Energy Futures Attempting To Rally

Energy futures are attempting to rally this morning and perhaps salvage what’s been largely another weak week of trading.  The IEA’s monthly oil market report is getting some credit for the move as demand estimates for next year were revised slightly higher, gasoline prices are once again trying to find a floor at $2.

Adding to the myriad geopolitical events roiling markets these days:  A US court has approved a theoretical seizure of Citgo assets to repay unpaid Venezuelen debt.  The actual seizure order is pending a plan on how to proceed from the parties involved.

Prompt RBOB gasoline futures settled below the $2 mark for the first time since April Thursday.  So far, just as we saw in June and July, the brief trip below $2 has been followed by an immediate bounce.  There is an trading adage that “there’s no such thing as a triple bottom” however, suggesting there’s a good chance we see a breakdown of that support, which would target a run at the 200 day moving average near $1.95.  This week’s drop is also threatening the monthly trend-line that started when RBOB bottomed out at 89 cents/gallon in February 2016.

Today’s interesting read:  Canadian oil producers are facing another crises as prices have dropped below $40/barrel again in August, even while WTI and Brent have been trading close to $70. The flip side of this coin is US refiners with access to the distressed Canadian barrels are picking up a 30-50 cent/gallon advantage over those that do not.   With pipeline constraints becoming the theme of 2018, next week’s GOM oil lease auction will be closely watched to see if perhaps the bottlenecks on land will encourage more investment at sea.

 

A few noteworthy quotes from the IEA monthly Oil Market Report:

…concerns about the stability of oil supply have cooled down somewhat, at least for now. We have seen increases in production, mainly in Saudi Arabia and Russia, a surge in US exports

This cooling down in prices is clearly welcome for consumers: the biggest single product market in the world is US gasoline and the national average price increase seen during the spring seems to have stalled for the time being.

The recent cooling down of the market, with short term supply tensions easing, currently lower prices, and lower demand growth might not last. When we publish our next report in mid-September, we will be only six weeks away from the US’s deadline for Iran’s customers to cease oil purchases. Thus, the market outlook could be far less calm at that point than it is today.

 

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Oil Prices Dropped More Than 3%

Oil prices dropped by more than 3% Wednesday, the 3rd time in the past month we’ve seen a drop of that magnitude.  From July 2017-June 2018, that only happened 3 times total.  No doubt the numerous geopolitical uncertainties are key drivers of the increased volatility of late, and with many more questions than answers for China, Iran, Venezuela and even the US, it seems like this choppy action could be here to stay.

Some headlines blame the US/China tariff tirade for the drop in oil prices Wednesday, while others note that China actually removed oil from its list of products subject to their new tariffs.

Gasoline took the biggest hit on the day, with bearish demand estimates from the DOE adding to the negative sentiment from inventory builds.  September RBOB futures are once again testing the $2 mark – a level that’s held up through the last few rounds of selling – but with only a few weeks left of the summer-spec futures contract and driving season winding down, it’s looking likely that sub $2 wholesale prices will be coming back in the near future.

The DOE’s estimate for US oil production dropped for a 2nd straight week as it appears the agency is reconciling its weekly estimates that saw an increase from 9.5 to 11 million barrels/day to start the year, with the monthly look-back that suggests maybe production actually topped out around 10.5 million barrels.

Total US Diesel inventories remain at the bottom of their 5 year range, but actually managed to get back into that range for the first time in 12 weeks.  The Midwest remains the outlier with PADD 2 stocks above the 5 year range as we approach the peak-demand harvest season.

Refiners are ramping up production again, continuing their record-setting pace for the year.  There was a fire at the Holly refinery in Tulsa yesterday, but it was quickly extinguished and operational disruptions aren’t expected.

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Charts from the DOE weekly report

 

Energy Prices Selling Off To Start Wednesday’s Session

After 2 straight days of failed rallies, energy prices are selling off to start Wednesday’s session.  Inventory builds are taking the blame for the selling in refined products, but that doesn’t explain the move in crude oil, suggesting this has more to do with a technical failure than a change in fundamentals.

The API was said to report a 6 million drop in crude oil inventories last week, while gasoline stocks built by 3 million and distillates increased 1.8 million.  The EIA’s Short term energy outlook predicted gasoline prices peaked in May, and that global inventories would increase again in 2019, which is in line with previous forecasts.  The EIA’s weekly status report will be released today at 9:30 central.

Despite all the trade-war talk, US equity markets are back on the brink of setting new record highs.  As has been the case for most of the year, energy prices don’t seem to be paying attention to the move at all.

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Energy Prices On The Move Higher

Energy prices are on the move higher again with WTI approaching $70 and Brent nearing $75.  The question of the day is whether we’ll see prices break through those resistance levels and press on towards the year’s highs, or if this rally will run out of steam again like we saw in Monday’s session.

A long list of geopolitical issues seems to be getting credit for today’s move with sanctions against Iran starting this week being the primary fear.  The failed assassination attempt of Venezuela’s President over the weekend has also been cited as a reason for strength in oil prices.  Here’s why the WSJ thinks it could be bearish long term.

Andeavor reported record earnings in the 2nd quarter this week, the latest sign of how US refiners with access to land-locked crude oil from Western Canada and shale plays in the US are benefitting from transportation bottlenecks.

News broke over the weekend that the EPA had finally released its “triennial report” to congress on the impact of biofuels on the environment.  The report highlighted concerns with water, soil, and air pollution which were all found to be adversely affected.  Perhaps most notable is the claim that ethanol combustion may be more harmful than gasoline combustion by some measures.

This report is supposed to be released every 3 years, so was actually due in 2014.  It’s unclear what caused the 4 year delay in releasing the details…other than it being a report produced by a government agency.  RIN values did not appear to react to the report, perhaps because it seems like it could be at least another 3-4 years before the findings may begin to influence the RFS.

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Charts from the EPA’s Biofuels and the Environment report.