Buy the Rumor, Sell the News

Across the board inventory draws were confirmed by the EIA’s Department of Energy’s data release yesterday morning. Crude oil took front-and-center with a convincing 4.4 million barrel draw in inventories, mostly coming from the Midwest and Gulf Coast regions, where refinery runs ticked up. After last week’s rise, total US refinery runs are only 4,000 barrels per day away from the all-time high set back in late April of this year. Despite seemingly bullish data, prices sagged yesterday as RBOB settled lower by less than a penny and diesel only 4 points below unchanged.

This morning seems to be a case of “buy the rumor, sell the news” as OPEC has confirmed to extend their crude oil production cuts through March of 2018. Refined products futures are falling in sympathy with the American crude oil benchmark which tested the $50 mark in overnight trading, and is current trading at 70 cents per barrel under yesterday’s close. Traders could be holding back to see if the non-OPEC participants in the Vienna meeting (most importantly Russia) will agree to the cut extension as well.

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Energy Futures Trading Around Flat this Morning

Energy futures are trading around flat this morning after reaching new highs for the month in overnight trading. Gasoline, diesel, and crude oil prompt month contracts traded up almost 1% after online trading opened back up at 5pm Central, after the API published across the board draws in product inventories. Gasoline and diesel inventories were reported to have dropped 3.15 million barrels and 1.85 million barrels respectively; crude oil down by 1.5 million barrels.

Overnight buying excitement was somewhat tempered by the prospect of the world’s largest oil importer facing a credit downgrade. For the first time in 30 years China’s rating has been cut by a major credit analytics firm (Moody’s). China oil imports averaged around 7.54 million barrels per day in 2016.

The largest oil cartel is continuing their meeting to decide on the continuation and/or deepening of oil production cuts. While most news coming out of Vienna claims the largest producers are strongly in favor of a cut extension, with the smaller producers dragging their feet, it is tough to differentiate how the actual discussions are progressing. News of an agreement to extend cuts could bolster short term prices.

Inventory action confirmed/denied by the EIA data release today will decide price action going into this afternoon. If crude stocks drop for the 8th consecutive week, technical resistance levels around $52.50 could be tested, leaving an open path to the $55 mark.

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Energy Prices Take a Breather After Reaching One Month Highs

Energy prices are taking a breather this morning after reaching 1 month highs on Monday.  The inventory reports today and tomorrow may create some turbulence in the price action, but it’s likely we’ll have to wait for Thursday’s OPEC meeting before seeing the next big move in prices.  The market seems to already be baking in a 9-month extension of the OPEC and friends production cut, so any variance from that plan may send prices moving in a hurry.

The president’s budget proposal includes a plan to cut the Strategic Petroleum Reserve in half over the next 10 years.  The long road for the budget proposal and even longer time-frame for the actual release are making the price reaction to this news fairly muted.  The SPR currently holds enough crude oil to theoretically run all US refineries for 40 days, although in practice it’s available only to refiners with the specific capacity to transport crude from the various storage locations along the gulf coast.   The reserve has been debated for decades by both traders and politicians, and is perhaps most notable for a sale announcement triggering the largest single day decline in WTI prices (33%) at the start of the first Gulf War, despite the fact that Iraqi forces were dumping oil into the Persian Gulf and setting wells on fire.

The race higher in the RIN market accelerated Monday, with D6 ethanol RINs trading up to 70 cents/rin for the first time since January.  Prices did cool a bit by days end, but remain in the high 60s this morning as projections for a shortage of RINs vs refinery output this year remain (record refinery rates will also create a record Renewable Volume Obligation for refiners) and so far there’s little sign that the Renewable Fuel Standard is on the White House agenda for this year.

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Oil & Refined Products Prices at One Month Highs

Oil & refined products prices are at 1 month highs this morning, and are trading up more than 16% since they bottomed out May 5th.  The push higher seems to be grounded in fundamental hope and technical reality as OPEC will meet Thursday to discuss extending production cuts, and as chart resistance collapsed last week and seemed to trigger some heavy short covering.  The question for this week is who is willing to keep buying the rumor, and if anyone will be bold enough to sell the news?

As is often the case anytime OPEC is about to make an announcement, there are plenty of conflicting stories to sort through.  This morning there are suggestions from some analysts that the cartel shouldn’t have any trouble extending the cuts for 9 months, while others are saying that the Saudi’s are taking an emergency trip to Iraq to try and salvage a deal.

The net positions held by money managers in WTI and Brent did not see large changes last week, but the short interest held by speculators in Brent did reach an all-time high.  That means that funds were betting more money than ever that prices would fall, just in time for them to climb by 5%.  That short interest very well could have been a contributor to the sharp rally to finish the week if they were forced to liquidate those positions.

The weekly rig report from Baker Hughes showed 8 more oil rigs were added last week.  Every increase from here will mark a fresh 2 year high for drilling activity, but we’ll need to see the count double in order to approach the peak levels from 2014.   Texas continues to lead the rig count increase as local shale plays are believed to have the lowest production costs in the nation.  A key question for the back half of the year is whether or not the revival in drilling activity will spread further to the fields in Colorado and North Dakota, or if the recovery will stay restricted to the Lone Star State.

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Energy Markets Holding Up In Spite of Sell-Off

Energy markets held up fairly well Wednesday in spite of the largest sell-off in US stocks in months.  Overnight however some fear seemed to set in as crude oil prices fell $1/barrel and refined products were off 3-4 cents before taking back half of those losses this morning.

Ever since the huge overnight sell-off 2 weeks ago that was the springboard for the May rally, the pattern seems to be that overnight weakness turns into day time strength.  It’s hard to say if this means traders in Asia or Europe are long and having to liquidate, or if traders in the US are simply eager to buy any dips.  Today’s response in the face of a suddenly fearful market may go a long way in determining if this rally can continue, or if this week’s highs will act as a price ceiling this summer.

Yesterday’s DOE report was relatively benign in terms of inventory changes.  The estimate for US crude oil production dipped for the first time in 14 weeks according to yesterday’s report, and while that may have given the bulls some hope, will rig counts and production per well still increasing, don’t expect the decline to last for long.

Gasoline stocks are holding steady over the past 4 weeks while historically this is a time when stocks draw down as we approach the “driving season”.  The demand estimate isn’t bad at 9.4 million barrels/day, although it is 200,000 barrels/day below last year’s pace, but gasoline production is simply better, holding north of 10 million barrels/day.

Refinery runs returned to their record setting pace, with the PADD 3 setting an all-time high with throughput rates north of 9.3 million barrels/day.

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