Petroleum Futures Moving Tentatively Lower This Morning After Recovery Rally

Petroleum futures are moving tentatively lower this morning after the recovery rally in stocks and energy markets ran out of steam in Tuesday’s session.  After a quiet start to the week, there will be plenty of news that could move markets over the next 36 hours.

The minutes from the last FOMC meeting will be released this afternoon, and are getting more attention than they might normally as concerns over inflation and subsequent interest rate hikes remain high.  Energy prices have been paying more attention to moves in equity and currency markets in 2018 than they did last year, so that report should be watched closely, in addition to the weekly inventory reports from the API and DOE.

BP issued its annual energy outlook yesterday, with predictions on all types of energy through 2040.   Highlights include a forecast for robust electricity growth driven by emerging economies and while oil is still expected to be the dominant force in energy supply 20 years from now, alternative modes of transport, improving efficiency and alternative fuels may cause demand for petroleum to peak at some point in the next 2 decades.  To clarify for the millennials who may have started searching for a new career path because oil demand is peaking, this means BP expects global oil demand to continue reaching new record highs for most of the next 20 years.

Meanwhile, this year, the US continues to stake its claim as a major oil exporter after the first ever export cargo was successfully loaded at the Louisiana Offshore Oil Port.  The new export options being set up in the US have helped WTI’s discount to Brent crude shrink to the lowest level since before Hurricane Harvey.  Canadian producers meanwhile continue to slog through a bottleneck of both pipeline and railcar capacity this winter, pushing the discount for Western Canadian barrels close the $30/barrel below US grades.

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Petroleum Prices Pulling Back From 2 Week Highs

Petroleum prices are pulling back from 2 week highs as the US Dollar recovers from a 3-year low, and the week-long recovery rally looks like it may be running out of steam.  NYMEX futures are still being compared to Friday’s settlement due to the President’s day holiday, and while those petroleum contracts are still in the green, WTI is nearly $1 off of its high trade from yesterday’s session, and RBOB gasoline has pulled back almost 2 cents.

Brent crude had a regular trading session Monday, ending the day up nearly 80 cents/barrel, only to drop 50 cents this morning, mirroring the action in NYMEX contracts, although the charts won’t line up.  The weekly inventory reports will also be delayed a day due to the holiday, leaving little in the way of news to drive the action today.

The overnight pullback leaves the contracts in technical limbo, with prices recovering nearly half of their February flop, the next few days may be critical in providing direction as we head into spring.  Neither the sell-off in the first 2 weeks of the month or the rebound since have done much to change the shape of the forward curve, with the exception of ULSD which was dealing with a winter weather demand spike in January – which certainly doesn’t help with indications of where prices may go from here.

While news in the petroleum complex is scarce this morning, the FERC passed a rule yesterday that could be a game changer for US electricity markets.

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Energy Futures Moving Higher For 4th Straight Session

Energy futures are moving higher for a 4th straight session this morning on light volume owing to the President’s day holiday.  NYMEX contracts will trade until noon central, although there will not be a settlement today, and spot markets are not being assessed by the major pricing agencies.

The action over the next few sessions may prove pivotal longer term as Brent, ULSD and RBOB contracts are all trading near the 38% retracement of their February Flops.  If prices stall out here and trade lower to end the week, it looks like the recovery rally may just be a short term correction and there’s more selling to come.   If they can push through that resistance layer however, there’s an easy 5% more room to the upside on the charts.

Speculators cut their net length across the board in energy contracts as of February 13, although the declines in crude oil positions were less than many predictions, given the severity of the selling over the previous week.  The reductions were more dramatic in ULSD and RBOB positions, as the total interest in each refined product is only roughly 10% that of the oil contracts, making a similar decline much more meaningful on a percentage basis.

7 more oil rigs were put to work last week according to Baker Hughes, bringing the total US rig count to its highest level in nearly 3 years.  WTI’s ability to regain the $60 mark last week may help the recent trend of increasing rigs and production rates continue on for a while longer.

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Recovery Rally Continues As Energy Prices Move Higher For 3rd Straight Day

The recovery rally continues as energy prices move higher for a 3rd straight day, and equity markets are pointed higher for a 6th.  The energy complex survived several attempts at a price breakdown this week, which put an end to the downside momentum and left several layers of technical support behind that could slow any future sell-offs.

It’s common to see a period of choppy consolidation following a strong move like we just experienced, so it’s still too soon to say that the trend has reversed course.  If WTI can climb back above $63, and refined products can get back north of $2 (April and forward for RBOB) there’s a case to be made for a return to the bull market that held prices for 7 months.  If those levels are not reached however, it looks like we could be in for an extended period of sideways trading, with the risk of another sharp selloff not far away.

Stronger stock prices and a weaker dollar both seem to have helped the energy rally this week as inflation fears seem to have subsided temporarily and volatility dropped back to more tolerable levels.

Comments from the Saudi Energy minister Wednesday seemed to be another catalyst for the recovery in oil markets as the kingdom seems prepared to hold to the output cut agreements, even if that means “over-balancing” global supplies.  No word yet if that term was used intentionally to confuse

A potential increase in federal taxes on gasoline and diesel fuel is being floated again this week, and is likely to become another hot-button issue if it moves forward.  The good news for consumers if this tax is moved forward is that the increase is about the same as the decline in prices witnessed the past couple of weeks.

The Baker Hughes rig count and Commitment of Traders reports will be out this afternoon.  Expectations are for more rigs to be added as the US Production surge continues, and for speculators to have slashed their bets on higher prices during last week’s heavy selling.

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Energy Complex Had Its Biggest Increases In Over A Month

The energy complex had its biggest increases in over a month Wednesday, but that rally is looking like a dead-cat bounce this morning as prices slide lower once again.  Crude oil prices are showing signs of carving out a potential short term bottom, but the increase in volatility caused by the tug of war between stock prices and supply fundamentals leaves plenty of uncertainty for the forward price outlook.

While inflation concerns quickly subsided in Wednesday’s session, with stocks quickly erasing the heavy losses witnessed in wake of the CPI report, it seems like the issue is going to hang around for a while as today’s PPI report showed the largest 12 month increase in producer prices since the BLS began compiling those figures 4 years ago.

It looks like someone transposed a number in last week’s DOE refinery run data now that the surprising increase of 784,000 barrels/day was largely wiped out in yesterday’s report.  Despite the large weekly decline, total throughput and utilization % of capacity both remain well above their 5 year seasonal range, which may act as a damper on the annual spring rally in gasoline prices that’s due to start any day now.

Inventories at the WTI delivery point in Cushing OK remain well below their 5 year range as new outlets for US crude oil both domestically and abroad have helped alleviate that bottleneck.  Tests are currently underway to export barrels from the Louisiana Offshore Oil Port, which should help that trend continue in the years to come.

Ethanol inventories snapped a string of record setting weekly inventory levels that stretched 7 months last week.  While ethanol stocks remain 10% above their 5 year average, they did drop below where they stood this time in 2016.

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Charts from the DOE weekly report