TAC Market Talk
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So much for that rally. Just when it looked like crude oil was breaking out of its 2017 range, another wave of selling has shown up and knocked prices right back into no-man’s land.
Yesterday it seemed like all the ingredients were in place for the next major move, technical were on the verge of a breakout, the DOE report had enough in the headlines to justify a rally, and the DJIA set its 10th consecutive record high. And yet, prices softened into the close and have sold off overnight, which may mean we’re going to be stuck moving sideways for a while longer.
It seems like traders are reading the DOE charts upside down, with record setting builds in inventory levels met with heavy buying the past couple of weeks, then yesterday’s relatively bullish headlines leading to a pullback from the morning rally.
Crude oil exports set another record last week with more than 1.2 million barrels/day being sent abroad. That figure is especially impressive when you consider that 2 weeks ago, the record was ½ million barrels/day less. The 2 week increase in exports is essentially enough crude oil to supply the country’s largest refinery, and it’s no longer staying in the US. Gasoline exports also had a nice recovery after a pullback last week. There has been much talk about an abnormal export flow from the US East Coast (a traditional importer of gasoline) which could be driving that number.
Charts from the DOE Weekly status report.
We’ve got another rally on our hands! After holding support Wednesday morning, refined products have bounced by 6 cents/gallon and WTI is once again looking like it’s ready to break out from its 2017 trading range. The only thing holding back optimism at this point is that we’ve been here a handful of times already this year, but have not yet been able to sustain the rally.
If prices can hold near current levels, the next test will be for WTI to break the 2017 high at $55.24, then the chart is wide open until the low $60s. Refined products look to have more substantial overhead resistance – they were just testing the bottom end of their ranges yesterday – with the low $1.70s in ULSD and $1.80s for the April RBOB contract appearing to be the next stopping points if this run pans out.
Yesterday’s API report seems to have sparked the latest round of buying, with across the board declines in inventories after weeks of record-setting increases. The draws in crude oil and gasoline were relatively small, reported at less than 900,000 barrels each, while distillates were said to have a more substantial decline of 4.2 million barrels. The DOE report will be out at 10am central today. Gasoline demand and export estimates have been market movers lately and will be worth watching today.
The FED minutes seemed to be in line with expectations that the FOMC would make its next interest rate hike, “Fairly Soon” assuming the wheels don’t fall off the US economy bus. Probabilities for higher rates ticked higher, with a 50% likelihood of a rate increase by May now priced into futures.
Just when it looked like oil prices were ready to break out and start a new rally, gasoline prices acted like an anchor in Tuesday’s trading session, pulling WTI and ULSD back to a soft close that carried over into an overnight selloff. The freshly-prompt April WTI contract has fallen back below the pivotal $54 range this morning, putting the chances of a run to $60 on temporary hold, disappointing those hoping for a breakout of the 2017 range.
The spread between gasoline and diesel (RBOB and ULSD futures) prices reached its lowest level in more than a year during yesterday’s tug-of-war trading, reflecting both the pessimism for US Gasoline consumption compared to some optimism that increased drilling activity should help diesel demand recover, despite a mild winter. RBOB futures are just ½ cent away from their 200 day moving average, and ULSD futures are only 2 cents away from their 2017 lows, so it’s possible that we could get a test of the low end of the product range now that crude failed to break through its top.
Inventory reports are delayed a day this week, with the API’s out this afternoon and the DOE report tomorrow. While we wait for energy prices to make up their mind, here’s an interesting take on why oil prices may be headed back to the $30 range.
Meanwhile, automakers wasted little time in requesting the new EPA chief consider withdrawing a recent ruling on vehicle emissions.
The minutes of the latest FOMC meeting will be released this afternoon, which will be closely read for signs of when the next rate increase may be. According to the CME’s FedWatch tool, there is currently a 22% chance of a March rate hike priced into futures, while there’s a 41% probability that there will be a rate increase by the May meeting.
Oil prices are back on the march higher this morning, threatening to break out of the top end of their 2017 trading ranges as bullish sentiment for the global supply/demand equation seems to be outweighing the overhang of inventory in the US.
WTI is trading at its highest level since the first trading day of the year. If it can settle above the $54 barrier today, the first test would be the January 3 intraday high of $55.24, and beyond that, there’s not much on the charts to prevent a run towards $60. The March WTI contract expires today, and the April contract is about 30 cents more expensive, which may help finally with finally getting that technical breakout. On the flip side, after reaching $55.24 on the first trading day of 2017, WTI collapsed, ending the day at $52.33, which set the stage for the trading range we’ve been stuck in ever since.
While the OPEC cuts are an easy headline to blame rising prices on every time the market rises, the WSJ made an interesting point that for the Saudis, production cuts don’t necessarily mean lower exports. If that idea catches on, suddenly the perma-bid caused by the production cut story might go away, which could leave the record amount of speculative money betting on higher prices in a vulnerable spot.
While oil and refined products prices are rallying this morning, Natural gas prices are reaching a 3 month low as mild (and in some cases record setting warm) winter weather sweeps across most of the country. So far this hasn’t dampened the enthusiasm for ULSD futures, but it certainly does not bode well for the supply overhang across the Eastern half of the country.
Energy futures are moving higher at the start of an abbreviated day of holiday trading. Gasoline prices remain the weak link, as a record overhang of physical inventories in the US is resisting the pull higher from crude oil and ULSD so far this morning.
Electronic trading will halt at noon central time today, and reopen at 5pm for the overnight session. There will not be a settlement for today’s futures trading, and spot markets are not being assessed.
Scott Pruitt was confirmed as the administrator of the Environmental Protection Agency (EPA) Friday. RIN values dipped another nickel early on in Friday’s session, trading down to 43 cents/RIN, but recovered most of the losses and ended the day around 47 cents.
6 more oil rigs were put to work last week according to Baker Hughes. The slow and steady march higher continues, with Texas shale plays continuing to lead the activity.
Money managers set new records for their net long position (speculative bets on higher prices) for both WTI and Brent last week. The next moves for those speculative positions could be the dominant story over the next few months and very well might determine which direction the complex finally breaks out of its sideways trend.
It’s a red day for energy prices, and while crude oil remains comfortably in the middle of its trading range, refined products are testing the lower end of theirs and taking refinery margins to their lowest level in a year in the process. If products break down here, it sets up an interesting test for the back half of February between range-bound crude and its suddenly bearish offspring.
RBOB gasoline futures are once again testing the 200 day moving average at $1.4860. Last week we did trade below that support level on Tuesday and Wednesday, but were unable to settle below it and ultimately rallied nearly 15 cents in the next 3 sessions. If we break through that support this time, there could easily be another 10 cents of downside for the March contract, but with only 7 trading days remaining until the Summer-Grade April contract takes over, it simply may not matter.
With gasoline inventories at record highs and April futures trading almost 23 cents above March, the focus is quickly turning to the spring RVP transition. Gulf Coast spot gasoline prices have already lost 14 cents in the past 5 trading days, and refiners in several markets across are already offering discount at terminal rack below spot replacement prices as they race to try and clear their winter inventory. With domestic consumption remaining soft, the export market may become more important than ever to balance the supply/demand equation this spring.
While US refinery margins have not been great since the Brent/WTI spread found a sort of equilibrium two years ago, they also haven’t been as bad as they are today in over a year. Each plant is unique, and their economics depend on their individual circumstances (location, crude slate, export capabilities, power source, labor force etc) but there is no doubt that the combination of sluggish demand and supply overhang has been wearing on margins this year.
The Baker Hughes Rig count is due out at noon central time today, and the CFTC’s commitments of traders report is due later in the afternoon. There will be electronic trading for the Nymex futures Monday, but there won’t be a settlement and spot market assessments will not be made, so most US cash market traders will be out of the office, I would imagine hosting some sort of President’s day celebration.
Wednesday saw new levels of apathy in oil markets as the DOE shared some truly impressive numbers, and nobody seemed to care. Today’s session is starting out with more of the same as we’re chopping around either side of unchanged, awaiting some unknown catalyst to break prices out of their sideways trend.
US Crude oil inventories reached an all-time high last week, rising more than 9 million barrels, despite record-setting crude oil exports that surged past the million barrels/day mark for the first time ever. Without the surge in exports we’d have seen another 3.5 million barrel increase in inventories, and yet the market barely flinched. The Financial Times published an interesting take on the mystery bidding that’s been holding up prices following the weekly stats report. That story should make next week’s report a good one to watch as funds may race to train their robots to take advantage of the anomaly.
One data point may not constitute a trend, but the diverging moves between gasoline and crude oil exports must have concerned US refiners, as their critical outlet is being front-run by producers who no longer have to process crude before they can send it overseas. Gasoline demand is another concerning bullet point as a spike in last week’s report was wiped out yesterday, removing the hope of many that the winter doldrums may have come to an early end. With retail prices 40-50 cents higher than they were this time last year, it’s easy to make an argument that the lower year on year consumption trend may be with us for a while.
Gasoline cash prices in the US Gulf Coast (the largest refined product market in the world) are beginning to signal that we may have seen the peak of spring maintenance season. If true, we should see the sharp decline in refinery runs reverse course in next week’s report as plants come back on line and ready for the transition to summer grade products. With record high gasoline inventories in many markets east of the Rockies, the next few months could see heavy discounting in local rack markets as terminals rush to turn over their inventory before the more stringent specs are required.
Charts from the DOE’s weekly inventory report.
It’s another mixed day for energy prices after Tuesday’s attempted rally ran out of steam and left prices range bound once again.
The API weekly inventories were reported to show another huge build of 9.9 million barrels in crude oil, while refined products had relatively small increases of 1.5 million barrels of distillate and 700 thousand barrels for gasoline. Most of the time, a build of around 10 million barrels would be enough to spark a heavy round of selling in energy markets, but given the general sense of lethargy – and last week’s surprisingly strong reaction to a 14 million barrel build – traders appear to be more or less shrugging off the news.
The DOE report is out at 9:30 central today. The government report is running ahead of the industry report in terms of total crude oil inventories, so don’t be surprised if we get an underwhelming build at some point in the next several weeks.
Speaking of the overlap of government and industry, the latest round of industry-friendly executive orders from the White House were announced Tuesday, attempting to rescind part of the Dodd-Frank act pertaining to disclosures of US Oil and Gas companies. The API welcomed the decision. It’s unlikely that there is any immediate impact on prices, as the projects affected often take years – if not decades – to bring online.
As the charts below show, it’s been a very strong couple of weeks for the US Dollar, especially against the Euro, which would typically put pressure on commodity prices, including petroleum. Not so this year as the energy contracts continue chopping sideways.
Likewise, strong US equity markets that have hit fresh records this week in years past may have encouraged a “risk on” rally in energy prices. Not in 2017.
The question is if this extended period of choppy but aimless trading represents a period of equilibrium in the markets, or simply a coiling spring ahead of a major move once the indecision finally ends.