Entire Complex Rallying for a 4th Straight Day

An unexpected shutdown of one of Europe’s largest oil pipelines has pushed several energy contracts to new 2.5 year highs this week and has opened the door on the charts to further upside to end the year.  The entire complex is rallying for a 4th straight day, with refined products trading close to a dime above where they stood just a week ago, wiping out the 5% decline we saw to start the month in what has been one of the more memorable head-fakes of the year.

Brent crude is leading the charge higher after the Forties pipeline was forced to shut due for emergency repairs.  That pipeline system is the largest in the North Sea, and one of the key arteries for physical delivery of crude oil tied to the Brent contract.  The downtime is expected to last for several weeks and will shut in roughly 400,000 barrels/day of production in the area that does not have an alternate delivery route.  It’s been a rough couple of days for owner INEOS who just bought the pipeline system from BP 6 weeks ago, and is also reportedly dealing with an unexpected shutdown of a refinery in France due to an explosion.

The rally has blown out the WTI/Brent spread to its widest level in 2.5 years which should provide some margin benefit for US refiners if they can source a WTI based crude as refined products are following Brent higher.  This relative strength for Brent may be a short term phenomenon however as the LOOP has confirmed plans in the last week to begin exporting US Crude via the offshore system that can handle the world’s largest tankers.

The short term technical outlook has completely flipped during the rally with indicators flipping from oversold to bullish in just a few short days.  If the overnight highs can be taken out this week, there’s a chance we see a move to challenge the 2015 highs over the next several weeks which could mean ULSD north of $2, and WTI in the $60s.  If the December action has taught us anything however, it’s that it’s best to wait and believe it when you see it.

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Energy Futures Rallying After Overnight Selling

A strong finish to last week’s action kept the bullish trend lines intact for energy markets and opening the door for another big rally just a few days after it appeared that we may see a winter price collapse.  Energy futures reopened with some selling overnight but rallied in the past hour on news of an explosion in New York city not far from Times Square.

Early reports suggest that perhaps only the suspect was injured in the botched attack which has tempered the buying, although this story is likely to keep traders on edge much of the morning as it develops.

Look for topside resistance that marked the November highs near $65 for Brent, $59 for WTI and $1.96 for ULSD to be tested this week.  If they break, there’s room to run on the charts, perhaps as much another $5 for crude and 15-20 cents for diesel prices.  If those levels hold however another pullback is likely as the market searches for direction.

2 more oil rigs were put to work last week accord to Baker Hughes’ weekly drilling report.  As the total rig count has stayed relatively steady over the past 6 months some reports suggest that shale drillers are favoring profit over volume, while others are pointing to technological advancements that will bring more of both.

Money managers made modest reductions in the net long holdings in crude oil and refined product contract last week, although all 4 contracts remain well above historical levels.  The speculative category of trader has proven resilient this year with sharp sell-offs being met with more buying rather than a mass evacuation of funds like we’ve seen in years past.

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Bulls Taking Back Control of Energy Markets to End the Week

The bulls are taking back control of energy markets to end the week, wiping out most of the heavy losses from earlier in the week and keeping the up-ward trend lines on the weekly charts intact. Strong oil import data from China, a strike threat from Nigerian oil workers, and new tensions in the middle east are all contributing to the rally the past two days.   Now that the threat of collapse has subsided, the question for next week will be whether the bulls have enough momentum to try and break the resistance set in November, or if we’ll be stuck back in the range-bound trading through the holidays.

Winter is finally arriving for much of the country as a storm is blanketing much of the Eastern US with snow.  Houston actually got snow overnight which means it’s highly unlikely your refiner’s sales rep will be available if you need them today.  The system could also be a demand killer over the next few days as it is forecast to hit many of the country’s largest metro areas.

RIN Prices continue to tumble today after Senators from states with lots of oil and oil refining said the President was open to talking about changing the RFS.   Senators from states with lots of corn who didn’t attend the meeting said it was a waste of time.  D6 ethanol RINs have fallen from 90 cents a week ago to 75 cents this morning.

The November jobs report was positive with payrolls increasing by 228,000 and the headline unemployment rate holding steady at 4.1%.  The unemployment rate labeled U-6 by the BLS, which is known by some as the “real” unemployment rate ticked higher by .1%.

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Yo-Yo Action Continues for Energy Markets

The yo-yo action continues for energy markets that are trying to bounce again today after yesterday’s DOE report sparked another heavy sell-off.  Today would mark the 6th straight trading session in which prices move in the opposite direction of the previous day if the current gains can hold.

The DOE’s weekly report largely confirmed what the API reported a day earlier with refined products showing large builds and crude oil inventories declining.  Refinery runs continue to set records for this time of year which seemed to help push both ULSD and RBOB futures to nickel losses on the day.

Oil prices also sold off heavily on the day, breaking some short term support levels that open the door to more selling longer term.  US crude oil production continued its steady climb higher, breaking above 9.7 million barrels per day for the first time in at least 40 years.  This is an increase of 750,000 barrels/day from the start of the year, enough to supply several large refineries.

Yesterday’s selling wasn’t limited to petroleum contracts.  Ethanol prices dropped to their lowest levels of the year as inventories continue to swell, and ethanol RINs fell below 80 cents for the first time in nearly 2 months.  There’s a meeting at the White House today to discuss the Renewable Fuel Standard that seems to have put some fear into the RIN market over the past week.  According to a White House spokesperson “”The President understands the importance of the RFS to rural America. He is also aware that workers in the refining sector believe the program isn’t working as intended, and should be improved to reduce their compliance burdens,”

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Gasoline Prices Driven to Lowest Levels in Six Weeks

Heavy selling in refined products Monday drove gasoline prices to their lowest levels in 6 weeks, and have left diesel prices testing the lower end of their November range.  A catalyst for the move was unclear, although the large speculative length held in energy contracts led many to speculate that the selling was liquidation by money managers now that the bull trend seems to have faltered.

Given the relative volumes – crude oil trading volume is roughly 10 times that of refined products – it would make sense that prices may have a larger swing than we might see with the same volume of crude being liquidated, if in fact that’s what was happening.  So far in 2017 money managers , aka speculators, have been surprisingly resilient unlike what we’ve seen in the past few years.  We should find out soon if they’re able to withstand some selling short term to continue their bet that prices will rise.

RBOB futures are bouncing back this morning, the only contract currently trading in positive territory, and are currently testing the 50 Day Moving average from the opposite direction after having broken below that support yesterday for the first time since October.  If that resistance around the $1.70 mark holds today, this looks like a dead cat bounce and will set up the next downside target at the 200 day moving average some 7 cents below current levels.

Ethanol RINs dipped to 86 cents/RIN, their lowest level in 3 weeks, after reports that the White House would host a meeting this week with Senators eager to change the RFS.  As has been the case for the past several months, the move in RIN prices corresponded with a move in gasoline crack spreads which fell to their lowest level in 3 months, proving yet again what a double-edged sword the renewable market can be for US refiners.

It’s not clear if some sort of deal on the RFS was an expectation in exchange for getting the tax bill through the Senate, but the timing is certainly interesting if not coincidental.  While plenty of negotiating on the tax plan is still to come as the House and Senate bills are reconciled, early reports suggest that refiners may be big winners since their income will be taxed less, while wind and solar companies may have their incentives eliminated.

Unconfirmed reports that the beleaguered Santa Cruz refinery in Mexico was restarting more units is also likely to have weighed on US crack spreads is it suggests that the export demand may decline in the coming weeks.  On the other hand, there are also reports that a crude unit at Exxon’s Beaumont TX refinery may be offline for 2 months following a fire last week, reducing output by around 100,000 barrels/day.

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