Energy Futures Erase Monday's Losses
Energy futures have erased Monday’s losses in similar but less dramatic fashion to what we saw in the first two days of trading last week. The rapid recovery keeps the bullish trend intact, and leaves the door open for a rally towards $55 for WTI, and north of $1.60 for refined products in the next week. Cash markets continue to flash warning signs with soft basis values and pipelines with excess capacity both showing that demand is softer than the rally in futures that’s approaching 60% since Nov. 1 might have you believe.
A rally in the U.S. dollar got some of the credit for Monday’s selling, even though the correlation between daily movements in the dollar index and energy futures has shrunk over the past couple of weeks. Case in point, the dollar is still ticking higher this morning, along with oil and refined products. While the currency relationship may be taking a break, the equity/energy correlation is holding strong as the simple factor of when demand will return has a huge potential impact on both asset classes.
Gasoline led the move lower for most of Monday’s session, with a big sell-off in RIN values contributing to the weakness in gasoline. It may seem that RIN values driving gasoline futures action is like the flee on the tail wagging the dog, but it does make financial sense as RIN values directly correspond to refinery margins, which have to adjust higher to offset higher RIN prices, and can slide lower when RINs fall and still end up with the same net result.
News that the Supreme Court would review the case of small refinery exemptions seemed to be the reason for RINs having their biggest sell-off in 10 months, with D6 values falling from 95 cents last week to 75 cents Monday. It also seems that a brief round of short covering in the wake of a lawsuit announced last week may have contributed to the spike and then rapid pullback in RIN values.