Bearish inventory figures knocked prices back sharply overnight

Just when it looked like energy prices were ready to make another run higher, some bearish inventory figures knocked prices sharply overnight, leaving us in a technical no-man’s land waiting for the next big move.

After a strong settlement put crude and refined products on the cusp of breaking out from their bearish October trend channels, the API was said to show a 3.1 million barrel build in crude oil stocks, a 2 million build in distillates and a 1.5 million barrel draw in gasoline.  The increase in crude and distillates, when many were expecting export-induced inventory declines, sent prices lower immediately yesterday afternoon and seems to be driving the early selling this morning.  The DOE’s weekly status report will be out at 10am central today.

Refined products were pushed up more than 2 cents early in Wednesday’s session on news that Delta was shutting its Trainer PA refinery due to a fire.  Those gains were given back later in the morning when subsequent reports suggested the fire was relatively minor and most units at the plant remained in operation.  Cash prices in NY Harbor did end the day by adding nearly a penny to basis differentials suggesting there may be some short term gasoline supply tightness caused by this event.

The IEA was a bit less optimistic in its outlook for the global economy and oil prices in its monthly oil market report published this morning.  The agency does make note of the progress towards rebalancing the supply & demand equation for petroleum globally in 2017, but cautions that “continued discipline” will be required from producers if they’re disappointment in 2018.

Saudis announce plans to cut back their exports to Asia.

If you were writing headlines Tuesday about why oil prices were rallying, there was a smoking gun provided by the Saudis announcing plans to cut back their exports to Asia.  Indeed many news outlets jumped on that story as the catalyst for the rally, and who can blame them when that’s so much easier to understand than the murky world of technical indicators and fund flows.

The problem with the theory (besides the Saudi claims being almost impossible to actually track of course) is that the US WTI contract leading the charge, not Brent, which is what would be expected if this really was a story about tightening supplies overseas.  Another problem with that theory appeared today when OPEC announced its production had increased again, as Libya, Nigeria and Iraq all saw notable increases last month, offsetting a big drop from Venezuela, and once again making the output cut discussions hard to take seriously.

The OPEC monthly oil market report did have some good news in terms of increased optimism for the global economy and global oil demand.  The report also noted that US Distillate inventories are tight compared to the past several years due to Harvey, and could create issues with a colder-than-normal winter forecast.  That note could help explain why diesel futures are leading the push higher this morning, since it still seems as though refinery operations were not significantly impacted by Nate based on USGC cash market prices.

As we await the delayed inventory reports this week, the WTI vs Brent discussion should continue to take center stage.  Ever since Harvey, Brent has been in backwardation and WTI has been in contango, suggesting the world is getting tight on oil supplies, while the US remains in a glut.  With more than 2 million barrels/day of US oil exports predicted in the past week, it’s possible that the relative strength we’ve seen in WTI so far this week may just be the beginning.

Tropical Storm Ophelia is making its way across the Atlantic and has a chance to become the 10th consecutive hurricane to be named this year, something that hasn’t happened since the late 1800s.  The good news for anyone in the US, is that Ophelia is going East across the Atlantic and appears to pose a threat only to Portugal.  There are two other disturbances, but both are given low probabilities of formation, meaning we may finally get a quiet week for storm activity next week.

WTI Forward curve, AKA the West Texas Mullet.

Technical Support Sparks A Rally Tuesday Morning

Energy prices are moving higher Tuesday, after technical support held up during Monday’s session and seems to have sparked a rally this morning.  WTI was able to find a floor at the 50 day Moving Average during both Friday and Monday’s session, and settled back above the 200 day moving average yesterday, which is now encouraging buyers to step back in.  RBOB survived another attempt to break below $1.54 for the 4th time in 6 sessions, while ULSD bounced solidly off of $1.72.  With some short term technical indicators having dipped into over-sold territory this type of a bounce is not too surprising, the question for the week now becomes how long does it last.

It will take WTI moving above $50.50 to break its bearish trend-line that started when prices peaked two weeks ago.  ULSD meanwhile needs to climb back above $1.78 and RBOB needs to reclaim $1.60 if today’s early rally is to transition from a dead cat bounce to the end of the October bear trend.

The EPA announced Monday that it was planning to roll back the previous administrations’ Clean Power Plan, and declared the “war on coal” to be over.  The announcement is unlikely to have any direct impact on petroleum prices, but it’s another sign that this EPA is much more friendly to the fossil fuel industry, which could have plenty of impacts down the road.  Separately, ethanol RIN values fell again Monday as the industry continues to try and digest the EPA’s plans to tweak the Renewable Fuel Standard.

Richard Thaler won the Nobel prize in economics Monday, for research on how human traits affect financial markets.  You may recognize Mr. Thaler from his cameo in the movie The Big Short.  For those that watch the energy markets, particularly during the 2017 hurricane season, his theories on human behavior affecting markets should be fairly easy to relate to.

US Gulf Coast cash markets saw a pullback Monday as fears over Nate’s impact on refinery operations subsided.  P66 announced it was restarting the Alliance LA refinery and that no damage was done, while Chevron was a bit more vague in reports that it had completed damage assessments in Pascagoula.  We’ll have to wait an extra day to see the official numbers on how refinery run rates recovered last week since the EIA decided to celebrate Canadian Thanksgiving yesterday and won’t release the weekly stats until Thursday at 10am central.

More selling in gasoline and diesel futures to start the week

We’re getting more selling in gasoline and diesel futures to start the week, following through on the sharp declines to end last week. Both ULSD and RBOB futures are around 1% lower this morning, while WTI is trying to hold onto small gains. From a chart perspective, the energy space is nearing critical support levels, that could bet the difference between getting a price bounce in the next few days, and seeing another 5% or more in losses.

It’s hard to say if Friday’s sharp losses were more a sigh of relief that Hurricane Nate was going to be a relatively minor event, or a wave of panic at the first monthly decline in US jobs in years. Most likely, it was some of both. Refined products are once again leading the push lower as it now seems Nate will do more damage to refined fuel demand as it dumps heavy rain across large swaths of the country, while its impacts on supply appear to be minimal.

Roughly 90% of offshore oil production was shut in ahead of the storm, and early reports suggest employees were already returning and beginning to bring that production back online. The LOOP was also said to have avoided damage and returning to service. The Chevron refinery in Pascagoula was just 30 miles to the east of Nate’s landfall, putting it near some of the worst winds and storm surge. There have not yet been reports on whether that plant, rated at 370md/day suffered any damage.

The net long positions held by money managers were little changed last week. Brent and ULSD positions held near their multi-highs, while WTI and RBOB saw modest reductions. With the heavy selling that we saw Friday and so far today, we may see further reductions in these positions in this week’s report, which is compiled based on Tuesday’s positions.

Baker Hughes reported a net decline of 2 oil rigs last week across the entire US. Texas and Louisiana saw declines in their total rig counts (oil and gas), while North Dakota and Colorado had small increases.

There is another tropical depression in the Atlantic which is predicted to become our next tropical storm, but fortunately looks like it will stay out of sea and not threaten land.

 

Headlines Whipsawing Energy Prices in Physical & Financial Markets

It’s been a busy week for headlines that are whipsawing energy prices in both the physical and financial markets.  After a strong day Thursday, we’re seeing heavy selling this morning in what appears to be optimism that the multiple storms wreaking havoc with prices, whether figurative or literal, will soon pass.

Yesterday the Saudi King met with the Russian President, indicating that the two countries were entertaining the idea of extending oil production cuts among other deals between the two long-time foes who have become friendly in the wake of the oil price collapse 3 years ago.

Meanwhile, the Kurdish independence movement continues to create waves, with Turkey’s President meeting with Iraqi and Iranian officials to discuss how to handle the breakaway, putting ½ million barrels per day of oil exports at risk.

Iran made the news again yesterday as the White House signaled its plans to abandon the Nuclear agreement set in 2015.

The US Dollar index has rallied to a 2 month high this week as fears about the fallout from Catalonia’s attempt to break away from Spain.  That rally in the dollar has been cited as a reason for WTI’s return to sub-$50 levels, although as the chart below shows the correlation between the two asset classes has been almost non-existent over the past year.

Tropical Storm Nate is making its way north and is forecasted to hit the Gulf Coast as a category 1 Hurricane Sunday.  Evacuations from offshore oil production facilities are underway, and several refineries in the area are expected to begin cutting runs so they can shut down safely ahead of the storm, in an effort to reopen more quickly after it passes.  The good news is the storm is moving relatively quickly, meaning rain forecasts are roughly 10% of what we saw with Harvey.

The scary part is that the waters in the Gulf are still above normal temperatures, so it’s still possible that this system could strengthen more than is forecast currently.

The September jobs report  showed a decline in payrolls of 33,000, which is believed to be caused the effects of Hurricanes Harvey and Irma.

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