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Energy futures have pulled back from the edge of the technical cliff they were teetering on earlier this week, leaving the complex in neutral territory. Thursday’s session was the third in a row in which an early drop was unable to sustain itself, showing a lack of conviction to sell below the trend-lines that have held up this market for more than a year.
After a soft start, prices quickly surged Thursday morning following comments from Saudi Arabia’s oil ministry denying that it would add excess supply to appease the US President. The spike was short-lived however as traders seemed to be debating whether this was a change in policy or just a reaction to a lack of demand.
The latest potential impact for oil markets from the Trade War threats? Oil pipelines needed to debottleneck the Permian.
RIN values continue to hold steady near their lowest levels of the year as both sides of the debate testified at an EPA hearing this week. The big unknown is whether the new EPA administrator will take a different stance than his predecessor.
The petroleum complex managed a bounce Wednesday that saved it from a technical break-down, but is selling off again this morning setting up another test of chart support.
A large build in US crude oil stocks reported by the DOE seemed to have prices teetering on the edge of a collapse Wednesday, but Reports of a drone attack on a Saudi Oil refinery stirred up prices late in the morning and kept them moving higher through the afternoon. Those fears have since subsided as the refinery announced production was not affected, although there was a fire in a storage unit.
US Crude oil production reached the 11 million barrel/day mark for the first time ever last week, and the pace of growth keeps the country on track to become the world’s largest producer sometime in the next year. US crude imports reached their highest level of the year last week, and exports dropped for a 3rd straight week, helping total stocks to build by nearly 6 million barrels despite another decline at the Cushing storage hub.
Refinery runs fell by more than 400,000 barrels/day last week, as a rash of unplanned issues knocked run rates lower in 4 of the 5 PADDs last week. Gasoline & Diesel production levels had a corresponding decline, but remain above year-ago levels, leaving room for refiners to set new all-time production records in 2018 – if they can avoid a repeat of last year’s hurricane season.
The committee monitoring the agreement among OPEC, Russia & other producers reported compliance with output cuts was 121% in June, down from 147% in May, reflecting the announced increases to make up for Venezuela’s collapse.
After a Tuesday bounce, energy futures are moving lower and once again testing price levels that could very well be the difference between a mid-summer price collapse, and another move to multi-year highs.
The charts below show that both Brent and WTI are currently testing the trend-lines that have held up prices since they bottomed out in June of 2017. Of course, there are no rules in futures trading that say if a trend-line breaks that prices will behave a certain way, but the likelihood of a major correction given the amount of speculative money that’s been betting on higher prices all year seems to be high.
Meanwhile, the $2 mark seems to be a key pivot point for RBOB gasoline futures near term. The contract has dipped briefly below that mark twice in the past month, but has quickly bounced both times. If that layer of support ends up breaking, chart suggest we could see a slide towards the $1.80 mark this summer.
Diesel futures have already broken their weekly trend line, reaching their lowest levels since early April this morning, which sets up a test of the 200 day moving average just above $2.01. A bounce off of that support may mean the worst of the selling is behind us, while a break sets the stage for another 10-15 cent slide.
The API was reported to show modest inventory builds across the board yesterday, with crude oil stocks up 629,000 barrels, gasoline up 425,000 and distillates up 1.7 million for the week. The DOE’s weekly status report is due out at its normal time of 10:30 eastern today.
Energy futures are on the cusp of a technical break-down after the 2nd heavy wave of selling in a week overtook the complex Monday. July 11, 2018 saw most petroleum contracts plunge around 5%, but was largely dismissed as prices recovered later in the week. Yesterday’s follow-through selling broke through the lows set last Wednesday, and have pushed several contracts below the weekly trend-lines that have held up this rally for more than a year.
If the sellers can follow through with breaking the bullish trend, charts suggest we could see another $5-7 of declines for oil contracts and 10-20 cents for refined products in the next few weeks. That said, we aren’t quite there yet, and a bit of early buying this morning is alleviating concerns of an immediate collapse, temporarily at least.
While the double drops of the past week are note-worthy, compared to the price action of a decade ago it seems boring in comparison. July 11th, 2008 saw oil reach its all-time high of $147/barrel, before beginning a precipitous decline that saw prices drop by $23/barrel by the end of July, and drop by $115/barrel to a low of $32 before the end of the year.
The IEA released its annual World Energy Investment report this morning. The annual report showed total global energy investment dropping for a 3rd straight year as oil companies continue to “do more with less” and renewable energy investments were “disappointing”.
New supply potential seems to be outweighing old supply concerns this morning as another heavy wave of selling grips energy markets. Both WTI and Brent are down around $1.70/barrel as of this writing, while refined products are off more than 4 cents – representing a 2-2.5% dip for most contracts.
Reports of extra Saudi oil being offered, a potential slowdown in Chinese demand, and rumors that the US Strategic Petroleum Reserve may be used to combat higher prices seem to be outweighing concerns of another oil field shutdown in Libya and an expansion of the oil worker strike in Norway.
The Russian oil minister also said the country would consider increasing production if needed ahead of today’s summit, giving the market yet another reason to dismiss concerns over global supply shortages, at least for a few hours.
Money managers were mixed in the most recent commitments of traders reports, with Brent seeing a decline in the net long position held by funds, while WTI held steady, and refined products gained. This report shows data as of last Tuesday – a day before the heavy sell-off began – so it seems likely we could see some long liquidation in the next report due out on Friday afternoon.
The rig count held steady with 863 active rigs searching for oil in the US last week according to Baker Hughes.
Energy futures rebounded back from Wednesday’s rout but failed to retrace even a quarter of the losses, leading some to call the market a ‘dead cat’, since they too can bounce after a big drop. Some are pointing to the increased tensions over Iran sanctions and the lack of production from Venezuela as key bullish factors, while others are wary of the return of Libya to the marketplace and Saudi Arabia’s output increase as downward price drivers. The result was an indecisive trading day Thursday that ended with refined products adding on a muted ½ percent gains and American crude oil finishing flat.
Once-hurricane Chris was downgraded to a post-tropical storm yesterday and has exited the Atlantic theater with no impact to energy infrastructure. The remnants of TS Beryl continues to churn out to see and is currently about 300 miles from Bermuda with a 20% chance of formation in the next couple days. For now it looks like the industry will have a quiet weekend on the storm front.
After Wednesday’s news of the EIA scrapping new required renewable fuel blending amounts, all has been quiet from the Administration and in RIN trade. Current year credits added half a cent yesterday as we wait for more news.
Prices are mostly flat so far this morning. RBOB and HO prompt month futures are fluttering within half a cent of unchanged while WTI and Brent benchmarks are up just under a quarter per barrel. So far it looks to be a quiet Friday.
Crude oil prices had their worst day since March of 2017, despite US oil inventories falling to their lowest levels since February 2015. While the 12.6 million barrel decline in crude oil inventories is the 2nd largest weekly drop on record, imports were down 11.3 million barrels on the week, which makes the decline look transitory, especially given the expectations that the Syncrude facility will begin coming back online in the next few weeks.
News that Libya would resume oil exports from 4 of its largest ports this week seemed to be the driver behind to the bearish sentiment, as it could mean around 800,000 barrels/day will hit the market in short order.
Soft demand in the US was also weighing on prices, as the EIA noted gasoline consumption was down 1.7% over the past 4 weeks, compared to the same period a year ago in its weekly highlights as retail prices averaged 56 cents/gallon more than they did this time last year. The timing was especially bad for this news, as it came the same week that gasoline production in the US reached a record high at 10.7 million barrels/day.
Crude oil production held steady at its record high of 10.9 million barrels/day for a 5th straight week, likely due to the Agency’s recent policy change of rounding the weekly estimates to the nearest 100,000 barrels/day.
Hurricane Chris is forecast to pass dangerously close to the Come-by-Chance refinery in Newfoundland, which is a frequent supplier of cargos to the NY Harbor, and coincidentally was in the news as a potential sale of the plant to Irving Oil was reported to have fallen through.
Somewhere in the shuffle of energy prices wiping out all of July’s gains, the EPA quietly trashed a plan to increase biofuel blending requirements for refiners. According to the EPA, an estimated 8 billion gallons of gas and 5.5 billion gallons of diesel produced by small refiners will be exempt from renewable standards in 2019. RIN prices dropped only 1.5 cents on the news while everyone else watched the NYMEX.
Notes & Charts from the Weekly Petroleum Status Report
The rally in energy prices has run into a figurative wall of fundamental concern and is seeing a heavy sell-off across the board to start Wednesday’s session. Tuesday morning it seemed like there was little to slow the upward momentum as WTI broke above $75 for the first time since November 2014, but 2 oil market reports and more trade talk have rapidly turned the tables.
Prices finally found some headwinds Tuesday after the EIA’s monthly Short Term Energy Outlook sparked concerns about the supply/demand balances for petroleum in the US and abroad. The DOE’s analytical arm is forecasting that WTI prices will drop to the low $60s in 2019 as global supply outpaces demand. To put the uncertainty of this (and pretty much any other) oil price forecast in perspective, the 95% confidence interval calculated by the EIA is a WTI price between $38 and $110 next year.
OPEC’s monthly oil market report showed that Saudi Arabia wasted no time ramping up its production. The Kingdom adding more than 400,000 barrels/day during June, enough to offset heavy losses in Libya, Venezuela & Iran and increase the total OPEC production for the month. The OPEC report also hinted that supply increases would outstrip demand over the next year, and noted how rising prices are likely to contribute to slowing consumption globally.
New tariff threats from the US & China have global equity markets in a “Risk off” mode this morning, with major indices in Asia, Europe and the US all deeply in the red. While the correlation between equity and energy price movements has been weak this year, the fear trade seems to be influencing both asset classes so far today.
Hurricane Chris is now a category 2 storm, but is still forecasted to remain off-shore of the US East Coast. The current path does have the chance of a landfall near St. John’s Newfoundland, not to be confused with St. John New Brunswick where the Irving Oil Refinery is located. The remnants of Hurricane Beryl still have a good chance of reforming near the Bahamas, although it’s unclear what path it might take should that happen.
The API was said to report another large crude draw of almost 6.8 million barrels last week. Gasoline stocks declined 1.6 million barrels while diesel stocks increased by 1.9. The DOE’s weekly report is due out at its regular time today.