managers increased their net length in Brent crude oil contracts for a fourth straight week, but those combined bets on higher prices remain at the lower end of the seasonal range as large speculators remain cautious on energy prospects.
New lawsuits and reports continue to shed light on the meltdown in oil prices in April, which now appears to have been driven in large part by the latest in a long and infamous chain of retail investors being caught holding the bag by financial engineering gone wrong.
While oil prices have had their best rally on record since the April collapse, refiners are getting squeezed by the rising oil prices as finished products are struggling to keep pace, driving expectations for more refinery closures around the world as the industry is forced to consolidate.
Solid Gains Posted As Trading Winds Down For Holiday
Energy and equity markets are cheering a strong jobs report this morning, posting solid gains as trading winds down for the holiday-shortened week.
The June payroll report showed another strong month for the recovery in U.S. employment with 4.8 million jobs added during the month. The headline unemployment rate dropped from 13.3 percent to 11.1 percent, while the U-6 rate dropped from 21.2 percent to 18 percent. Those figures were better than most forecasts, similar to what we saw in May’s report, suggesting the recovery on the street is much stronger than we see on the news. The big question for July will be whether or not this trend can continue now that states are having to reverse some of their reopening plans.
Spot markets will not be assessed tomorrow, and although there will be an abbreviated NYMEX trading session (you mean the rest of the world doesn’t celebrate July 4th?) there will not be settlements for those futures contracts, so most rack prices posted tonight will carry through Monday.
The latest in the political football known as the Renewable Fuel Standard: Senators from Big Oil and Big Ag states are both separately threatening to block nominations of EPA officials until the agency updates the RFS. At least they finally agree on something. Meanwhile, the EPA administrator is saying the agency is waiting for feedback from the DOE before proceeding with a plan on small refinery exemptions, and is not planning on releasing proposed RFS volumes this week. While the same tired debate plays out in Washington, ethanol prices are surging, well above pre-COVID levels now as inventories have quickly gone from record highs to their lowest in 3.5 years, as producers have not kept pace with the increase in demand.
The DOE’s weekly report showed crude oil stocks had their largest draw of the year, pulling back from record highs, as import volumes slowed and refinery runs continue to inch higher, passing the 14 million barrel/day mark for the first time since March. Normally this time of year we’d expect refinery runs north of 17 million barrels/day.
We seem to be in a pattern of two steps forward, one step back for U.S. fuel demand. Last week, diesel consumption estimates had a nice uptick, while gasoline pulled back. We should see a surge in gasoline demand heading into the holidays, particularly with automobiles now the preferred mode of transport, but total consumption is still some 20 percent below where it should be this time of year.
Week 26 - US DOE Inventory Recap
A Roller Coaster Start To July Trading
It’s a roller-coaster start to July trading as strong overnight gains moved to early morning losses, then back to gains in just a couple of hours. This type of back and forth action is indicative of a market that’s struggling to find direction as good economic news is offset by more bad news on COVID-19 counts.
A large decline in oil inventories of more than eight million barrels reported by the API had oil prices rallying through the overnight session, with WTI trading north of $40 again, only to see those gains wiped out in the past hour. Refined products had a similar pattern, trading up three to four cents overnight only to see those gains wiped out this morning. The API showed gasoline stocks declined nearly 2.5 million barrels last week, while distillates grew by 2.6 million barrels. The EIA’s report is due out at its normal time this morning.
The bulk of the brief selloff in energy and equity futures followed closely behind the ADP payroll report that showed June private jobs increasing by 2.3 million, and May’s estimate seeing a huge revision from 2.7 million jobs lost to three million jobs gained. It seemed that there was an immediate widespread knee jerk reaction to that data – perhaps someone forgot to program their trading algorithm to deal with negative numbers again – that has since faded. While this morning’s swing may be a one-off event, it could also signal that we’re returning to a “bad news is good news” market, similar to what was experienced for several years following the 2008 financial crisis, as the market cheered anytime it looked like negative economic data would encourage more stimulus from the FED.