TAC Market Talk
News from the TAC Energy Trading Desk. Stay up to date with all the relevant energy market news and latest information. Subscribe with the button on the right to get the daily TAC Market Talk e-newsletter delivered directly to your inbox each workday.
Oil prices are starting the week poised to break their sideways triangle patterns if they can just manage another day or two of positive trading. Refined products are also threatening to break chart resistance that could propel them upward by another 10% or more over the next several weeks if they can find a way to sustain another push higher today.
RBOB futures hit their highest levels since Hurricane Harvey on Friday, and are on the cusp of a technical breakout to the upside. If April RBOB prices can settle above the $1.95 mark that has marked a price ceiling so far in 2018, the door will be open for the annual spring gasoline rally, which in most years marks an increase of 25% or more.
Money managers trimmed their net long positions in NYMEX WTI, RBOB and ULSD contracts for a 2nd straight week, while the net length in the ICE’s Brent contract ticked up slightly. While the speculative category of trader seems to have become a bit more cautious since the selling in February, all of the petroleum contracts still hold much larger net length (betting on higher prices) than they did a year ago.
Baker Hughes reported an increase of 4 oil rigs last week, offsetting the decline of 4 rigs counted the previous week. The total number of active oil rigs working in the US stands at 800.
Energy prices are barely moving so far this morning, and look set to finish a 3rd straight week of moving around a lot without really going anywhere. Today is one of 4 “quadruple witching” days in US stock markets, which lends itself to increased volatility, so it’s possible that could trickle down to energy futures, provided that traders can look up from their brackets for long enough to notice.
Talk about an upset: The FERC announced a revision in its policies Thursday, disallowing tax allowances for MLPs in their cost of service calculations for interstate oil and gas pipelines. The market reaction on MLP stocks was harsh, and while it may have only mean a minor reduction in shipping costs – starting in 2020 – this could mark another step in the pendulum swinging back away from the partnership corporate structure.
While prompt oil prices have been chopping around this week trying to decide where to go, the forward curve has flipped into contango for the first and 2nd month WTI contracts. This is certainly a story in itself as that curve plays a big part in investor appetite for oil ETFs that benefit from backwardation and suffer from contango.
The charts below show that it has not done much to change the backwardation further along the curve that reflects the expectations of growing production, and the efforts to hedge it, that so many are expecting over the next 2 years. They also show that diesel futures have had by far the most meaningful change in the forward curve, with the entire next year falling into contango as we move out of the heating season with global refinery runs set to break all time production records.
A trio of fundamental reports in the past 24 hours helped energy markets to shrug off another volatile day for stocks on Wednesday, with WTI managing to survive another test of support at the $60 mark.
So far this morning prices are moving modestly higher as both Brent and WTI continue to move within the bounds of their triangle patterns, with only another week or so left before a breakout in one direction or another becomes inevitable.
The monthly oil market reports from OPEC and the IEA both showed higher demand estimates for 2018 than a month ago, although both agencies still project that supply growth will outpace demand this year, mainly due to the rapid increase of US output. The IEA also projected this morning that global refinery rates will set a new record in the second quarter of 2018.
The DOE’s weekly petroleum status report seemed to confirm the US portion of those global projections with Crude production setting a new weekly record at 10.38 million barrels/day, and refinery runs continuing at their record pace. The weekly report also showed large product draws thanks to strong domestic gasoline demand and a surge in distillate exports. One big unknown as we move into the back half of March is whether the gasoline demand estimate is a signal of a busy driving season ahead, or if there was just a surge in fill ups ahead of the triple Nor’easters that will mean a drop off now that the storms have passed.
Oil & product prices are all moving higher this morning after being whipsawed Tuesday as traders around the world try to digest a deluge of market moving headlines.
Tuesday’s rollercoaster session started with a sell-off on the PES/EPA settlement news, then got a sharp bounce following the announcement that the Secretary of State (and former Exxon CEO) was being replaced. The back and forth action continued for the rest of the day, and has carried through the overnight session as traders try to decide the long-term impacts of both situations.
The EPA/PES settlement was met with the usual protest from renewables groups, although it seems to be a one-time deal that does little to answer the larger RFS questions, or those surrounding whether the refinery can survive given its logistical hurdles and competitive disadvantages in a country that’s built excess refining capacity over the past several years.
Although the initial reaction was short-lived, the change at the State Department looks to be bullish for oil prices longer term as Secretary Tillerson was seen as less of a hardliner on countries like Iran and Venezuela than his replacement will be.
The API was reported to show a crude build of 1.1 million barrels, while diesel inventories declined by 4.2 million barrels and gasoline stocks declined by 1.26 million barrels. The DOE weekly report is due out at 9:30 central, and the OPEC monthly report should be released in a few minutes
Oil prices are on the move lower for a 2nd straight day following the monthly drilling report from the EIA that shows that overall production and output per well are both climbing as the technological phenomenon known as hydraulic fracturing continues to make the bulls nervous. It’s much too soon to declare victory for the bears however as prices did stage a meaningful bounce off of Monday’s lows, and there is still some technical support that must be broken before we see the next move lower.
Even since the 7-month long bull trend was broken in February, most futures prices have been chopping back and forth in what is beginning to look like a triangle pattern on the charts. These patterns can mark either a continuation of the current trend, or a reversal of it, depending on which way they break. At this point, prices are closer to the low end of that triangle, and are set up for another wave of selling if we see a breakdown this week.
There was supposed to be a meeting at the Whitehouse Monday to discuss the RFS but it seems that was either delayed or cancelled. It’s unclear whether that change had something to do with a settlement proposal between the EPA and PES which would relieve some of the bankrupt refiner’s RIN obligation. Renewable Fuels groups are clearly upset about the settlement and nervous about the various proposals floating around Washington these days as you can see by a search of the RFS online, or in ethanol RIN values that are trading in the mid 30s this morning for the first time in nearly a year.
After a strong Friday finish, energy markets are starting bracket week with a sell-off as they await monthly reports from OPEC and the IEA later this week, and a general drop in productivity in offices across the country.
Reports that Iran and Saudi Arabia are once again disagreeing on the ideal price for oil (in addition to disagreeing on most everything else) is taking some blame for the decline in prices this morning. The fact that refined products are selling off more heavily than WTI and Brent suggests there must be more to the story.
The third Nor’easter so far in March is bearing down on New England today, and is expected to hit on the 25th anniversary of the “storm of the century”. While forecasts suggest this latest storm will have a more narrow range than the previous 2, more than a foot of heavy wet snow is predicted so more power outages are likely in coastal New England.
Baker Hughes counted 4 fewer oil rigs last week, the first time in 7 weeks that the count has declined.
Money managers made small reductions in their net-long positions across the board last week with Brent, WTI, RBOB and ULSD all seeing relatively minor declines. Meanwhile, the net-short position held by swap dealers in WTI saw another small reduction but remains near its record low. To sum up the commitments of traders, speculators seem comfortable holding on to large bets that prices will go higher and the producers still like holding hedges against their future output in case the speculators are wrong.
Energy prices are trying to bounce this morning after 2 straight days of heavy selling leave the complex on the verge of a 2nd straight weekly decline. Financial influences from equity and currency markets seem to have kept their hold on energy trading this week, and with another FED meeting coming in 12 days it seems that pattern may hold for now.
It’s been a tough week for the Colonial pipeline with Line 3 shutting Wednesday due to a potential spill, and then its main gasoline line, line #1, shutting Thursday to investigate an integrity issue. The good news is both lines have resumed normal operations this morning with no impacts to regional supplies reported.
If North Korea and the US can agree to meet after decades of avoiding one another, I guess it only makes sense that Big Oil and Big Ag do the same. The White House has scheduled another meeting Monday to try and get the two group to work on a reform plan for the RFS, which continues to put pressure on RIN values. There are competing proposals being floated around the halls of congress this week, with one of the bills called “The Growing Renewable Energy Through Existing and New Environmentally Responsible Fuels Act” or TGRETENERFA for short. Has a nice ring to it.
The February jobs report was a strong one, with 313,000 jobs added for the month, while both December and January estimates for job growth were revised higher. The initial reaction was positive for equity and energy markets, but could have the opposite effect if the news is seen as “too good” and encourages the FED to make more aggressive moves to keep the economy from overheating.
In the minutes following the DOE status report Wednesday, it looked like we might see energy prices break out to the upside as robust demand figures helped spur optimism in the marketplace. A couple hours later however, stocks took a sharp move lower and energy futures were dragged along for the ride once again.
The technical outlook remains murky with RBOB gasoline showing the most potential – as one might expect since we’re in the window for the annual spring gasoline rally – while Brent, WTI and ULSD all look like they’re stuck moving sideways for now.
If you were to sum up US petroleum fundamentals based on last week’s DOE report, you might just say that demand is good, but supply is better.
US Crude production was estimated by the DOE to hit a new record high last week at 10.37 million barrels/day and US Refiners continue to run at record setting rates which should only increase as we head into spring. Exports continue to provide the safety valve for both oil producers and refiners, helping to keep inventories within their seasonal ranges as domestic demand – while healthy – just isn’t big enough to keep up with the record setting pace of production.
East Coast gasoline stocks declined again last week, and while the New England states (PADD 1a) are holding above their 5 year range, the lower Atlantic states (PADD 1C) have not seen inventories this low since the wake of Hurricane Harvey.
That imbalance may find an unwelcome correction this week after Colonial pipeline was forced to shut down its main line number 3 which runs from the Carolinas to New Jersey after an issue was discovered in Maryland Wednesday. Details are scarce at this point, but the limited market reaction so far suggests this is not expected to be a major event like we saw with the line 1 shutdowns in 2016.