Energy Futures Treading Water Just Below 3 Year Highs

Energy futures are treading water just below 3 year highs on a holiday-shortened trading session for NYMEX contracts.

It’s been 2 years since oil futures bottomed out at $26 for WTI and $27 for Brent, and the path has been essentially straight up for the past 7 months, leaving both contracts overdue for a correction lower.  That said, some of the most aggressive rallies in history have come from contracts that were already “overbought” such as the last time we saw a similar streak of monthly gains in 2011, when WTI went from $101 to $127 in the last 3 months of an 8 month run.

MLK Day is a Federal holiday so US Banks and stock markets are closed for the day.  Based on the global nature of energy contracts, not to mention the revenue concerns of the exchange, the CME group keeps trading open for an abbreviated session, although there will not be a settlement today and all activity will fall into Tuesday’s activity.  US Spot markets are not being assessed meaning most physical traders will take the day off.

10 more oil rigs were put to work last week according to Baker Hughes, the first increase in 5 weeks.  For the first several months of 2017 we saw an average weekly increase of 10 rigs before the count plateaued in the back half of the year.  A big question for 2018 is if drillers will continue to ramp up production with crude north of $60, or will they hold back to avoid another over-supplied market.

Money managers still love betting on higher energy prices as WTI, Brent and ULSD all reached all-time high net length for the speculative category of trader last week.  Oil producers also seem to like hedging at these levels as the Swap Dealer category also set a new record net-short position.  For the past 6 months the money managers have gotten the better part of that trade, even though the extreme positions for speculators are often known as a contrarian indicator.

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Oil Prices Pulling Back Following Reports of Sanctions Relief

Oil prices are pulling back from 3-year highs following reports that the US President would extend sanctions relief to Iran and that Chinese oil imports declined last month.  Brent crude broke the $70 mark briefly during Thursday’s session, WTI put a scare into $65 and ULSD came a few ticks away from $2.10 before the entire complex seemed to just run out of steam and stumbled into the close.

The action is very similar to what we saw a week ago with a Thursday peak and a Friday sell-off, so for those hoping for an end to the bull market, it’s probably a good idea to wait a few days before calling an end to the rally.

Depending on which headline you’re reading, the Chinese customs data could be both bearish and bullish for oil prices.  Some news agencies are focused on a counter-seasonal decline in imports of 9% for December, while others are noting that 2017 was a record year and that China surpassed the US as the world’s largest importer on an annual basis first time ever.   It’s worth mentioning that Chinese natural gas imports are also surging as the country tries to balance a growing economy and a severe smog problem, which could mean great news for US producers long term.

While the White House is leaving the Iran nuclear pact intact for now, expectations are that new sanctions outside of that agreement will be announced, in what appears to be some sort of compromise to avoid roiling allies without giving in completely to the agreement that has been the target of so much criticism.

While the daily correlation between energy and equity prices has been minimal for the past 18 months, the common theme of low volatility between both oil prices and US equities is clear and suggests an unprecedented lack of fear in both asset classes.  This may be another major theme for 2018 for those wondering just how much higher can either market go?

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March Higher Continues for Energy Prices as WTI and ULSD Set Fresh Highs

The march higher continues for energy prices as WTI and ULSD set fresh 3-year highs overnight and Brent is knocking on the door of $70/barrel.  The pending decision from the White House on Iranian sanctions continues to loom large over the market, making it seem easy for prices to continue along on their bullish trend lines for a 7th straight month.

Although the EIA’s weekly inventory report was less dramatic than the API, it did mark an 8th straight week of large crude oil declines and refined product gains, while demand estimates to start the year were good enough to keep the bull trend intact.

US Crude output dropped sharply last week, presumably due to complications from the extreme winter weather as most forecasts (including the EIA’s STEO) suggest that US production will average more than 10 million barrels/day this year.  A year ago Cushing OK inventories were close to capacity, but start 2018 below the 5-year average after 8 straight weeks of solid declines.  This could become a major story for the year if the NYMEX delivery hub stays relatively tight, and causes the WTI/Brent spread to close along with it, which could negatively influence refinery margins.

After setting a record for annual production in 2017, Refinery runs dipped across all 5 PADDs last week.  Total throughput rates are still several hundred thousand barrels/day above year-ago levels, and nearly 1 million barrels/day above the 5-year average for this time of year.  Refinery runs are expected to dip sharply over the coming weeks as plants catch up on maintenance that many postponed last fall in the wake of the hurricanes.

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WTI Reaches its Highest Level in 3 Years Overnight

WTI has reached its highest level in 3 years overnight, adding another dollar per barrel after punching through resistance at the May 2015 high of $62.58 during yesterday’s session.  The overnight high of $63.67 was aided by an 11 million barrel draw in US crude inventories that the API was said to report in its weekly report.

Refined products are somewhat reluctantly following crude higher this morning after a rash of refinery issues sent gasoline prices spiking to their highest levels since Hurricane Harvey in Tuesday’s session.  The API report had 4 million barrel builds in both gasoline and diesel inventories as refiners continued to ramp up production.

The butane pipeline leak near the Irving refinery in St. John New Brunswick was said to not cause any immediate issues at the refinery, but it could threaten production if the situation wasn’t resolved soon.

The EIA released its monthly Short Term Energy Outlook yesterday, predicting that Brent and WTI will average roughly $5-6/barrel less than where they’re currently trading for 2018 as global supplies increase after declining in 2017.  The report also noted that retail gasoline prices average 22 cents more now than they did this time last year, which sets up an interesting test for the year between the tax law just passed by congress vs. the fastest acting consumer tax for control of the American pocketbook.

Last week’s DOE report showed large declines in gasoline and diesel demand estimates in the last full week of 2017.  This week expectations are that we should see a spike in diesel demand as heating oil was called on to supplement supplies during the cold snap, while gasoline demand should continue its pattern of a dismal start to the year as drivers avoided the roads wherever possible.  The weekly report returns to its regular schedule today and is due out at 9:30 central.

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