TAC Market Talk

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Oil Prices Reach Highest Levels in 2 Months Overnight

Oil prices reached their highest levels in 2 months overnight as a slew of bullish news reports appear to be changing the sentiment for a market that’s been stuck in the summer doldrums.  Charts suggest there’s room to continue the run until its next resistance layers in the low $49 range for WTI.  $49.17 marks the high trade for June, and $49.43 marks the 200 day moving average, so that area should let us know whether or not this latest rally has staying power.  So far refined products have been reluctant participants in the run-up, still trading below the highs set last week, so a move higher for the entire complex is far from a foregone conclusion.

There have been plenty of bullish headlines to support the oil rally this week.  It started with the Saudi pledge to cap export volumes, followed by signs from US Shale drillers that they were slowing down their investment due to soft returns.  Then, yesterday, reports that the US Navy had fired warning shots at an Iranian vessel that was approaching it in the Persian gulf seemed to be the catalyst to push prices to their highest levels of the month.  While nothing more came of that incident, the timing – just as congress was due vote on a new round of Iranian sanctions – suggests there may be more provocation in the near future.

After the close the API sparked the next wave of buying when it was said to report a 10 million barrel draw in US crude stocks last week. Refined products have tempered the enthusiasm in crude oil as the API was said to show a 1.9 million barrel build in gasoline inventories, while distillate stocks fell by only 100,000 barrels.  That report suggests US Refiners are continuing their record-setting production levels, and we’ll see if the EIA confirms that at 9:30 central.

The FOMC announcement is due out at 1pm central, and expectations remain low for any notable changes to interest rates or the FED’s monetary policy this month.

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Oil Prices Moving Higher for a 2nd Straight Day

Oil prices are moving higher for a 2nd straight day, taking back most of the losses from the back half of last week as the new Saudi export plans and softer dollar both seem to be encouraging buyers to step back in.  Last week’s high trades of $47.55 for WTI and $50.19 for Brent should be pivotal resistance points.  If those levels break, the charts suggest there’s a good chance we’ll see another 5% increase, while if they hold we may be stuck moving sideways for the dog days of summer.

The FED’s open market committee starts a 2 day meeting today.  Interest rate futures are pricing in only a 3% probability that interest rates will be hiked at this meeting, although many are expecting some further news for plans to reduce the size of the asset holdings on the FED’s balance sheet. That announcement is due out tomorrow afternoon. For what it’s worth, according to the CME Group’s FEDWATCH tool, it’s essentially a 50/50 bet that the fed will raise rates again by the end of the year.

Although currency and energy prices have had a weak correlation over the past year, it’s possible we’re beginning to see that influence increase as the US Dollar index trades at its lowest level in a year, as the Euro trades at a 2.5 year high vs its US counterpart.  Tomorrow’s FOMC announcement may help determine if that trend continues – which may be the catalyst needed to push energy prices through the upper end of their summer trading range – or if it reverses which could mean weaker oil prices ahead.

It’s one of the busiest weeks of the year for earnings announcements, which is giving us a glimpse into the reality of US shale oil drillers.  Early results suggest that we may be witnessing at least a short term peak in drilling activity as exploration firms cut back due to weak returns with oil prices hovering in the mid $40s.

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Busy Morning for Energy Traders

It’s been a busy morning for energy prices as traders volley back and forth over the numerous headlines/rumors coming from the OPEC and friends meeting in St. Petersburg Russia.

Perhaps the most notable piece of news to come from the meeting is that the Saudi’s have pledged to cap their export volume at 6.6 million barrels/day, in what seems to be the first official acknowledgement that internal production and global exports are different figures with different influence on prices.

In addition, Nigeria, which is exempt from the current agreement, will agree to cap production at 1.8 million barrels/day, which still allows it to increase output nearly 200k bpd from current levels.  No word yet on what role the Russians played in the decision, beyond hosting the event, but surely at some point there will be accusations of meddling.

The muted market reaction to the news suggests that oil traders are in “prove it” mode with regards to any supply agreements, having already witnessed multiple rallies falter once these deals failed to re-balance the global supply balance over the past couple years.

The count of active oil rigs dropped by 1 last week, according to Baker Hughes’ weekly report.  Since this is the 2nd time in 4 weeks that the rig count has dipped, following a record-setting string of weekly increases, some analysts are suggesting that drilling activity is now poised to slow down with crude oil prices in the mid $40s.  The counter argument is that we’re just 1 rig away from the highest level in more than 2 years, and with productivity/rig increasing, total US output still has room to increase.

Speculators added to their net-long positions in both WTI and Brent for a 3rd straight week, driven by liquidation of outstanding short positions, with only a small amount of new length being added.  Once again, those shorts covered – as of last Tuesday when the report’s data is gathered – missing out on the late week sell-off.

Refined products have been both down more than a penny and up more than a penny and up more than a penny and a half this morning as they ride the OPEC rollercoaster.  RBOB gasoline futures are testing a key cluster of chart support in the $1.54 range, that could lead to a dime or more of downside if it breaks this week, or could propel the next move higher if it holds.  ULSD futures face a similar test at the $1.50 mark.

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Energy Prices Slipping into the Red for a 2nd Straight Session

Energy prices are slipping into the red for a 2nd straight session after the weekly rally ran out of steam Thursday.  Refined products had been leading the move higher with some impressive seasonal strength in both calendar and crack spreads, but now appear poised to lead the move lower to end the week with both RBOB and ULSD off around 2 cents to start the day.

Colonial pipeline was reported to shut-down Line 1 – it’s main gasoline line running from the refining hub on the Gulf Coast – for repair work yesterday.  The line came back on-line this morning which is likely contributing to the sell-off in gasoline, as those who remember last year’s line 1 disaster, and the ripple effects it caused throughout the South East, appear to be breathing a sigh of relief that this latest incident was short lived.

Thursday morning, Brent crude broke through the $50 mark for the first time in over a month, while WTI reached its highest level in 6 weeks, before reversing course and settling lower for the day.  We have seen similar reversals lead to heavy selling in the past couple of months, so the bulls may be a bit nervous today.  In-spite of some bullish headlines about oil inventories declining both in the US and globally, and 2 strong weekly rallies, oil prices are still just 50 cents higher so far in July, leaving them just a modest sell-off away from a 5th straight monthly decline.

It’s been a very strong week for ethanol RINs, which traded up to 85 cents for the first time this year.  Several bank analysts have been suggesting that ethanol RINs could go back to $1/RIN since the proposed 2018 obligation will require refiners to use more of their carried-over RINs to comply with the law.  The run-up may also be impacted by the recent strength in RBOB calendar spreads which likely encouraged more gasoline imports into the US in the next several weeks, and created demand for ethanol RINs from those importers.  There continue to be daily stories about the lobbying efforts on both sides of the RFS argument, but as is often the case in Washington, there is little yet of substance to change the current course of the RIN market.

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Energy Prices Up this Morning After a Strong Day Yesterday

Energy prices are up this morning after a strong day yesterday. RBOB and HO prompt month futures are up $.0125 and$.0185 per gallon, respectively; WTI crude is 30 cents per barrel higher so far today.

The surprise draw in crude oil stocks topped off a very bullish DOE release with across-the-board inventory decreases.  US gasoline and diesel inventories fell by 4.45 and 1.14 million barrels respectively last week; crude actually outpaced the duo with a 4.73 million barrel draw.

A bearish surprise that didn’t garner much attention given the headline shock: gasoline demand fell by about 200k barrels per day. Blips in demand are common given the volatile nature of  that measurement but it is still odd that gasoline demand fell during peak driving season. However, as long as demand stays elevated through the summer and inventories continue to drop, demand struggles probably won’t be enough to end this rally.

Most refined product technical indicators and studies point to higher prices in the short term. Chartists are now flipping to longer range charts to try and find strong resistance levels to keep this rally train on its proverbial rails. Gas and diesel still have 5-7 cents of ground to cover before making a run at overtaking May’s high prices, after which April’s levels will need to be conquered at about 10 cents above that. Peg the next resistance tests at $1.67 for gasoline and $1.62 for diesel.

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Energy Complex Attempting to Match Yesterday’s Gains

Energy futures settled with moderate gains yesterday with gasoline up just under 1.5%. Diesel and crude oil futures only managed to garnish half of the attention and finished up .7% and .8% respectively. The complex is attempting to match those gains this morning ahead of the EIA data release.

The American Petroleum Institute’s figures released yesterday afternoon shows a sizeable (and expected, due to the summer driving season) draw in gasoline inventories of almost 5.5 million barrels. Diesel inventories also drew by 2.9 million barrels and crude stocks built by 1.6 mmbbls. Confirmation of the inventory moves by the DOE at 9:30am central will likely pave the way for higher prices through the end of the week.

In the latest cluster that is the OPEC supply cut, Ecuador has reneged on their agreement to slow production along with 12 of the 14-nation cartel. While their direct impact to global oil economics is not necessarily significant, the symbolic gesture of and OPEC member splintering from its agreement is much more potent and could lead to lower prices if followed suit by others.

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Energy Futures Make Up Monday Losses in Overnight Trading

After sustaining moderate losses to start the week, energy futures have made up those losses and more in overnight trading. New York gasoline currently sits on the top of the pile showing gains of almost 3 cents while diesel lags behind at +.0200. West Texas Intermediate crude oil benchmark shows gains of just over 1.5% bringing prompt month values up to $46.75.

Healthy refinery runs, limited imports, and a tick up in gasoline demand are what traders expect to see on the menu this week. All three showing up should provide some additional buying support for gasoline and crude futures. The American Petroleum Institute will release this week’s first looks at inventory levels later this afternoon.

Prompt month RBOB futures held on to limit losses yesterday suffering less than .25% while its counterparts fell over 1%. The relative strength in gasoline prices is being attributed to the recent run-up in ethanol RIN prices. Uncertainty about Renewable Fuel Standard quotas and the program’s future in general has RIN prices spiking.

NYMEX HO is currently above $1.50 per gallon, a level it has been hard pressed to stay above since mid-May, and should see some moderate support there if it manages to settle above it today. RBOB is knocking on the door of its 20-week moving average at around $1.5850. Breaking and staying above may lead to a couple-week-long rally good for about 20 cents to the upside.

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Energy Futures Hovering Above Friday’s Settlement this Morning

Energy futures are hovering above Friday’s settlement this morning, WTI and Brent futures showing modest gains of about 15 cents per barrel after each benchmark logged gains of about 5% last week.

Money managers, also referred to as “smart money”, closed out of their short oil positions last week. Net positions rose in both European and American oil futures, supporting intentions of continuing the rally into a second week.

Baker Hughes reported 2 additional oil rig restarts last week, bringing the total to 765; over twice the number of rigs running a year ago this week. This marks the 27th consecutive rise in operating oil production platforms.

RBOB futures hopped over an important technical barrier on Friday and has a little room to run before it is tested again, the $1.58 level will provide a little pushback. WTI and HO futures have a similar amount of room before running into pivotal technical levels, peg $48 per barrel for crude and $1.55 for diesel.

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