Another Red Day for Energy Prices

It’s another red day for energy prices, which are now trading at their lowest levels in a month after yesterday’s DOE report showed huge refinery production and soft demand, pushing prices below key technical support.

The record setting run rates for US refiners seems to have the market spooked that consumption, domestically and abroad via exports, can keep pace with the US Gulf coast & Midwestern facilities that have come out of maintenance season bigger and badder than ever.

Diesel inventories broke a streak of 9 straight weeks with declines, rising by 2.65 million barrels, following the 2nd straight weekly drop in estimated demand of more than 10%.  Weekly demand estimates are notoriously unreliable, but a 22% decline in 2 weeks is still something that needs to be watched closely.  If next week’s report does not show a bounce back, it could be an early warning signal that all is not well with the economy since over the road trucking is the main driver of that figure.

Gasoline inventories rose by 3.3 million barrels, essentially all in PADD 1, which will put extra downward pressure on RBOB futures since the delivery point is in NY Harbor.  Adding to the bearish sentiment this week, indications are that the border tax adjustment has been put on the back burner for now, so imports of gasoline – a key component to East Coast supply – should not be impacted.

At this point, a run towards the March lows, $47 for WTI, $1.47 for ULSD and $1.49 for RBOB looks like an inevitability.  If prices can hold there the damage may be limited as we head into the driving season, but if those levels break, we could see another 20 cents of downside for refined products and $5-7 for crude before the next support layers come into play.

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Energy Prices Pushed to First Positive Settlement in Over a Week

The streak was broken Tuesday as a rally in the last few minutes of trading pushed energy prices to their first positive settlement in over a week.

WTI survived several tests of the  200 day moving average during yesterday’s session, which may have been enough to encourage the bottom fishing that showed up just before the close, and pushed prices to a positive settlement on the day.

The API report threw cold water on the idea that the late day rally was the start of a reversal with builds in crude inventories reported to be up close to 900,000 barrels on the week, while gasoline stocks rose 4.4 million barrels, and distillates were essentially flat declining by around 34,000 barrels on the week.  The market reaction to the counter-seasonal builds in crude oil and gasoline inventories was immediate, with prices giving back the gains they’d picked up ahead of the close.

So, today we’re right back on the cusp of a big move lower, testing the same support that we were yesterday morning, and threatening another 3-5% of downside should it break.  The weekly DOE inventory report – due out at 9:30am central – is likely to keep traders hesitant to make a big push in either direction early on this morning, with the real bets likely to come out shortly after its released.  US refinery runs and crude oil output are two numbers that seem to have been price drivers in the report over the last few months.

After 3 weeks of quiet trading in the mid 50-cent range, ethanol RINs have been active this week, dipping all the way to 40 cents in early trade Tuesday after Valero said they hoped a change in the obligation point for the Renewable Fuel Standard may come by the end of the year in a quarterly earnings call.  Once traders realized that the hopes were simply that and not a signal that any legislation changes were pending, prices popped right back to the 45 cent range where they stayed for the rest of the day.  With the action in Washington all about taxes and funding this week, it seems unlikely that we’ll see any actual changes to the RFS anytime soon.

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Another Failed Overnight Rally and Selloff for Energy Prices

Another day, another failed overnight rally and selloff for energy prices that are approaching their lowest levels in a month.  Even a trio of typically bullish influences – rallying equities, a surging Euro and weaker US Dollar – have not been enough to stem the tide of relentless selling over the past week.

If prices end the day lower, it would mark the 7th consecutive drop for ULSD futures, 6th for WTI, and while RBOB did manage to settle higher on Friday, gasoline futures are still trading at their lowest levels in a month.

So, as always, the question is where to from here?  WTI faces a key test at the 200 day moving average $48.89, with a break there setting up a move to the March “triple bottom” near $47.  For all those that believe triple bottoms don’t exist, the next target is likely to be much lower in the $40s, and there’s a case to support that as any further declines would break the bullish trend-line that’s been in place since WTI bottomed out at $26 in February of 2016.

If refined products follow suit, there looks to be another 6-10 cents of downside for both gasoline and diesel prices over the next week or two.

The API’s inventory reports are due out this afternoon.   While the industry-group’s report is typically overshadowed by the DOE inventory reports (since the government’s data is mandatory for all companies, whereas the industry data is voluntary and thus a smaller sample size) the API is likely to get more focus these next couple weeks as the potential shutdown of many federal agencies due to the funding drama playing out in congress this week may mean no weekly reporting after tomorrow.  Here’s a link to notes on the last time a government shutdown impacted the weekly DOE reports back in 2013.

Although there’s no direct impact on energy prices, the new tariff on Canadian lumber is worth keeping an eye on, and might stir fears within the industry as a trade war with the country’s largest importer of crude oil and a major supplier of gasoline and blend-stocks to the East Coast may have ripple effects on refiners and consumers nationwide.

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Energy Complex Looking Vulnerable After Attempted Rally

Following a brutal week of selling, energy prices attempted a rally overnight only to give back most of those gains this morning.  The inability to sustain even a modest bounce after 5 straight days of selling leaves the complex looking very vulnerable, with the March lows of $47 for WTI, $1.47 for ULSD and $1.56 for RBOB the next targets to the downside.

RBOB gasoline futures are down about a half cent early on, after giving up penny gains overnight.  We are in the seasonal peaking window for gasoline prices, and most physical markets have already completed their transition to summer-spec product, so both seasonal and technical influences are pointing lower at the moment.

ULSD futures have also pulled back more than a penny from their overnight high, but are in a more neutral technical stance, and don’t have the same seasonal headwinds as gasoline, but short term technical studies are pointing lower for diesel as well.

Baker Hughes’ reported another 5 oil rigs were put to work last week, with total US oil rigs reaching a 2 year high.  That weekly increase is only half of the weekly average we’ve seen so far in 2017, but we’ll need a couple more readings to know if that tick lower is the start of any sort of trend.

The managed money category of trade showed little change last week, with speculators adding some slight amount of net length in WTI positions while trimming them in Brent.  Those positions are collected as of Tuesday, meaning this data set was collected before the big selling started Wednesday.  This week’s report should let us know how much of that length was forced to liquidate as prices plunged in the back half of the week.   The relative lack of liquidation during the early March sell-off was a major reason why prices bottomed out, but we’ll have to wait and see if the story is the same in April.

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Energy Complex Collapses Below Boundaries of the 2017 Trading Range

It was a case of taking the stairs up and the elevator down for energy prices yesterday after the slow but steady spring rally over the past few weeks faltered only to wipe out nearly half of the total gains realized in one session.  Yesterday’s sell-off was the largest since March 8th when the complex finally collapsed below the boundaries of the 2017 trading range.  The drop 6 weeks ago seemed to have a clear technical reason, while yesterday’s decline has left many scratching their head.

$50 held support for WTI, which looks like it will be pivotal to end the week in determining if yesterday’s action was an aberration, or the beginning of a new downward trend.  The selloff did rapidly change the short-term technical outlook however, with studies that were just gradually moving from bullish to neutral, now pointing lower after weeks of upward progress were wiped out.

There’s certainly a case to be made that the harsh sell-off was largely technical in nature.  After the bullish channel broke earlier in the week, sellers had a false start on Tuesday, before getting it right Wednesday.

There’s also a case to be made that the macro-economic and political issues that have equity markets on edge may have spread over into the energy arena, although yesterday it was oil that made the declines early, while stocks didn’t sell off so sharply until later in the afternoon.

It certainly did not seem to be the DOE report that caused the selling, as we saw an initial pop in prices after the release then a slow burn lower until the early afternoon when the selling really picked up pace.  The headline values were exactly like the API report on Tuesday, so they shouldn’t have been a surprise, but when looking deeper, there is plenty of reason for the bulls to get nervous over what the report may suggest is on the horizon.

The DOE Debate:

Crude Inventories

Bulls:  Crude drew for a 2nd straight week.  Bears:  We’re still only 3 million barrels from all-time highs, 27 million barrels higher than a year ago, and 128 million barrels above the 5 year average.

Crude Production

Bulls:  The rate of increase for crude output slowed to only 17mb/day last week.  Bears:  We’re 300mb/day above a year ago, and less than 200mb/day below 2015 even though there are 100 fewer rigs drilling today than there were then.  We’re still on pace to surpass 2015 levels by the end of this year.

Diesel Demand:

Bulls:  US Diesel demand remains above the 5 year range for this time of year.  Bears:  Even if demand is above average it’s still 1 million barrels/day less than what we’re producing.  Also, the estimate dropped 10% in 1 week, proving that last week’s record high was another example of how flawed the DOE demand estimates are, more than it was a signal of strength for distillates.

Refinery Throughput:
Bears:  The US is on pace to break all-time records for refinery throughput, exceeding last year’s spring peak by more than ½ million barrels/day.  Bulls:  I got nothing.

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