TAC Market Talk
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After a brief bounce overnight, oil prices are ticking lower again this morning, threatening the lower end of the August trading range as they give back most of the gains picked up late last week. If prices can take out the August lows, and some significant moving average support levels along with them, this week, there’s a strong case to be made for more selling. If not, it’s likely we’ll see more of this choppy, but ultimately aimless, trading action as we head towards fall.
The remnants of Tropical Storm Harvey are expected to reorganize once they reach the gulf of Mexico later this week. While forecasts suggest the system will stay south and west of the major oil producing & refining zones along the Gulf Coast, south Texas may see some very heavy rains from this system. Meanwhile, Florida is likely to also get heavy rains and some flooding from another tropical system, even though it’s given a low probability of further development.
Ethanol RINs have fallen back below the 90 cent range after an appeals court ruled the EPA went too far in denying a small refinery exemption for the renewable fuel standard to Sinclair Oil. The ruling has sparked speculation that many other small refiners will request similar exemptions now, and could create some short term excess if those companies can sell their RINs back in the open market. On the other hand, it’s still unclear how the EPA will handle the other recent court ruling that said it “went too far” in lowering the total amount of renewable fuels requires nationwide over the past 2 years.
Stock markets in the US and across the globe seem to be breathing a sigh of relief this week after two nervous weeks of trading that saw volatility readings reach their highest levels in almost 2 years. The correlation between energy and equity prices has stayed soft lately, and the uptick in stock volatility has not carried over to oil markets yet. You can make a case that this type of action suggests a healthier energy market that’s trading on its own fundamentals compared to the “Risk on/Risk Off” patterns we saw earlier this decade, but it’s still worth watching as we approach the bottom end of the summer trading range in case the selling in stocks starts spilling over.
Today’s interesting reading: While Russia is claiming new technology to replace fracking, the WSJ notes that more US drillers are going old-school. Meanwhile, according to Bloomberg, we can add convenience stores to the list of things that millennials are changing.
Refinery issues and storm concerns stirred up the oil market on Friday, wiping out the weekly losses, and helping RBOB gasoline prices rise nearly a dime from Thursday’s low trade. Those concerns are subsiding this morning, with refined products leading a sell-off that threatens to put the complex right back into the sideways trading range that’s held the action for most of the month.
Speculators continued to add to their net long positions (betting on higher prices) in Brent and ULSD last week, while they cut back slightly in WTI and RBOB. The increase in Brent was driven by new long bets entering the market, while shorts were stable. The fund positioning between Brent and WTI may have been a contributing factor in the premium for the European contract reaching its largest level vs. the US contract in nearly 2 years last week. That spread was a major driving factor in all sorts of arbitrage plays before the oil bubble burst in 2014, and could be an important factor on price action for crude and refined products in the back half of the year.
The Baker Hughes oil rig count showed 5 fewer rigs last week, as drilling activity cools with prices in the US stuck below the $50 mark. Even if this does in fact mark the peak for drilling activity, we are likely to see production levels continue to climb for several more weeks, if not months, as the wells already drilled still need to be fracked and brought in.
For those who may be wondering how the futures market may react to the eclipse today, the honest answer is that the NYMEX didn’t exist the last time this occurred in the US, so it’s really hard to say. My guess is it will be similar to the action we see during March madness with trading getting quiet as the attention turns elsewhere.
Yesterday started off as very bearish since we broke the 200 day moving averages in both RBOB and Diesel at 1.5601 and 1.5584. That was 2 cents lower and then the entire market jumped on a story about Shell’s refinery Deer Park Texas had a fire in one unit. The RBOB crack jumped one dollar from its low on that story. Next there was a terror attack in Spain which spooked the market for a second time in a few hours. Therefore, the market swiftly changed from a bearish position to bullish in a short time. China also had a fire in one of their largest refineries in Dalian yesterday. It was extinguished quickly.
Crude stocks continue to draw down in the US and may be a sign that rebalancing is taking place. Yet the wild card continues to be Nigeria and Libya since they are free to produce whatever they want. Russia seems to be struggling with holding back their production after March of 2018. Citigroup came out with their projections this morning expecting crude to trade within a range of $40.00 to $55.00 through 2022.
Last week saw the largest drop in crude oil stockpiles across the US, down almost 9 million barrels. Although a number like that would seem to incite some buying, it was coupled with an increase in diesel stocks and an unseasonal build in gasoline. Pairing this with a 3% drop in gasoline demand during America’s driving season and you’ve got a case for bearish action. RBOB and ULSD futures settled lower by $0.0157 and $0.0252 per gallon, respectively; NYMEX crude chopped 17 cents in sympathy.
Reaching record gasoline demand earlier this summer has sparked analysts to take a good look at energy consumption now as opposed to last time we called peak demand back in 2007. Now days, we are consuming 9% more gasoline despite increase governmental sanctions via CAFE standards and ethanol requirements. It seems that our driving population growth is, on a large scale outpacing our current gas output. If this is also the case for the rest of the world, emerging markets may not have the infrastructure to keep up with their respective demand and we could see an increase in gasoline exports, which could push prices higher.
Both refined products opened above their respective 200-day moving averages and have since moved below them, with conviction. Settling below will likely incite more selling and solidify the bear market for energy commodities. About 5-10 cents of downside will likely be seen near term if that support level is breached. Crude oil prices are looking to make a run at a less important support level around $46.50 and will likely look to the rest of the complex for direction.
Oil prices survived a trip to the brink Tuesday as WTI and Brent each came within 2 cents of breaking through support at $47 and $50 respectively. Ordinarily the bounce that followed after touching chart support may inspire some follow-through buying, and a large draw reported by the API set the stage for a big move today. Instead, crude oil is trading flat, providing the latest evidence that this market is lacking conviction.
Most weeks the API only shows up on the radar when they release their inventory reports, but yesterday the industry group made headlines as it published support of the President’s executive order to streamline energy infrastructure projects. It’s unlikely that order will have any short term impact on prices, given the long-term nature of these projects, but may be another contribution to the longer term trend of cheaper energy in the US.
Later in the day, the API was said to report a 9.2 million barrel decline in total US crude oil inventories, the largest weekly drop reported in almost a year. The price reaction was muted however as Cushing OK stocks were said to build by more than 1 million barrels, and gasoline stocks had another small counter-seasonal build of 300k barrels. Diesel stocks were said to draw by 2.1 million barrels. The DOE report is due out at 9:30 central.
Activity in the tropics has really ramped up this week, as it often does this time of year, with Hurricane Gert churning north off of the East Coast, 2 more areas to watch forming as they cross the Atlantic and potentially a 3rd right behind them off the coast of Africa. Gert is still forecast to stay offshore, and it’s too soon to say where any of the other 3 systems will go, or if they’ll develop, but the conditions are ripe and some forecasters are predicting the gulf coast will see multiple named storms over the next 2 months.
Energy futures have reached 3 week lows overnight, and are teetering on the edge of another major sell-off as technical support is breaking, and fundamentals are offering little support.
There’s a chance that the $47 mark for WTI and $50 for Brent, which acted as short term resistance back in July, could now become technical support (as of this writing the low trades for the day were $47.09 and $50.11 respectively). If those levels fail to hold however, there’s not much on the charts to prevent another drop of $2 or more. Refined products are also looking suddenly vulnerable, and both RBOB and ULSD are within striking distance of their 200 day moving averages. If that support breaks, we could see another 5 cents of downside for products as well.
The EIA is predicting record oil production from US shale plays in September in its monthly drilling report. The agency expects total shale production to grow by more than 117,000 barrels/day compared to August, as the increase in drilling activity we saw earlier in the year finally turns into meaningful output growth. Although that report certainly seems to have contributed to the selling we’ve seen so far this week, it’s also worth noting that several of the shale formations seem to be showing a peak in output/well following years of dramatic growth in that reading.
The monthly drilling report from the US-based EIA, supports the theory from the IEA’s monthly oil report last week that the drawdown in global crude oil stocks may take longer than expected. The idea that “we’ll rebalance next year” seems to have become the theme for the past 3 years. Most forecasts are guessing that US oil stocks declined again last week as refinery production remains near record levels. Now that the momentum clearly favors the bears after 2 weeks of going nowhere, the API and EIA weekly readings will need some bullish readings in order to stem the tide of selling.
Energy futures are ticking modestly lower to start the week as the struggle for direction continues. At one point last Thursday when Brent traded north of $53, it looked like maybe we’d get a breakout to the upside, only to see the sellers step in and knock prices back to the lower-end of the range. Then, on Friday, WTI briefly dipped below the $48 level and looked like it might drag prices below their August floor only to bounce back and settle higher on the day. That back and forth action leaves the technical studies muddled, and favors more choppy trading until a breakout can be sustained.
Three more oil rigs were put to work last week according to Baker Hughes’ weekly rig count. While the total oil rig count of 768 is the highest of the year, there has only been a net increase of 5 rigs over the past 6 weeks, a stark contrast to the 9 rigs/week average in the first half of the year.
Money managers seem to be having a difference in opinion over the US vs European grades of crude oil. Last week saw the Net long position held in WTI dip slightly, while the net bets on higher Brent surged again to the highest level in 4 months. The increase in Brent was split roughly 1/3 short covering and 2/3s new length, suggesting that speculators are gaining more confidence in a push towards the mid $50s. It’s possible that this new found confidence coincides with the October Brent contract now moving into backwardation of roughly 15 cents over November, a condition that suggests physical supplies have tightened following years of excess.
Tropical Storm Gert formed over the weekend, and is likely to become a hurricane over the next few days. Fortunately the forecasts show this storm staying off-shore of the US East Coast, not creating a significant threat to those of us who spend our time on land. The last time there were this many named storms so early in a season was 2005, which will not help gulf coast residents rest easy as that was the year of hurricane Katrina and Rita. With most of refining country already inundated with rain this summer, the risks of flooding and power outages could be severe even in the event a smaller storm should reach the area in the next few weeks.
Why are prices moving lower this morning? Take your pick.
The energy complex traded lower yesterday after news from Russia emerged claiming the country sees no need to continue cutting crude production after the OPEC agreement has expired. The deal, first reached in November of last year and again renewed in May, held each member (with a couple of exceptions) and a volunteering Russia to limited production capacity in an effort to raise prices. The deal is set to end in March 2018 and then its back to business as usual, at lease for the former Soviet Union.
Renewable Identification Number (RIN) prices continue their march upward and traded as high as 92 cents for the first time since last year. Uncertainty over if and how the EPA will hold obligated parties to retroactive RIN obligations have spurred a buying spree originating in May.
Crude oil futures failed to settle above the psychologically important $50 mark yesterday. WTI contracts exchanged hands around the $50.20s yesterday but ended the day almost $2 lower at $48.59, and producing a bearish chart formation in the process. Prompt month crude prices are currently buoyed by the contract’s 100 and 20 day moving averages, after which support can be seldom found. If selling pressure manages to force crude to settle below $48, another $3 could be knocked out of the benchmark shortly thereafter.
New York gasoline futures settled lower by 8 points yesterday, resisting the upward pressure of the rest of the energy complex, after seeing the first build in inventory levels of the summer driving season. The prompt month diesel contract settled up almost 2.5 cents, West Texas Intermediate gained just over 50 cents on the day.
Both gasoline and diesel demands are close to record highs but cannot seem to keep up with refinery runs which have been hanging around the nosebleed section since mid-March. To exacerbate the situation, gasoline exports have dropped off for a second week in a row which is the main culprit for the unseasonal build in inventories.
This morning’s rally looks to break WTI out of its high set earlier this month. August 1st had the crude benchmark top out at around $50.50 and has since fallen. If broken today, not much stands in the way of crude prices running up to the $51-52 range and taking refined products along for the ride.