TAC Market Talk
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An unexpected shutdown of one of Europe’s largest oil pipelines has pushed several energy contracts to new 2.5 year highs this week and has opened the door on the charts to further upside to end the year. The entire complex is rallying for a 4th straight day, with refined products trading close to a dime above where they stood just a week ago, wiping out the 5% decline we saw to start the month in what has been one of the more memorable head-fakes of the year.
Brent crude is leading the charge higher after the Forties pipeline was forced to shut due for emergency repairs. That pipeline system is the largest in the North Sea, and one of the key arteries for physical delivery of crude oil tied to the Brent contract. The downtime is expected to last for several weeks and will shut in roughly 400,000 barrels/day of production in the area that does not have an alternate delivery route. It’s been a rough couple of days for owner INEOS who just bought the pipeline system from BP 6 weeks ago, and is also reportedly dealing with an unexpected shutdown of a refinery in France due to an explosion.
The rally has blown out the WTI/Brent spread to its widest level in 2.5 years which should provide some margin benefit for US refiners if they can source a WTI based crude as refined products are following Brent higher. This relative strength for Brent may be a short term phenomenon however as the LOOP has confirmed plans in the last week to begin exporting US Crude via the offshore system that can handle the world’s largest tankers.
The short term technical outlook has completely flipped during the rally with indicators flipping from oversold to bullish in just a few short days. If the overnight highs can be taken out this week, there’s a chance we see a move to challenge the 2015 highs over the next several weeks which could mean ULSD north of $2, and WTI in the $60s. If the December action has taught us anything however, it’s that it’s best to wait and believe it when you see it.
A strong finish to last week’s action kept the bullish trend lines intact for energy markets and opening the door for another big rally just a few days after it appeared that we may see a winter price collapse. Energy futures reopened with some selling overnight but rallied in the past hour on news of an explosion in New York city not far from Times Square.
Early reports suggest that perhaps only the suspect was injured in the botched attack which has tempered the buying, although this story is likely to keep traders on edge much of the morning as it develops.
Look for topside resistance that marked the November highs near $65 for Brent, $59 for WTI and $1.96 for ULSD to be tested this week. If they break, there’s room to run on the charts, perhaps as much another $5 for crude and 15-20 cents for diesel prices. If those levels hold however another pullback is likely as the market searches for direction.
2 more oil rigs were put to work last week accord to Baker Hughes’ weekly drilling report. As the total rig count has stayed relatively steady over the past 6 months some reports suggest that shale drillers are favoring profit over volume, while others are pointing to technological advancements that will bring more of both.
Money managers made modest reductions in the net long holdings in crude oil and refined product contract last week, although all 4 contracts remain well above historical levels. The speculative category of trader has proven resilient this year with sharp sell-offs being met with more buying rather than a mass evacuation of funds like we’ve seen in years past.
The bulls are taking back control of energy markets to end the week, wiping out most of the heavy losses from earlier in the week and keeping the up-ward trend lines on the weekly charts intact. Strong oil import data from China, a strike threat from Nigerian oil workers, and new tensions in the middle east are all contributing to the rally the past two days. Now that the threat of collapse has subsided, the question for next week will be whether the bulls have enough momentum to try and break the resistance set in November, or if we’ll be stuck back in the range-bound trading through the holidays.
Winter is finally arriving for much of the country as a storm is blanketing much of the Eastern US with snow. Houston actually got snow overnight which means it’s highly unlikely your refiner’s sales rep will be available if you need them today. The system could also be a demand killer over the next few days as it is forecast to hit many of the country’s largest metro areas.
RIN Prices continue to tumble today after Senators from states with lots of oil and oil refining said the President was open to talking about changing the RFS. Senators from states with lots of corn who didn’t attend the meeting said it was a waste of time. D6 ethanol RINs have fallen from 90 cents a week ago to 75 cents this morning.
The November jobs report was positive with payrolls increasing by 228,000 and the headline unemployment rate holding steady at 4.1%. The unemployment rate labeled U-6 by the BLS, which is known by some as the “real” unemployment rate ticked higher by .1%.
The yo-yo action continues for energy markets that are trying to bounce again today after yesterday’s DOE report sparked another heavy sell-off. Today would mark the 6th straight trading session in which prices move in the opposite direction of the previous day if the current gains can hold.
The DOE’s weekly report largely confirmed what the API reported a day earlier with refined products showing large builds and crude oil inventories declining. Refinery runs continue to set records for this time of year which seemed to help push both ULSD and RBOB futures to nickel losses on the day.
Oil prices also sold off heavily on the day, breaking some short term support levels that open the door to more selling longer term. US crude oil production continued its steady climb higher, breaking above 9.7 million barrels per day for the first time in at least 40 years. This is an increase of 750,000 barrels/day from the start of the year, enough to supply several large refineries.
Yesterday’s selling wasn’t limited to petroleum contracts. Ethanol prices dropped to their lowest levels of the year as inventories continue to swell, and ethanol RINs fell below 80 cents for the first time in nearly 2 months. There’s a meeting at the White House today to discuss the Renewable Fuel Standard that seems to have put some fear into the RIN market over the past week. According to a White House spokesperson “”The President understands the importance of the RFS to rural America. He is also aware that workers in the refining sector believe the program isn’t working as intended, and should be improved to reduce their compliance burdens,”
Heavy selling in refined products Monday drove gasoline prices to their lowest levels in 6 weeks, and have left diesel prices testing the lower end of their November range. A catalyst for the move was unclear, although the large speculative length held in energy contracts led many to speculate that the selling was liquidation by money managers now that the bull trend seems to have faltered.
Given the relative volumes – crude oil trading volume is roughly 10 times that of refined products – it would make sense that prices may have a larger swing than we might see with the same volume of crude being liquidated, if in fact that’s what was happening. So far in 2017 money managers , aka speculators, have been surprisingly resilient unlike what we’ve seen in the past few years. We should find out soon if they’re able to withstand some selling short term to continue their bet that prices will rise.
RBOB futures are bouncing back this morning, the only contract currently trading in positive territory, and are currently testing the 50 Day Moving average from the opposite direction after having broken below that support yesterday for the first time since October. If that resistance around the $1.70 mark holds today, this looks like a dead cat bounce and will set up the next downside target at the 200 day moving average some 7 cents below current levels.
Ethanol RINs dipped to 86 cents/RIN, their lowest level in 3 weeks, after reports that the White House would host a meeting this week with Senators eager to change the RFS. As has been the case for the past several months, the move in RIN prices corresponded with a move in gasoline crack spreads which fell to their lowest level in 3 months, proving yet again what a double-edged sword the renewable market can be for US refiners.
It’s not clear if some sort of deal on the RFS was an expectation in exchange for getting the tax bill through the Senate, but the timing is certainly interesting if not coincidental. While plenty of negotiating on the tax plan is still to come as the House and Senate bills are reconciled, early reports suggest that refiners may be big winners since their income will be taxed less, while wind and solar companies may have their incentives eliminated.
Unconfirmed reports that the beleaguered Santa Cruz refinery in Mexico was restarting more units is also likely to have weighed on US crack spreads is it suggests that the export demand may decline in the coming weeks. On the other hand, there are also reports that a crude unit at Exxon’s Beaumont TX refinery may be offline for 2 months following a fire last week, reducing output by around 100,000 barrels/day.
Energy markets are starting on a weak note this morning after a wild Friday session brought oil and diesel prices back up close to their highs for the year. The back and forth action over the past week has left the technical outlook for oil and diesel prices in neutral, while gasoline prices are suddenly looking like they could be in for a big drop.
ULSD came within 3 points of reaching its highest level of the year during the Friday rally, with little to explain the 6 cents spike other than crude oil prices being strong. Diesel prices did pull back later in the session, and the weak start this week suggests the conviction to press a move towards the $2 mark may be lacking. Until we see ULSD break below $1.88 or above $1.96, it seems like diesel prices will remain range-bound as they have been for the past month.
RBOB futures meanwhile are currently testing chart support in the low $1.70s, and several short term technical indicators are pointing lower, suggesting we could see another 10-20 cent drop in gasoline prices over the next few weeks. Seasonal influences also favor softer gasoline prices as lower demand and less-restrictive winter specs combine to increase supplies in most markets, a phenomenon known by many in the industry as the Winter doldrums.
The net long position held by money managers in WTI surged last week to the 2nd highest level on record, from a combination of new long bets and short covering. Brent and ULSD also saw modest increases in their net length held by money managers, while RBOB saw another small decline. While gasoline is lagging a bit, the sentiment among speculators remains firmly in bullish territory as all 4 of the contracts are well above the holdings of money managers in previous years, and most are within several thousand contracts of all-time highs.
The Venezuelan crisis took an unusual turn as President Nicolas Maduro announced plans to create a new crypto-currency to get around US sanctions. There were few details provided along with the plan, and unless cars can soon drive on crypto-gasoline, it seems unlikely that this will do much to change the country’s fortune.
2 more oil rigs were put to work last week according to Baker Hughes’ weekly rig count to the highest level in 9 weeks. With the recent rally in oil prices, many analysts expect that count to continue to increase over the coming weeks.
The pair of long-awaited announcements failed to stir up much excitement in energy prices Thursday as both OPEC and the EPA stuck to expectations for 2018. The new month is starting on a stronger note with all of the energy contracts moving higher this morning. The big question for December is whether or not the bulls can keep the momentum or if we’ll see the seasonal influences drag prices lower into year-end.
Perhaps the most interesting part of the announcements was that the EPA got their press release out early in the morning, while OPEC and Friends took most of the day to finally release their plans for next year, both of which are a change from recent norms.
The EPA made small increases to the 2018 final RFS volumes from what they proposed in July. While the volumes themselves equate basically to a rounding error, it’s worth noting that the original proposal had decreased requirements from 2017 to 2018 in 3 of the 4 renewable categories, while the final ruling has increases in 3 out of 4. RIN prices had been bid from 90 up to 93 ahead of the release, but dropped back to 90 after it, and held steady around that level the rest of the day. Ethanol prices meanwhile were pushed to their lowest levels of the year under the weight of ample inventories and a bearish outlook on the charts.
OPEC & friends (aka Russia) announced that they were extending their oil output cuts for 9 more months, from March 2018 through the end of the year. The group did however say that this plan would be up for review mid-year, so it is only a “firm” agreement for 3 additional months. Perhaps more importantly, they did not put any official language in the agreement regarding Libya and Nigeria, who were exempt from the original deal, and who’s ability to increase production has occasionally off-set the reductions from the other countries. Oil prices barely flinched as this type of deal had been talked about for weeks, and
While energy prices shrugged off their big news, equity markets surged yesterday after it seemed that the senate was close to passing a tax reform package. That optimism seems to have been erased overnight as new reports suggest the Senate may fail to even bring the bill to a vote this week.
After a DOE-inspired sell-off Wednesday, gasoline and diesel prices are following Brent crude higher this morning ahead of the OPEC announcement. Today is the last trading day for December RBOB and ULSD futures, so most of the action will be seen in the January contract.
The long-awaited OPEC meeting is underway in Vienna, with an announcement on output expected later this morning. The opening comments noted that the cartel is approaching the “half-way” point of rebalancing global oil supply & demand. There are plenty of rumors and guesses swirling that should keep prices active most of the day.
The EPA is scheduled to release next year’s renewable fuel obligation volumes later on today. RINs have been holding steady for the past week waiting to see if any changes from the levels proposed in July will be made, but already this morning there has been some buying that has pushed ethanol RINs up about 3 cents
Record setting production and export activity highlighted the details of the DOE weekly status report, while a decline in crude and increases in product inventories seemed to dominate the headlines.
Should refiners cheer that they were able to export 8.5 million barrels of gasoline in a week, or be depressed that US inventories still increased by 3.6 million barrels on the week because domestic demand estimates had one of the largest weekly declines in history? The sell-off we saw yesterday favors the second reaction, although a single week’s data point – particularly a government estimate of export or consumption – should not be taken as a definitive sign of a new trend.
US Crude oil production climbed for a 6th straight week, setting a new record for the “modern” era at 9.68 million barrels/day.
Diesel inventories seem to have made their seasonal turn in the past week and should begin building over the next month as harvest demand ends and the winter heating demand has not yet cranked up.
Oil prices are dipping lower for a 3rd straight session after the API surprised many by showing a build in US crude inventories last week. Refined products are following crude’s lead this morning as they await today’s DOE inventory report, and tomorrow’s announcements from OPEC and the EPA.
The API was said to show total US crude inventories increasing by 1.8 million barrels last week, while stocks at Cushing OK dropped by 3.2 million barrels due to the Keystone pipeline closure. Gasoline stocks were said to drop 1.5 million barrels while diesel inventories increased by 2.7 million. Prices reacted negatively to the report – both refined products were down more than 2 cents overnight – but have since wiped out those losses and appear to have moved back into “wait and see” mode ahead of the OPEC announcement tomorrow.
Doubts about OPEC’s ability to get another extension deal done outside of the cartel had been cited for some weakness in Brent this week, and may have been contributing to the selling we saw overnight. Those losses seem to have been erased this morning after the Russian energy minister said after meeting with the Saudis he thought an extension would get done. Expect plenty of these unofficial comments today as stakeholders crowd the sidelines of the OPEC meeting.
US Equity markets continued their record run Tuesday, encouraged by signs of progress towards tax reform in the Senate, and by testimony from the new FED appointee that could be deemed as friendly to the industry. While the correlation between equity and energy prices remains weak, there is historically low volatility in both markets suggesting a lack of fear among investors that’s helped the bull runs for both asset classes.