Oil Prices Ticking Higher for a 4th Straight Day

Oil prices are ticking higher for a 4th straight day, gaining back nearly 5% since bottoming out at $42 last week.

Today’s action looks like it could be pivotal as prices are breaking the downward trend-line that’s been in place ever since prices topped out a month ago.  If WTI can settle at current values that break-out should leave room for a run back north of $45 to end the month, and at least temporarily put a stop to the discussions about sub $40 crude.  That said, it’s too early for the bulls to rest easy as the weekly inventory reports have not been released yet, and the past 4 Wednesday’s have had post-DOE wipeouts with 5% losses.

A weaker US Dollar, stronger Euro is getting credit for some of the strength today, even though the currency/energy correlation has not been strong for most of the past year.  In addition, reports this morning suggest that Syria may be planning another chemical attack, which would likely mean a military reaction from the US.  While the supply overhang has dampened the price reaction to middle east tensions over the past couple of years, the perpetual powder keg in the region is impossible to ignore as it still accounts for at least 1/3 of the world’s oil production.

A good read from the WSJ over the weekend on how US manufacturing is benefitting from the shale revolution.

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Oil Prices Ticking Higher this Morning

Oil prices are ticking higher this morning, with diesel prices trying to lead a small recovery rally after 5 straight weeks of losses. How prices fare this week, which marks the end of the 2nd quarter, may go a long way to determining whether the oil prices make a run to the $30s or back to the $50s in the back half of the year.

Money managers slashed bets on higher prices in WTI and Brent last week, bringing the net position held by speculators to the lowest level of the year, just in time for prices to hit their lows for the year as well.  The decline in Brent was primarily driven by liquidation of long positions, but some new shorts (betting on lower prices) were added, bringing the short holdings held by the managed money category to an all-time high.  WTI was the opposite, with most of the decline in net length owing to 42,000 new net short contracts added by speculators, while 18,000 long contracts were liquidated.

After announcing that Line 1, the main gasoline line, would not be allocated for the first time in 6 years last week, Colonial pipeline announced today that its main diesel line would also not be allocated for the next cycle, the latest in a series of indicators that much of the country remains oversupplied.

Baker Hughes reported another 11 oil rigs were put to work last week, with Oklahoma and North Dakota again leading the increases, while Texas was unchanged for a 3rd straight week.

The tragic story of a fuel tanker explosion in Pakistan may not have an impact on fuel markets this week, but is a stark reminder of several of many things we’re fortunate to have an abundance of in this country.

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Oil Prices Poised to Finish 5th Straight Week with Losses

Despite a reversal Thursday rally, oil prices are still poised to finish a 5th straight week with losses today, and outside of a 15% rally next week, will mark a 4th straight month of lower prices. Not even the sanctions on Qatar, a shakeup of the Saudi royal family or a tropical storm hitting the heart of US refining country was enough to stir things up this week, so it’s difficult to see what type of event it might take to finally get prices moving higher again.  That said, it’s typically that exact type of sentiment that marks the end of a trend, and at some point near term, we may just run out of people willing to bet that crude oil is going to trade below $40.

We’ve reached the 1 year anniversary of the Brexit vote, which was perhaps the last time we saw energy prices move in tandem with stocks prices in a meaningful way.  After being attached at the hip for the start of 2016, after the Brexit vote, the two asset classes decided to go their own way, and have been on separate paths ever since.  Volatility remains very low for both the S&P 500 (VIX) and Oil (OVX) especially compared to the spike we saw this time last year when consensus seemed to be that Europe was falling into a state of financial anarchy.

The Federal Reserve Board released results of their bank stress tests Thursday, and determined that even in a severe recession, large US banks would remain well capitalized.  The probability of the FED raising interest rates ticked higher  following the report.  In years past this would have been market-moving news for energy prices, but like the break down in correlation in equities, currency changes don’t seem to be holding much bearing on energy prices these days.  Right now, for energy traders, it’s all about supply.

The Baker Hughes rig count will be out at noon central today.  While the slow and steady builds we’ve seen all year are likely to continue given the lead times for drilling projects, the drop in prices over the past 5 weeks has some analysts starting to call for the rig count to plateau in the back half of the year.

Tropical storm Cindy was downgraded to a tropical depression overnight, and while there have been widespread impacts from flooding and tornados in several states, so far it appears that the oil production, refining and distribution infrastructure has come through without any major or long-lasting damage.

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Oil Prices Having Their Worst Start to a Year in Two Decades

Oil prices are having their worst start to a year – falling more than 20% in the first 6 months – in the past 2 decades after another post-DOE Wednesday wipeout left values at 10 month lows.  Refined products joined in on the fun, reaching their lowest levels of the year before recovering ahead of the close and then trying for another bounce during the overnight session.

After each of the past 4 DOE weekly inventory reports we’ve seen a heavy wave of selling that accounts for most of the 20% drop in prices over the past 5 weeks.  Some of today’s gasoline-led bounce may be recognizing that despite the disappointment that inventories aren’t returning to more normal levels, yesterday’s gasoline demand estimate was the 2nd highest on record.  In addition, after 3 straight days of selling to start the 5th consecutive week of losses, the entire energy complex is oversold technically, and just begging for a corrective bounce like we’re seeing this morning.

The shake-up in the Saudi royal family announced yesterday does not yet seem to be having much influence on prices, although many more questions about the future of the kingdom and OPEC given the crown prince’s tough stance against Iran.

Tropical Storm Cindy made landfall near the Texas/Louisiana border overnight, and while nearly 20% of Gulf Coast oil production was shut in temporarily as a precaution, prices have not flinched from this storm threat and there have not been any reports of refinery issues yet.  In another day or so, we should know for sure whether the first bullet of what’s predicted to be a very busy hurricane season has been dodged.

For the first time in over 5 years, Colonial pipeline will not be allocating the next cycle on its main gasoline line.  After years in which space on that key artery to deliver gasoline from the country’s main production area along the Gulf Coast to the main consuming regions along the East Coast was one of the hottest commodities around, values for Line 1 have stayed negative for the past 6 months, and it appears many shippers have finally given up shipping into a closed arbitrage window in hopes that those values will recover.

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Charts from the weekly DOE stats report.

Refined Products Trying to Pull Crude Oil Prices Up from 9 Month Lows

Refined products are trying to pull crude oil prices up from 9 month lows this morning as Tropical Storm Cindy is bearing down on 6 refineries that make up 15% of the country’s total production.

Perhaps most notable is that despite the path of this storm, products are up less than a penny, whereas in year’s past we may very well have seen 5-10 cent increases in prices from a system heading right for the heart of the gulf coast refining hub, further proof of the dampening effects of the country’s excess supply.  Even gulf coast basis values have barely flinched as the forecasts for this storm have unfolded, whereas the storms of years past often were accompanied by spikes of 10-20 cents or more, with $1/gallon increases not unheard of.

Notable refineries within the forecast cone for TS Cindy’s path.

Refinery Location Capacity (MB/Day)

Motiva Pt Arthur             635

Valero   Pt Arthur             415

Total      Pt Arthur             245

Exxon    Beaumont           359

P66         Westlake LA       273

Citgo      Lake Charles LA   440

Fortunately the refineries in the Houston/Pasadena hub are on the less-dangerous western side of the storm’s path currently, but flooding and power outages will remain a concern for the next couple of days.  Once the storm passes however, assuming no long term damage to refineries or other infrastructure, it will be put up or shut up time for energy bulls as prices remain teetering on the edge of another big move lower as solutions to the global supply glut seem few and far between.

Yesterday the API was said to show a crude oil draw of 2.7 million barrels, while diesel built 1.8 million and gasoline built 346 thousand barrel.  Those product builds, particularly gasoline which is in its peak demand season is the latest in a long string of reminders that the US can now produce much more refined products than its able to consume.  The EIA will release its weekly inventory report at 9:30 central today, and earlier this morning they released this study on the growing demand for premium gasoline, and its effect on price.

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A look at the refineries in the path of TS Cindy.