Energy And Equity Market Daily Price Movement Correlations Highest In 2 Years

The rally continues in energy markets with refined products jumping another nickel to fresh 3-month highs this morning, on the heels of US equity markets that are suddenly acting like the risks of recession are receding. The correlation between daily price movements in energy and equity markets is at the highest level we’ve seen in more than 2 years, which helps explain the recent run-up in futures even when fundamentals still suggest all is not well for oil producers and refiners.

WTI has broken through its 200-day Moving Average for the first time in nearly a year this morning, which could be a catalyst for more buying if prices can maintain these levels. Then again, the 3 other times in the past year we saw prices attempt to break this resistance layer, heavy selling followed soon after. ULSD prices are trading above $2.80 for the first time since March 28th and could open the door for another run at $3 if current levels hold.  Here too, there’s a cautionary tale, as the last time we saw distillates break $2.80, they dropped below $2.65 the very next day.

The strength in gasoline is somewhat counter-seasonal as we’ve already put the 2 biggest driving season holidays in the rearview mirror, but prices are now within just 5 cents of their highs for the year. Physical players don’t seem to be buying the futures hype with time and basis spreads both showing weakness while financial prices push to new highs, suggesting that supply tightness is not driving the recent upward momentum. There has been concern that recent unplanned maintenance at the P66 Bayway refinery, and the long-planned 5-year turnaround at the Monroe refinery in Trainer PA could cause some tightness along the East Coast, but the drop in basis values, and premiums to ship gasoline on Colonial all suggest the big physical players aren’t worried.

Money managers seemed conflicted last week after multiple weeks of strong buying in energy futures, which many believed was driven by hedge funds jumping on the Saudi Output cut bandwagon. Last week saw ULSD and Brent contracts face heavy liquidations of length and new short bets driving sharp reductions in speculative length, while WTI, RBOB and Gasoil contracts continued to gain.

Another mixed message: the surge in speculative bets on higher WTI prices coincides with a large decline in total open interest held in the legacy crude oil contract. Brent’s open interest is holding steady, suggesting the move away from WTI has more to do with new contracts competing with the land-locked NYMEX hub than a move away from energy completely. Refined products are also seeing a resurgence in open interest with both ULSD and RBOB touching 17-month highs last week as the decline in volatility seems to be bringing traders back that had been forced out of the market during last year’s costly chaos.

Maybe it’s just too hot out? Baker Hughes reported more heavy declines in drilling rates last week, with oil rigs dropping by 7 to a fresh 16-month low, while natural gas rigs dropped by 2. Texas continues to lead the slide lower with a net decrease of 7 rigs last week, while Utah of all places saw an increase of 2 rigs. So far this recent slowdown in drilling hasn’t impacted production much, with the EIA’s weekly report still showing steady output, particularly when including the 1-2 million barrels/day of condensate that’s not (yet) classified as oil.

Click here to download a PDF of today's TACenergy Market Talk.