Big Three Energy Futures a Modest Mixed Bag this Morning

The big three energy futures are a modest mixed bag this morning after a rally on Friday that pushed RBOB to a gain for the week and made up most of the diesel contract’s losses.  The shuttering of five US oil rigs, following the previous week’s closure of two, doesn’t seem to be driving much price action with the benchmark up only 14 cents to start the week. New York gasoline and diesel are taking a small step back and are down 25 and 50 points respectively.

The proverbial “smart” money backed off on their net WTI positions last week and in turn opted for the European crude contract instead. The Brent-WTI spread is hanging around the $5.50 range and will likely continue to drive American exports, of which we saw an increase of 500mb per day last week.

The conflict in Kurdistan resulted in the slowing of a pipeline carrying crude from Kurdistan through Turkey to ports in the Black Sea. While this would be a fundamental disruption, especially to export economics, it looks like Iraq is considering reopening a different pipe to Turkey, essentially cutting Kurdistan out. It’s unclear whether resolution or disruption are currently priced in; it’s likely a little of both.

Last week’s move established some technical buying support for prompt month HO contract at its 10 and 20-day moving averages. The benchmark sold down and settled below the averages on Thursday only to be brought back above them in Friday’s rally. The prompt month’s interaction with these support levels will likely dictate any downward movement this week. Any significant upside potential will be decided around the $1.86 level with little in the way before then. RBOB’s similar break above the 50-day MA last week put in some support at $1.65 and the contract will likely trade between that and last month’s highs around the upper $1.70s.

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Oil Prices Seeing Modest Losses for a 2nd Day

Oil prices are seeing modest losses for a 2nd day as geopolitical tensions have eased momentarily, while refined products are attempting to push higher as tensions in Washington heat up.

The tail continues to wag the dog for refined products, as the latest spike in RIN values has pulled both RBOB and ULSD futures from overnight losses, to early morning gains.  The political maneuvering surrounding the EPA and Renewable fuel standard was ratcheted up a notch this week, sending ethanol RINs to 90 cents this morning, up from 77 on Monday.

While the pressure on the EPA to keep the biofuel mandates at current levels may be good news for Agriculture businesses long term, near term things look a little rough as ethanol values plummeted to their lowest levels in over a year this week as inventories remain well above their 5 year range.

The divergence between crude and products leaves the outlook for prices for the coming weeks very much in doubt.  Buyers showed this week that they didn’t have the staying power to push prices past their September highs, leaving the technical picture stuck in neutral.  It seems like unless some new headline is able to shake things up, we may see prices move sideways for an extended period as a result.

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Energy Prices Moving Tentatively Higher Wednesday

Energy prices are moving tentatively higher Wednesday after another rally attempt stalled out in Tuesday’s session.  Bullish technical indicators and geopolitical tensions still seem to be favoring higher prices, but the conviction among buyers seems to be lacking at the moment, holding prices back from the next big move.

You wouldn’t be alone if you expected to see more of a reaction out of WTI after an inventory decline of 7 million barrels that the API was said to report yesterday.  Then again, the API and DOE reports did differ by nearly 6 million barrels of crude oil inventories last week, leaving the industry group with plenty of ground to make up in this week’s report, which may explain the lack of movement.  The API report was also said to show builds in refined products of just under 2 million barrels for gasoline and 1.6 million for distillates.  The DOE’s latest will be out at 9:30 central.

There are reports this morning that the Iraqi government is seeking alternate production and distribution options for oil from Kirkuk, after the Kurds quickly relinquished control of the area yesterday.  It’s still hard to say if that means more or less risk to supplies short term as any solution outside of the current exports via Turkey will likely take several months, if not years, to put in place.

The Dow Jones Industrial Average surpassed the 23,000 mark for the first time yesterday, just over 2 months after it first broke the 22,000 mark.  Optimism over potential tax reform seems to be an underlying theme in the ongoing rally – which by some measures has reached record proportions – but ever since the correlation between energy and equities broke down roughly 18 months ago, oil prices just don’t seem to care.

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Energy prices have bounced back today as the complex struggles for direction

After the IEA and EIA reports led to some heavy selling Thursday, energy prices have bounced right back today as the complex continues its struggle for direction.

A large increase in Chinese oil imports, which reached their highest level since May, is the often cited reason for the overnight buying, although that doesn’t seem to explain why gasoline and diesel prices are up $1.50/barrel, while WTI and Brent are only up about $1.00.

The concerns over political posturing with Iran, and Kurdish oil exports from Iraq are both getting credit for the overnight strength in prices, but again, neither story does much to explain why products are out-pacing crude oil in the run-up.  It’s certainly possible based on the relative strength in time and crack spreads for products that there’s a refinery issue somewhere in the US that’s yet to be widely reported.  Whatever the reason, today’s rally could be significant from a technical perspective as it may eliminate some bearish potential from the charts.

If ULSD futures can get back above the $1.80 mark, they’ll be back into the bullish trend that carried diesel prices up by more than 50 cents/gallon since June before faltering last week.  If RBOB can break back above the $1.63 mark, this week’s action will be a bullish reversal pattern after gasoline prices reached their lowest level since July Monday morning, opening the door to another counter-seasonal rally.

If you reversed the signs on the API report this week, you’d have been pretty close to the DOE figures as the two data sets diverged in nearly every headline category.

Refinery runs are not yet back to pre-Harvey levels, but they are still higher than they were a year ago, or during any other year on record for the first week of October.  As the refinery throughput charts below show, usually we see large declines in run rates at this time of the year due to fall maintenance, and since many plants deferred that maintenance after the storm, we may continue to see runs stay above their normal levels throughout the month.

Crude oil exports declined sharply last week, dashing hopes for those calling for a 2 million barrel/day export figure.  That said, at 1.27 million barrels/day, this was still a top-5 week for US crude deliveries to international destinations.

US Crude output ticked just slightly lower, as the pre-Nate shut-ins were just starting when the weekly data was collected last Friday.  We should see a dip in next week’s report, but that is likely to be the only noticeable feature from the least-impactful hurricane to make US landfall in recent memory.

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.