Energy Markets Facing Wave Of Heavy Selling

Energy markets are facing another wave of heavy selling, with RBOB and ULSD both trading at their lowest levels of the new year, while oil contracts hit 4 month lows. The trade war and signs of a weakening economy are getting much of the blame for this week’s slide, along with OPEC’s plans to slowly increase output, and charts suggest there is likely more room to fall in the days ahead.

There is some optimism for cooler heads to prevail in the trade spat as the U.S. Commerce Secretary said that a compromise between the NAFTA crew could be announced this afternoon.

Much has been written about U.S. Mid-continent refiners dependance on Canadian crude oil imports after 2+ decades of configuring their facilities to operate on the heavily discounted heavy oil. Already yesterday reports suggest that Western Canadian Select blends were trading at around a $13.6 barrel additional discount to WTI down $2-3/barrel from where they stood last year prior to the tariff threats. That increased discount effectively eliminates nearly half of the tariff cost for buyers, suggesting that the Canadian producers and U.S. refiners will be able to share the burden in some form or fashion to continue operating.

Much less has been written about Canadian suppliers’ dependance on U.S. ethanol imports to blend their finished gasoline produce as both countries have largely transitioned to lower-octane “BOBs” to satisfy various renewable mandates. Fuel Ethanol does seem to be a target of Canada’s retaliatory tariffs, although it’s unlikely that inland Canadian suppliers have alternatives to U.S. supplies. Roughly ¼ to 1/3 of all U.S. ethanol exports go to Canada, and we already saw domestic ethanol stocks reach record highs in last week’s DOE report. Similar inter-dependencies between the countries are evident throughout the energy arena in addition to numerous other industries.

The API estimated a fairly quiet week for inventory changes with petroleum stocks all seeing changes between 1 and 2 million barrels. Oil and Gasoline inventories were said to drop by 1.5 and 1.2 million barrels respectively last week, while distillates saw a build of 1.1 million barrels. The DOE’s weekly report will be out at its normal time this morning.

Crossing their fingers the trade war ends soon: Cenovus is working on expanding its fuel export capacity from its Toledo refinery. The local port authority approving a new land transfer that will allow the Canadian oil producer/US Refiner to get more of its refined products into the great lakes for transit.