Oil prices are treading water this morning, trying their best to ignore a tug lower from refined products on expiration day for the November product contracts.
RBOB futures ended their string of consecutive gains at 9 trading sessions Monday, ending the session with their first loss since October 16th. From a technical perspective that string of consecutive increases leaves the contract overbought and begging for a pullback, while fundamentally it’s hard to argue as the US moves out of driving season and winter-grade specs are allowed to be used. When the December (RBZ) contract takes over the prompt position tomorrow, it is poised to open about a nickel lower than where the November (RBX) goes off the board.
While gasoline futures are pulling back, physical prices in the Chicago market have spiked north of the $2/gallon mark due to lingering effects of the Explorer pipeline – which runs from Houston, through DFW and Tulsa on its way to Chicago – shutdown. That line is expected to remain at reduced rates for at least another few days.
While ULSD futures are not as severely backwardated as gasoline, the front of the curve is trading about a nickel higher than 1-year forward values. As we head into winter, a critical question for diesel will be if cold weather can cause a demand spike that moves that curve further into backwardation, or will the ramp up in domestic production push domestic prices back into a contango market.
The FED’s Open Market Committee begins a 2 day meeting today. Little is expected from this meeting, as most forecasts call for the FOMC to wait until December to make their next interest rate hike. This is likely to be Janet Yellen’s last meeting as FED Chair, with the announcement of the new presidential appointee expected as soon as Thursday. Based on the weak correlation between currency, energy and equity markets over the past year, it seems like this week’s announcements may have little effect on energy futures.