Big Three Energy Futures a Modest Mixed Bag this Morning

The big three energy futures are a modest mixed bag this morning after a rally on Friday that pushed RBOB to a gain for the week and made up most of the diesel contract’s losses.  The shuttering of five US oil rigs, following the previous week’s closure of two, doesn’t seem to be driving much price action with the benchmark up only 14 cents to start the week. New York gasoline and diesel are taking a small step back and are down 25 and 50 points respectively.

The proverbial “smart” money backed off on their net WTI positions last week and in turn opted for the European crude contract instead. The Brent-WTI spread is hanging around the $5.50 range and will likely continue to drive American exports, of which we saw an increase of 500mb per day last week.

The conflict in Kurdistan resulted in the slowing of a pipeline carrying crude from Kurdistan through Turkey to ports in the Black Sea. While this would be a fundamental disruption, especially to export economics, it looks like Iraq is considering reopening a different pipe to Turkey, essentially cutting Kurdistan out. It’s unclear whether resolution or disruption are currently priced in; it’s likely a little of both.

Last week’s move established some technical buying support for prompt month HO contract at its 10 and 20-day moving averages. The benchmark sold down and settled below the averages on Thursday only to be brought back above them in Friday’s rally. The prompt month’s interaction with these support levels will likely dictate any downward movement this week. Any significant upside potential will be decided around the $1.86 level with little in the way before then. RBOB’s similar break above the 50-day MA last week put in some support at $1.65 and the contract will likely trade between that and last month’s highs around the upper $1.70s.

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Oil Prices Seeing Modest Losses for a 2nd Day

Oil prices are seeing modest losses for a 2nd day as geopolitical tensions have eased momentarily, while refined products are attempting to push higher as tensions in Washington heat up.

The tail continues to wag the dog for refined products, as the latest spike in RIN values has pulled both RBOB and ULSD futures from overnight losses, to early morning gains.  The political maneuvering surrounding the EPA and Renewable fuel standard was ratcheted up a notch this week, sending ethanol RINs to 90 cents this morning, up from 77 on Monday.

While the pressure on the EPA to keep the biofuel mandates at current levels may be good news for Agriculture businesses long term, near term things look a little rough as ethanol values plummeted to their lowest levels in over a year this week as inventories remain well above their 5 year range.

The divergence between crude and products leaves the outlook for prices for the coming weeks very much in doubt.  Buyers showed this week that they didn’t have the staying power to push prices past their September highs, leaving the technical picture stuck in neutral.  It seems like unless some new headline is able to shake things up, we may see prices move sideways for an extended period as a result.

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Across-the-Board Selling Wiping Out Gains

Reversal Thursday is in effect this morning as across-the-board selling (with little in the way of news to explain it) is wiping out most of the gains earned earlier in the week.

It’s hard to say what’s behind the selling so far.  It could be a delayed reaction to the soft demand estimates given by the EPA  yesterday, with both gasoline and diesel consumption reaching their lowest weekly levels since last winter.  It could also be a reflection of the easing of the tensions in Iraq when the Kurds chose not to fight the government forces over Kirkuk.  Or perhaps the speculative funds ran out of bullets to fire as they’ve already amassed historically large long positions in crude and refined products.

At this point, it doesn’t matter so much why we’re pulling back, as it does how long this selling can last.  If the momentum continues through tomorrow, it will create some bearish patterns on the weekly charts that bring on more heavy selling to end the month.  If the sellers run out of steam however, this may just be chalked up to yet another reversal Thursday session that was merely a short term correction of a longer term trend.

Refinery runs dipped sharply on the week as all 5 PADDs saw decreases, which seemed to catch the market a bit off-guard.  What will be critical for next week’s report will be whether or not we see a recovery.  If we do, it’s possible there were more plants in PADD 3 that slowed run rates ahead of Hurricane Nate than what was reported.  If they don’t, it appears that some of the fall maintenance work that was pushed back after Harvey has been put back on the schedule.

Even though it feels like the tail wagging the dog, RIN values continue to be a frequent driver of the daily action in gasoline prices. Yesterday it was the latest rumor of the White House telling the EPA to squash the 2 proposals that would reduce the Renewable Fuel obligation action sending ethanol RINs back above the $.80 mark for the first time in 3 weeks and also helping to push gasoline prices back into positive territory on the day.

While the strong correlation between ethanol RINs and gasoline crack spreads in 2017 certainly helps neutralize the costs of the RFS to some degree, it may not be enough to save PES, which operates the largest refinery system on the East Coast, after another credit downgrade was announced yesterday.

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Charts from the DOE weekly status report.

Energy Prices Moving Tentatively Higher Wednesday

Energy prices are moving tentatively higher Wednesday after another rally attempt stalled out in Tuesday’s session.  Bullish technical indicators and geopolitical tensions still seem to be favoring higher prices, but the conviction among buyers seems to be lacking at the moment, holding prices back from the next big move.

You wouldn’t be alone if you expected to see more of a reaction out of WTI after an inventory decline of 7 million barrels that the API was said to report yesterday.  Then again, the API and DOE reports did differ by nearly 6 million barrels of crude oil inventories last week, leaving the industry group with plenty of ground to make up in this week’s report, which may explain the lack of movement.  The API report was also said to show builds in refined products of just under 2 million barrels for gasoline and 1.6 million for distillates.  The DOE’s latest will be out at 9:30 central.

There are reports this morning that the Iraqi government is seeking alternate production and distribution options for oil from Kirkuk, after the Kurds quickly relinquished control of the area yesterday.  It’s still hard to say if that means more or less risk to supplies short term as any solution outside of the current exports via Turkey will likely take several months, if not years, to put in place.

The Dow Jones Industrial Average surpassed the 23,000 mark for the first time yesterday, just over 2 months after it first broke the 22,000 mark.  Optimism over potential tax reform seems to be an underlying theme in the ongoing rally – which by some measures has reached record proportions – but ever since the correlation between energy and equities broke down roughly 18 months ago, oil prices just don’t seem to care.

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Energy prices have bounced back today as the complex struggles for direction

After the IEA and EIA reports led to some heavy selling Thursday, energy prices have bounced right back today as the complex continues its struggle for direction.

A large increase in Chinese oil imports, which reached their highest level since May, is the often cited reason for the overnight buying, although that doesn’t seem to explain why gasoline and diesel prices are up $1.50/barrel, while WTI and Brent are only up about $1.00.

The concerns over political posturing with Iran, and Kurdish oil exports from Iraq are both getting credit for the overnight strength in prices, but again, neither story does much to explain why products are out-pacing crude oil in the run-up.  It’s certainly possible based on the relative strength in time and crack spreads for products that there’s a refinery issue somewhere in the US that’s yet to be widely reported.  Whatever the reason, today’s rally could be significant from a technical perspective as it may eliminate some bearish potential from the charts.

If ULSD futures can get back above the $1.80 mark, they’ll be back into the bullish trend that carried diesel prices up by more than 50 cents/gallon since June before faltering last week.  If RBOB can break back above the $1.63 mark, this week’s action will be a bullish reversal pattern after gasoline prices reached their lowest level since July Monday morning, opening the door to another counter-seasonal rally.

If you reversed the signs on the API report this week, you’d have been pretty close to the DOE figures as the two data sets diverged in nearly every headline category.

Refinery runs are not yet back to pre-Harvey levels, but they are still higher than they were a year ago, or during any other year on record for the first week of October.  As the refinery throughput charts below show, usually we see large declines in run rates at this time of the year due to fall maintenance, and since many plants deferred that maintenance after the storm, we may continue to see runs stay above their normal levels throughout the month.

Crude oil exports declined sharply last week, dashing hopes for those calling for a 2 million barrel/day export figure.  That said, at 1.27 million barrels/day, this was still a top-5 week for US crude deliveries to international destinations.

US Crude output ticked just slightly lower, as the pre-Nate shut-ins were just starting when the weekly data was collected last Friday.  We should see a dip in next week’s report, but that is likely to be the only noticeable feature from the least-impactful hurricane to make US landfall in recent memory.