Oil Prices Trying To Hang On After Wave Of Selling

Oil prices are trying to hang on this morning after another wave of selling Wednesday pushed them back to the edge of a technical cliff.  A large build in US crude oil inventories and soft demand figures reported by the DOE yesterday added to the selling pressure that began Tuesday afternoon.

One support level to watch this week:  WTI has traded down to the 200 day moving average twice in the past 24 hours, and managed to bounce modestly both times.  If that support (currently at $64.39) breaks, there’s not much on the charts to prevent a test of the $60 mark.

The gasoline demand estimate failed to make much of a recovery after last week’s plunge lower, and is currently hovering around the 5 year average level, well below the past couple of years.  With “Back to school” upon us, there are only a couple of weeks left of the driving season, and then demand figures should begin their seasonal trend lower.  That reality seems to be sinking in as gasoline prices hit a new summer low overnight.

Soft demand is bad news for US Refiners that set a new all-time high for run rates last week just shy of 18 million barrels/day.  To put that feat into perspective, total refining capacity in the US just 5 years ago was below where plants are actually running today.   PADD 3 (Gulf Coast) refinery runs accounted for the surge in run rates, topping 9.6 million barrels/day for the first time ever.  The seasonal charts offer a cautionary tale however as last year we saw refinery runs hit a new record high in August, just before Hurricane Harvey hit.

Right on cue, a new tropical disturbance is making its way towards the Caribbean, as Tropical Storm Ernesto churns through the north Atlantic on a path towards Ireland.   While odds are low that this latest wave will develop into a storm, it’s a reminder that we’re still a month away from the peak of the season, and despite the lower-than-average forecasts, all it takes is 1 storm to wreak havoc on energy supplies.

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Charts from the DOE weekly report


A Week Full Of Headfakes

We aren’t even halfway through the week and already we’ve seen two drops of nearly 3% bookending a 4% rally in petroleum futures.  Tuesday’s session was almost a mirror image of Monday’s action with a large early rally being wiped out by the end of the trading session, and that selling has continued overnight.

The weekly API report is getting credit for the early selling in crude oil and diesel prices this morning, as the industry group was reported to show a 3.6 million barrel build in oil inventories and a 1.9 million barrel build in distillates.  Gasoline prices are treading water, as those stocks were said to have declined by 1.5 million barrels on the week.   The EIA’s weekly status report is due out at 10:30 Eastern.

The US dollar has continued its rapid climb after breaking through to a new one year high last week as concerns over Turkey’s melt-down continue to build.  Although currencies and commodities have not been locked at the hip as much this year as in years past, whenever fear starts driving the action, it seems the correlations between asset classes become stronger, so this story is worth watching closely.

There’s a tropical disturbance in the Atlantic, but it’s too far North and East to threaten the US coastline.  As we’re approaching the anniversary of Hurricane Harvey, take a look at why this year’s hurricane season is so different from a year ago.

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Energy Futures Survived Brink Of Technical Meltdown

Energy futures survived another trip to the brink of a technical meltdown Monday morning, and have recovered sharply ever since.

A rapid rise in the US dollar took blame for some of the heavy selling to start the week, as Turkey was added to the growing list of geopolitical uncertainty when its currency hit a record low.  While a stronger dollar has often meant weaker energy prices (which are largely priced in dollars) in years past, the correlation between the asset classes has been relatively weak this year, and since most of the dollar’s big move happened Friday, the timing doesn’t quite match up with the swings in petroleum futures.

RBOB gasoline futures reached their lowest level since early April during Monday’s early selloff, trading down nearly 6 cents on the day to a low of $1.9800 before rallying sharply to finish the day.  With the overnight strength RBOB is actually up for the week, and has survived a 3rd trip below $2 in as many months.  The unknown status of the P66 refinery in NJ – which was rumored to have operational problems last week – is a lingering issue that may be keeping the sellers at bay, although basis values continue to decline, suggesting the physical players aren’t betting on a shortage.

The EIA confirmed that US refiners are running at record rates in 2018, and predicted that trend would continue with new records set in 2019.  2020 looks to be a wildcard with the pending IMO diesel specs causing many to bet that some less-complex refiners will be forced to cut rates since they won’t have a home for their higher sulfur diesel products.

Speaking of refiner uncertainty:  Venezuela’s state oil company PDVSA has appealed the court ruling that allowed a seizure of Citgo’s assets.  The possibilities of what may happen to Citgo are numerous, although it could be months or years before we know what will happen.

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Energy Futures Treading Water To Start Week

Energy futures are treading water to start the week, after a Friday bounce helped pull them back from the edge of a technical cliff.  While near term technical indicators are stuck in neutral ground, longer term charts continue to hint that another sharp sell-off could be coming soon.

The fundamental outlook also has some bearish signs, as OPEC’s monthly oil market report revised supply estimates higher for the next year, and revised demand estimates lower.  The cartel also reported a net increase in its oil production last month, in spite of declines from Saudi Arabia, Venezuela and Iran.

Reports Friday of an upset at the P66 refinery in New Jersey sent futures sharply higher, as that plant is a key contributor to supply into the NY Harbor – which happens to be the hub for NYMEX refined product contracts.  By the end of the day however, gasoline basis values in the harbor had dipped, suggesting the physical players weren’t too terribly concerned about the situation.

Baker Hughes reported an increase of 10 oil rigs last week, bringing the total US count to 869 active rigs, the highest since March of 2015.  As has been the case for the past year, the Permian basin continues to account for the majority of the increase, although this week it was the western edge of the basin outperforming as New Mexico increased enough to offset a net decline in Texas.

Money managers cut back their net-long holdings in each of the big 4 petroleum contracts last week.  While none of the declines were very large on their own, the Brent position did drop below its year-ago level for the first time in 2018.

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