The energy complex is going nowhere to start April

The energy complex is going nowhere to start April after an attempt at an overnight rally fell apart this morning.  WTI is currently unchanged while gasoline futures are down around ½ cent and diesel futures are up about the same, some two cents lower than they were at their overnight peak.

After a strong spring breakout rally in March reached several technical targets, the outlook for April is conflicted, and the charts suggest we could be in for a period of choppy, sideways trading.  One thing to watch for this month, some forecasts call for more than 1 million barrels/day of refining capacity to be taken offline for maintenance, which could create more regional product shortages as we move through the RVP transition approach the driving season.

Money managers jumped on the spring breakout bandwagon, adding to their net long positions across the board the past two weeks.  Brent net-length held by the speculative category of trader reached a new record high north of 600,000 contracts last week.

Baker Hughes reported a decline of 7 oil rigs last week, leaving the total US count essentially flat over the past 2 months.

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RBOB Futures Set New 2 ½ Year High Overnight

RBOB futures set a new 2 ½ year high overnight, and is currently topping the energy complex with 2 cent gains this morning. Diesel and West Texas crude are following with gains of about .5% as well.

Uncertainty over what will become largest refinery on the east coast after its owner, Philadelphia Energy Solutions, filed for Chapter 11 bankruptcy yesterday is likely what’s driving today’s rally. PES is citing the cost of the Renewable Fuel Standard as the straw that broke the refiners back, after the financial crisis of 2011 put the company in a poor spot. The refiner estimates they spent over $800 million on RFS credits since 2012. The price of current year ethanol RINs seemed unaffected and traded a lazy .0325 cents lower.

The federal government is back up and running after being officially shut for 3 days last week. While short-lived government shut downs don’t directly affect energy economics, the removal of uncertainty over who is going to run the county boosts equities markets and energy futures by association, and is likely priced into yesterday and today’s bullish sentiment.

Technical indicators still remain on the top side for gas and diesel futures but will likely remain ignored while there is still fundamentally impactful news to digest. If manageable, a quiet couple of news days could be useful for traders to figure out if barrels of refined product really should cost this much or if maybe we’ve let the headlines carry us a little too far out to sea.

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Oil And Diesel Prices Ending 2017 In Style, While Gasoline Futures Slump Into The New Year.

Oil and diesel prices look ready to end 2017 in style today, while gasoline futures are slumping into the new year.  ULSD futures are trading higher for a 9th consecutive session, breaking the $2.08 mark for the first time since February 2015.  WTI also set a fresh 2.5 year high overnight, and is currently holding on above $60.  Yesterday’s DOE report was a mixed bag that didn’t cause much of a price reaction, leaving the market content to continue its low volume melt-up until most participants return to work next week.

There are plenty of questions to be answered in 2018, but perhaps the most pressing is how much longer can the 6 month-old energy rally last when US oil and refined product production is poised to break every record in the books?

Notes from the DOE weekly report:

US refineries set a record for December production last week, and will set an all-time high for annual throughput, despite the dramatic impact of Hurricane Harvey.

Refiners are clearly taking advantage of robust diesel margins with diesel production setting a new all-time high last week of 5.47 million barrels/day, which is 1.1 million barrels/day more than the domestic demand estimates, which have been aided by the recent cold-snap.

A strong gasoline demand figure for December wasn’t quite enough to prevent inventories from increasing for a 7th straight week.  Early indicators suggest post-Christmas gasoline consumption has been especially weak with the cold snap hitting much of the country, raising concerns that we could see a soft start to the new year, similar to 2016 and 2017 when demand started out nearly 1 million barrels/day lower than the pre-holiday peak.

US Oil production dipped for the first time in 9 weeks, although most forecasts still suggest we should see that level break the 10 million barrel/day mark sometime early next year.

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Oil Prices Holding Steady With Only Two Days Of Trading Left In 2017.

Just two trading days remain in 2017 and oil prices are holding steady near 2.5 year highs.  At the time this was written, prompt month WTI and Brent futures were exactly unchanged for the day, which is an extremely rare occurrence for a market more accustomed to 5% swings than going nowhere.  As has been the pattern over the past couple of weeks, an overnight sell-off attempt was short-lived as the traders who drew the short straw to be in the office this week aren’t willing to commit to a move lower.

Another pattern over the past several weeks has been to see large crude draws and healthy refined product builds as US refiners continue their record pace of production.  Yesterday’s API report held that pattern, with the industry group said to show a 6 million barrel decrease in US Crude oil inventories, while gasoline stocks increased 3.1 million and diesel stocks increased by 2.8 million barrels.

The DOE’s weekly report will be released at 10am central today, delayed 24.5 hours by the Christmas holiday.  Since the data is compiled as of Friday, it will take at least another week before we get to see the impacts of the record-setting cold snap that’s engulfed much of the country in the DOE data.  The question for refiners is, will this system create enough demand for distillates to offset the damage its doing to gasoline consumption.

Diesel prices did trade briefly above their high from May 2015 during yesterday’s session before topping out at $2.0576, just 4 points above the 2.5 year peak.  The next major chart top comes in at $2.35, a high set in February 2015 which is not-coincidentally the last time a winter storm created a major spike in heating-fuel demand.

The US dollar index has dropped to a 3-month low this week, and has been cited as a factor in the energy rally.  Then again, the last time the USD was in the 92 range, crude oil was trading around $47 making correlation or causation a tough argument for the pair.

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