Petroleum Futures Trying To Carve Out Bottom

Petroleum futures are trying to carve out a bottom this morning, following a brutal sell-off that pushed most contracts to their lowest levels in 2 months overnight, with the big 4 futures contracts all dropping 10% or more from their May peaks.

Since we won’t get the commitments of traders data until this Friday, it’s impossible to say for sure, but the crescendo of selling we saw last Friday certainly had the feel of some of the record setting speculative length that’s been hanging around for most of the past year finally deciding to head for the exits.

This is expected to be a pivotal week as the OPEC meeting Friday should let the world know how much production the cartel and its allies are prepared to restore now that their inventory goals have been met.  From a technical perspective this could be an equally important week as the bullish trend-lines in place for the past year are once again under pressure.

Money managers increased their net-long positions in Brent & WTI modestly last week, snapping a 2 month-long streak of liquidation.   Based on what happened in the trading sessions after the data was compiled last Tuesday, it seems like those who added bets on higher prices may want a mulligan.  Heavy liquidation in RBOB speculative length continued for a 3rd week, and based on what we saw last Friday, it seems a safe bet that we’ll see that trend continue for a 4th.

Baker Hughes reported 1 more oil rig was put to work last week, bringing the US total to a fresh 3 year high at 862 active rigs.

While strength in the US dollar is getting credit for some of the pullback in prices we’ve seen the past few weeks, the WSJ points out that the combination of a stronger dollar and higher oil prices is a dangerous combination for many economies around the world.

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Oil Prices Are Selling Off

Russia beat Saudi Arabia 5-0 in their World Cup match Thursday and oil prices are selling off.  The two events may not be related, but are probably just as meaningful as the other headlines trying to explain today’s move as we await the OPEC meeting 1 week from today.

The US dollar has pushed through to a new 2018 high following the FOMC and ECB announcements earlier in the week, which can put pressure on US-dollar-denominated commodity prices, even though the two asset classes have been largely ignoring each other for most of the year.

US equities are also pointing lower to start the day following the latest shots fired in the US/China trade war.  While equity & energy prices were attached at the hip for much of last year, they too have largely gone their own way the past few months.

Roughly a quarter of Libyan oil production is shut in due to attacks on two of the country’s largest ports, but this news doesn’t seem to be drumming up any buying interest as Brent prices are down more than $1/barrels since the story broke yesterday.  Perhaps we’ll hold on to this headline for a day when prices are up next week.

RIN values are ticking modestly higher this week as it appears that whatever deal the White House was pushing to try and get Big Oil and Big Ag to find a compromise on renewable fuels has fallen apart.

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Inventory Declines And Surging Demand Estimates Sparked Rally

Inventory declines and surging demand estimates sparked a rally in Wednesday’s trading session, but that enthusiasm has been tempered by hawkish news from the world’s 2 largest central banks.  From a technical perspective the energy complex looks like it’s stuck in neutral near-term, so it’s likely we’ll see another week of choppy but ultimately aimless trading ahead of the OPEC meeting June 22.

The era of easy money from central banks appears to be ending.  The FOMC announced their 2nd rate increase of the year Wednesday, and suggested a high probability that we’ll see 2 more this year, an increase of 1 from previous forecasts.  This morning, the ECB announced that it would be ending its bond-buying program at the end of the year.   With energy prices following OPEC more than currency and equity markets lately, this doesn’t seem to be influencing prices much today, but it certainly has the potential to do so in the future.

Saudi Arabia & Russia meet in the World Cup today, giving leaders of both nations a convenient reason to discuss their plans ahead of next week’s OPEC meeting.  As the NY Times pointed out yesterday, those 2 nations and the US – the world’s 3 largest oil producers – may actually be in the unusual position of being aligned on oil prices.

Notes from the DOE status report:  Last week estimated total US petroleum demand dropped by the 2nd most on record, and the most in 24 years.  This week we saw the largest weekly increase in 27 years’ worth of published data, and gasoline demand reached its highest level on record at 9.789 million barrels/day.  See the note below from the EIA on why the timing of import & export figures may explain the large swings in the weekly estimate.  This also explains why many analysts rely on a 4-week rolling average for the “implied demand” data points.

On a smoothed average, total petroleum demand in the US is holding above the 5-year range and there appears to be a good chance of breaking the all-time high of 22 million barrels/day set last summer.

US crude production increased by 100,000 barrels/day last week, enough to supply an average refinery, setting yet another record at 10.9 million barrels/day.  The EIA forecast that total domestic production will average 11.8 million barrels/day in 2019, so we should see this steady climb higher continue unless prices collapse again.

Total US refinery runs increased for a 3rd straight week, led by a 350mb/day surge in PADD 5 that has West Coast refineries running at their highest levels since 2008.

 

From the DOE weekly status report explanatory notes:

Timing Issues: Timing of reported data can impact published results. For example, the calculation of product supplied includes imports and change in stock levels. Normally imports would result in a stock increase. However, respondents recording inventories are frequently different than the respondents reporting imports. The accounting system of one respondent may lag that of another, resulting in the imports and associated stocks being reported in different weeks. These timing differences result in weekly variations in product supplied.

 

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Monthly Data Deluge Hitting Energy Markets

The monthly data deluge is hitting energy markets this week, with OPEC, EIA and IEA monthly reports all released within 24 hours of each other, along with the API and DOE weekly reports.  Add an FOMC announcement later today and we’ve got a huge helping of alphabet soup to digest which seems to be creating some choppy action.   Prices are sliding modestly in early trading, but are still holding above longer-term support levels.

The OPEC monthly report released Tuesday put some downward pressure on prices as global demand estimates were held steady, while supply estimates were revised higher.  Total OPEC oil production increased during the month, with gains in Saudi Arabia and Iraq outpacing declines in Venezuela, Libya and Nigeria.

The EIA also released its monthly Short Term Energy Outlook Tuesday, predicting US Oil output to continue its rapid growth and average 11.8 million barrels/day in 2019 up from 10.8 million barrels/day currently.  The DOE’s statistical arm also projected that retail gasoline prices will average $2.87/gallon this summer, compared to an average of $2.41 last year.

The IEA’s monthly report was released this morning and follows a similar pattern.  The agency is holding demand estimates steady for 2018 & 2019 but increasing supply estimates as US & Canadian production continues to exceed expectations.

The API was said to show inventory builds north of 2 million barrels for both gasoline and diesel, while oil inventories increased by roughly 830,000 barrels.  The DOE’s weekly report is due out at 9:30 central.

The FOMC announcement is due out at 1pm central, and according to the CME’s FedWatch tool, traders are pricing in a 96% probability of a 25 point increase in the FED’s target rate today.   There is also roughly an 90% chance of a 3rd rate hike before the end of the year, and with so much certainty in today’s outcome, we may not get much of a reaction unless there’s a sign that those future plans may be changing.

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