It’s A Strong Start For Energy Markets Monday

It’s a strong start for energy markets Monday, after the biggest weekly drop to start a new year in several decades for most contracts. The back and forth action keeps the complex in technical no-man’s land, with plenty of conflicting fundamental stories to keep the choppy back and forth action moving near term.

China increased its oil import quotas by 20%, coinciding with its borders reopening, in a sure sign that the world’s largest oil buyer is attempting to get moving once again. A big question that will need months to answer is how much of that oil will end up as products consumed domestically, and how much will be sent overseas as the country has also made big increases to its refined product export quotas this year, allowing more of its excess processing capacity to reach the world market.

Part of the weakness in the petroleum arena to start the year has been blamed on a big drop in natural gas prices which hit an 18 month low last week. Warm weather across much of the US and Europe has helped avoid what many feared would be a brutal winter for heating fuel supplies, and may be upending Russia’s strategy to bring western nations to the negotiating table.

Colonial’s line 3 returned to service Sunday evening, a little more than a day later than expected heading into the weekend, but still soon enough to keep from stirring up the regional markets too much.

Baker Hughes reported a decline of 3 oil rigs and 4 natural gas rigs drilling in the US last week, marking the 4th time in 5 weeks we’ve seen the count drop. That pattern suggests current prices aren’t enough to encourage a rush of drilling activity, even though producers remain profitable at these levels. The lack of new investment is keeping the rig counts well below pre-pandemic levels, and perhaps upending the government forecasts that suggest US oil output will reach all-time highs this year.

Money managers continue to be split on where energy prices are going, with RBOB, Brent and Gasoil contracts seeing small increases in net length last week, while ULSD and WTI saw small decreases. The biggest change of the week were 19,000 new short WTI positions added, which suggests someone may be making some large bets on falling prices, until you notice that there were 16,000 new long Brent contracts added, and now it just appears to be a spread position guessing that European prices will outpace the US now that Keystone is back up and running. Open interest on all contracts remains near 7 year lows as the increased volatility, margin costs and interest rates to pay that margin continue to keep some traders on the sidelines.

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