Oil Price Survive a Trip to the Brink Tuesday

Oil prices survived a trip to the brink Tuesday as WTI and Brent each came within 2 cents of breaking through support at $47 and $50 respectively.  Ordinarily the bounce that followed after touching chart support may inspire some follow-through buying, and a large draw reported by the API set the stage for a big move today.  Instead, crude oil is trading flat, providing the latest evidence that this market is lacking conviction.

Most weeks the API only shows up on the radar when they release their inventory reports, but yesterday the industry group made headlines as it published support of the President’s executive order to streamline energy infrastructure projects.  It’s unlikely that order will have any short term impact on prices, given the long-term nature of these projects, but may be another contribution to the longer term trend of cheaper energy in the US.

Later in the day, the API was said to report a 9.2 million barrel decline in total US crude oil inventories, the largest weekly drop reported in almost a year.   The price reaction was muted however as Cushing OK stocks were said to build by more than 1 million barrels, and gasoline stocks had another small counter-seasonal build of 300k barrels.  Diesel stocks were said to draw by 2.1 million barrels.   The DOE report is due out at 9:30 central.

Activity in the tropics has really ramped up this week, as it often does this time of year, with Hurricane Gert churning north off of the East Coast, 2 more areas to watch forming as they cross the Atlantic and potentially a 3rd right behind them off the coast of Africa.  Gert is still forecast to stay offshore, and it’s too soon to say where any of the other 3 systems will go, or if they’ll develop, but the conditions are ripe and some forecasters are predicting the gulf coast will see multiple named storms over the next 2 months.

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Energy Futures Reach 3 Week Lows Overnight

Energy futures have reached 3 week lows overnight, and are teetering on the edge of another major sell-off as technical support is breaking, and fundamentals are offering little support.

There’s a chance that the $47 mark for WTI and $50 for Brent, which acted as short term resistance back in July, could now become technical support (as of this writing the low trades for the day were $47.09 and $50.11 respectively).  If those levels fail to hold however, there’s not much on the charts to prevent another drop of $2 or more.  Refined products are also looking suddenly vulnerable, and both RBOB and ULSD are within striking distance of their 200 day moving averages.  If that support breaks, we could see another 5 cents of downside for products as well.

The EIA is predicting record oil production from US shale plays in September in its monthly drilling report.  The agency expects total shale production to grow by more than 117,000 barrels/day compared to August, as the increase in drilling activity we saw earlier in the year finally turns into meaningful output growth.  Although that report certainly seems to have contributed to the selling we’ve seen so far this week, it’s also worth noting that several of the shale formations seem to be showing a peak in output/well following years of dramatic growth in that reading.

The monthly drilling report from the US-based EIA, supports the theory from the IEA’s monthly oil report last week that the drawdown in global crude oil stocks may take longer than expected.  The idea that “we’ll rebalance next year” seems to have become the theme for the past 3 years.  Most forecasts are guessing that US oil stocks declined again last week as refinery production remains near record levels.  Now that the momentum clearly favors the bears after 2 weeks of going nowhere, the API and EIA weekly readings will need some bullish readings in order to stem the tide of selling.

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Energy Futures Ticking Modestly Lower

Energy Futures Ticking Modestly Lower

Energy futures are ticking modestly lower to start the week as the struggle for direction continues.  At one point last Thursday when Brent traded north of $53, it looked like maybe we’d get a breakout to the upside, only to see the sellers step in and knock prices back to the lower-end of the range.  Then, on Friday, WTI briefly dipped below the $48 level and looked like it might drag prices below their August floor only to bounce back and settle higher on the day.  That back and forth action leaves the technical studies muddled, and favors more choppy trading until a breakout can be sustained.

Three more oil rigs were put to work last week according to Baker Hughes’ weekly rig count.  While the total oil rig count of 768 is the highest of the year, there has only been a net increase of 5 rigs over the past 6 weeks, a stark contrast to the 9 rigs/week average in the first half of the year.

Money managers seem to be having a difference in opinion over the US vs European grades of crude oil.  Last week saw the Net long position held in WTI dip slightly, while the net bets on higher Brent surged again to the highest level in 4 months.  The increase in Brent was split roughly 1/3 short covering and 2/3s new length, suggesting that speculators are gaining more confidence in a push towards the mid $50s.  It’s possible that this new found confidence coincides with the October Brent contract now moving into backwardation of roughly 15 cents over November, a condition that suggests physical supplies have tightened following years of excess.

Tropical Storm Gert formed over the weekend, and is likely to become a hurricane over the next few days.  Fortunately the forecasts show this storm staying off-shore of the US East Coast, not creating a significant threat to those of us who spend our time on land.   The last time there were this many named storms so early in a season was 2005, which will not help gulf coast residents rest easy as that was the year of hurricane Katrina and Rita.  With most of refining country already inundated with rain this summer, the risks of flooding and power outages could be severe even in the event a smaller storm should reach the area in the next few weeks.

Why are prices moving lower this morning?  Take your pick.

 

 

Market-Update-16-10

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Energy Complex Trading Lower

The energy complex traded lower yesterday after news from Russia emerged claiming the country sees no need to continue cutting crude production after the OPEC agreement has expired. The deal, first reached in November of last year and again renewed in May, held each member (with a couple of exceptions) and a volunteering Russia to limited production capacity in an effort to raise prices. The deal is set to end in March 2018 and then its back to business as usual, at lease for the former Soviet Union.

Renewable Identification Number (RIN) prices continue their march upward  and traded as high as 92 cents for the first time since last year. Uncertainty over if and how the EPA will hold obligated parties to retroactive RIN obligations have spurred a buying spree originating in May.

Crude oil futures failed to settle above the psychologically important $50 mark yesterday. WTI contracts exchanged hands around the $50.20s yesterday but ended the day almost $2 lower at $48.59, and producing a bearish chart formation in the process. Prompt month crude prices are currently buoyed by the contract’s 100 and 20 day moving averages, after which support can be seldom found. If selling pressure manages to force crude to settle below $48, another $3 could be knocked out of the benchmark shortly thereafter.

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Gasoline and Diesel Demands Close to Record Highs

New York gasoline futures settled lower by 8 points yesterday, resisting the upward pressure of the rest of the energy complex, after seeing the first build in inventory levels of the summer driving season. The prompt month diesel contract settled up almost 2.5 cents, West Texas Intermediate gained just over 50 cents on the day.

Both gasoline and diesel demands are close to record highs but cannot seem to keep up with refinery runs which have been hanging around the nosebleed section since mid-March. To exacerbate the situation, gasoline exports have dropped off for a second week in a row which is the main culprit for the unseasonal build in inventories.

This morning’s rally looks to break WTI out of its high set earlier this month. August 1st had the crude benchmark top out at around $50.50 and has since fallen. If broken today, not much stands in the way of crude prices running up to the $51-52 range and taking refined products along for the ride.

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