Volatile Day for Energy Prices

It’s been a volatile day for energy prices already, following an impressive bounce in Wednesday’s session after crude oil and diesel prices reached their lowest levels of the year a few minutes after the DOE report.  WTI rallied nearly $1.5 after reaching a low of $47.01 yesterday, and leaving behind what could be a double bottom with last week’s low trade at $47.09 that precluded a $2.5 rally to end the week.   ULSD has a similar pattern after reaching its low trade of the year at $1.47 then bouncing back north of $1.50.

Headlines were already out this morning touting draws in refined product inventory stocks as the reason for the overnight rally, but they may have to be re-written as the overnight gains have turned into losses.    This choppy action sets up for a volatile finish to the week, with a risk of a slide to $44 for WTI if yesterday’s floor fails to hold, and a run back to $50 certainly likely if it does.

Crude oil inventories set a new record high last week, led by a build in PADD 2.  Seasonally we often see crude inventories continuing to build this time of year until increased refinery runs start drawing them down sometime in April.  US Crude production was up another 20,000 barrels/day, slowly but surely making a push towards 2015 levels, although as the WSJ points out this morning, rising sand prices may threaten the recovery in fracking activity.  Watch those PADD 2 inventories in future weeks to see how the Syncrude Canadian unit shut due to a fire will impact regional inventories.

Product demand estimates are good not great.  Gasoline demand was down slightly on the week at 9.2 million barrels/day, down nearly 300,000 barrels/day from this time last year, but nearly 1.2 million barrels higher than the weekly estimate 2 months ago.

Refinery run rates are also cranking back up after a busy spring maintenance season.  Despite several issues last week, including the fire at LyondellBasell, PADD 3 run rates were up nearly 200,000 barrels on the week, and should continue to build throughout the spring.

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Equity & Energy Markets Around the World Moving Lower this Morning

It’s a “risk-off” type of day as equity and energy markets around the world move lower this morning, a day after the worst sell-off for US stocks of 2017.  Oil prices are also slumping under the weight of another large inventory build reported yesterday by the API, that would set a new all-time record if confirmed today by the DOE.

Gasoline futures are attempting to resist the pull lower after the API reported a large draw-down in inventories last week of nearly 5 million barrels.  If confirmed by today’s DOE report, that would mark a 5th straight week of declines for gasoline inventories after setting a record high.  Inventory draws are expected this time of year ahead of the spring vapor pressure transition, but the speed of the move from glut to average has been impressive thus far and may have refiners breathing a sigh of relief after a tough winter.

Diesel prices meanwhile came within 30 points of last week’s low trade, a level that appears to be a bit of a trap-door on the charts should it break, setting up an additional 8-10 cents of downside near term.  The transition in WTI from the April to May contract yesterday has temporarily staved off a break of $49, but with current values just 50 cents away, it certainly feels like this market wants to test support again near term.

On the other hand, the thorn in refiners shoe known as RINs have made a dramatic comeback this week, reaching 60 cents for D6 ethanol RINs yesterday, double their price just a few weeks ago before falling back to trade in the low 50s in the afternoon.  Despite rumors to the contrary, it appears that the new administration and the EPA have bigger priorities at the moment than a change to the Renewable Fuel Standard that created RINs as a compliance tool, leaving the current plan in place for 2017.  RIN values have been as steady as the headlines from Washington the past few months so it’s hard to say what might happen from here, but it’s worth noting that they did trade north of $1 when the 2017 volumes were set last year, so there’s a case to be made there’s more upside to come.

Yesterday’s slide in equities months has plenty of people nervous that the Trump rally has finally run out of steam.  While equity and energy prices have not had a strong correlation in some time, a new theory is surfacing that may tie the massive amounts of speculative money betting on oil prices to a potential stock market crash like the Black Monday crash of 1987.  That theory may be a stretch, but there’s no doubt more money than even has decided to play in the energy arena in the past year, whether it be for hedging purposes or speculative, and the flow of funds often proves to have more power than the flow of oil.

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Energy Futures Ticking Modestly Higher

Energy futures are ticking modestly higher this morning after a wild Monday session that saw the tail of renewable fuels once again wagging the dog of refined products.  2 cent overnight gains for gasoline and diesel have been halved in the past hour, suggesting we might be in wait and see mode until the weekly inventory reports arrive.

Monday saw an 11 cent rally in RINs after the EPA boss made no mention of the RFS in an announcement.  The omission was interpreted as a signal that the 2017 Renewable Volume Obligation (RVO) would be allowed to stay as they were left by the previous administration, without a change in the point of obligation or volumes for this year.  A month ago when rumors swirled that the point of obligation would be changing, D6 ethanol RINs dropped from the low 50 cent range all the way to 30.  Yesterday, they recovered back to a high of 50 cents.  The RIN rally also helped refined both RBOB and ULSD make a push higher despite a drop in crude oil prices, a common pattern in the past year as crack spreads adjust to offset the increased cost to domestic producers and imports caused by higher RIN values.  The big question now is whether ethanol RIN values can get anywhere close to the $1.10 value they hit in December after the 2017 RVO was announced.

Gasoline prices also got a boost from news that the P66 refinery in NJ was facing delays in its maintenance schedule and could delay restart by a couple of weeks.  With PADD 1 refinery runs already at the low end of their range for this time of year, the record setting surplus of supply we saw this winter might dwindle quickly.

The April WTI contract expires today, and the May contract is trading some 65 cents higher, north of $49, which makes a return to the $50 mark a much easier target should today’s gains hold.  That could set up a new consolidation range between last week’s lows of $47.09 and $50 to determine which direction the next move may be.

The EIA published final crude oil production and import numbers for 2016 yesterday.  The agency noted that production levels were ticking up at the end of the year – consistent with the increase in rig counts and price recovery.  Perhaps most notably was the change in crude oil imports replacing crude-by-rail in 2016, as the price advantage of several land-locked north American grades disappeared.  That phenomenon is a key driver in the declining margins for East Coast refiners and could contribute to more changes in the PADD 1 supply landscape this year.

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Energy Prices Falling Again to Start the Week

Energy prices are falling again to start the week as another week of increases in US oil drilling activity seem to be outweighing confirmation of Saudi production cuts so far.  Currently WTI is about 85 cents above its low set last week, and if that support breaks, there’s likely another $2-3 to fall.  Refined products are in a similar position, 2-3 cents/gallon above where they bottomed out last week and threatening another dime drop if those levels do not hold.

14 more oil rigs were put to work last week according to Baker Hughes’ weekly report, to 631 total.  Whether or not prices continue their downtrend may determine if the rig count continues to grow this year, or if we might see the activity stall out in the mid-600 rig range this summer like we did in 2015.  Given the lead time to start or stop a project, it will likely take several more weeks to see how drillers will react to the first drop back into the $40s this year.

Saudi Arabia’s crude oil production and export activity dropped in January, as expected based on the OPEC agreement.  Perhaps most notable however is that a 700,000 barrel/day reduction in production, only corresponded to a 300,000 barrel/day reduction in export activity – several reports have noted the Kingdom’s drop in oil consumption as it updates its electrical grid to alternate power sources – which means the production cut agreement may have less impact on international markets than expected.

As expected, the net long position held by money managers in WTI and Brent was slashed last week after the 2017 trading range finally broke to the downside.  Perhaps what was not as expected was the declines were as much driven by new short positions (betting on lower prices) as they were by liquidation of long positions (betting on higher prices).    Bulls may say that the new shorts could spark the next rally if they get squeezed out of those positions, while bears will find solace that there is still so much long money left to be liquidated if lower prices persist.

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