TAC Market Talk
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Oil prices hit fresh multi-year highs overnight as tensions over the situation in Iran, and a looming deadline for the White House to make a decision on sanctions, seems to be keeping the sellers at bay. WTI peaked out at $62.56 overnight, just 2 points shy of its May 2015 high, while Brent topped out at $68.29.
A variety of weather-related issues are complicating boat and terminal traffic along the North East coast of US and Canada and have caused a handful of refinery issues in the Midwest. Numerous terminal shutdowns to deal with frozen equipment or malfunctioning units have been reported, while sea ice is wreaking havoc on shipping lanes. In addition, a butane leak near the Irving refinery in Saint John prompted evacuations Monday, and seemed to help RBOB futures find a bid as that plant is a key importer to the NY Harbor region.
The good news for the Winter weather weary is that a warm up has arrived across much of the country, and we’re already seeing ULSD spreads relax as a result. Although there have been a handful of minor refinery issues reported from Illinois to Ohio, so far it seems that major damage has been avoided and any supply disruptions are likely to be limited to a handful of regional terminal markets.
Energy futures are ticking cautiously higher to start the week with headlines split between a short term catastrophe and a potential game changer for long term oil supplies.
An Iranian oil tanker collided with a cargo ship off the coast of China, sparking a huge fire and threatens to be the worst tanker spill in 30 years. While tragic in terms of lives lost and potential environmental damage, the situation does not seem to have stirred prices so far and may be seen as an isolated incident rather than one that might influence global shipping patterns.
Last week, the Interior Department announced a proposed plan to open up US coastal waters to oil and gas leasing, which is reportedly the most aggressive offshore drilling plan in history. The opposition to this plan from several states has already started, and it would take years before any of these projects begin. This proposal, if passed, will provide some interesting insight into the long term views of big oil however to see if they’re ready to again start investing in the longer-cycle plays with WTI at $60.
Speculators are still eager to bet on higher energy prices with Brent and ULSD reaching new records for managed-money net-long positions last week. WTI saw a modest decline, but remains near its own record high for speculative length. The Swap dealer category of trader reached another record net short position last week, suggesting that producers are happy to sell into the oil rally to hedge future production. Since producers often don’t want to tie up their capital with the margin required to trade futures contracts, they often use the Swap dealers as intermediaries to execute their hedge programs.
Baker Hughes reported a decline of 5 oil rigs last week, ending 2017 with 26 fewer rigs than where the count peaked out in the summer. On the other hand, the total is still 121 rigs above where it stood a year ago. The record net-short position held by Swap dealers suggests that US producers have been hedging future output at a record pace and may keep the rig count moving higher in 2018.
Oil prices are pulling back this morning after reaching their highest levels in nearly 3 years Thursday. There’s little in the way of news to pin the 50 cent/barrel drop on for crude oil prices, so this move looks like a natural correction of the ongoing bull market. Refined products on the other hand were given plenty of reasons to sell-off in yesterday’s DOE report, but have not been able to make any sort of convincing move lower, in another sign that the bulls are firmly in control of the petroleum complex for now.
The DOE report showed a 7th straight week of crude inventory declines and refined product builds as US Refiners cranked up to record rates and demand estimates dropped sharply. Gasoline and diesel prices started selling off sharply in the immediate aftermath of the report but that move lower quickly stalled out and prices drifted higher the rest of the session.
Several reports released later in the day expressed confusion as to how gasoline & diesel prices could move higher after such a bearish report, which could explain some of today’s move lower as a delayed reaction.
The weekly build in diesel inventories was the 3rd largest in the past 16 years of data published by the DOE. The table below shows the 10 largest weekly builds, which all happen within a week of the new year, which may explain why ULSD is still trading within 3 cents of its highest level in the past 3 years.
No major refinery disruptions have been reported yet from the winter storm at this point, and NY Harbor cash prices showed slightly weaker differentials yesterday suggesting that the supply side of the equation came through relatively unscathed. We’ll have to wait and see how demand recovers from the snow and cold combination, and there may be a short window for it as another storm system is tracking across the country this weekend.
The December Jobs report was a bit softer than November, with only 148,000 jobs added vs 252,000 a month ago. The headline unemployment rate was unchanged for a 3rd month at 4.1% while the U-6 rate (the unemployment rate before the remove the unemployed people from the calculation) ticked up to 8%
Oil prices hit their highest levels since May 2015 overnight, spurred on by concerns over the deteriorating situations in Iran and Venezuela, and following another large inventory decline reported by the API yesterday.
The industry group was said to show another large crude draw of just under 5 million barrels last week, while gasoline stocks increased by 1.9 million barrels and distillates increase by 4.2 million barrels. The overnight price reaction in futures seems to be following the report with WTI ticking higher while ULSD is off a penny and RBOB is bouncing around either side of flat. The DOE’s weekly report will be out at 10am central.
Trading volumes are light to begin the day, and may remain that way to end the week as the East Coast is taking cover from the major storm system hitting the region today. With another round of extreme cold forecast to follow the storm system today, we may not know until early next week how the PADD 1 refiners along the coast were able to weather the storm. So far there have not been reports of any major disruptions from the cold snap along the Gulf Coast this week.
While the cold-induced spike in heating oil demand has sent ULSD futures into their steepest backwardation in nearly 3 years, the chart below shows that the current 2 cent premium for prompt vs 2nd month contracts pales in comparison to the spreads from 2013-2015. If this storm passes without any major disruption to refineries or the NY Harbor, these spreads may stay relatively soft as total distillate output remains at record highs, and demand stalls on the backside of the system, but if the deadly combination of cold, wind and ice knocks units offline, we could still see a spike like in years past.
After snapping a 9 day winning streak in the first trading day of 2018, energy futures are ticking higher again this morning as a winter storm bears down on the US and protests in Iran continue to escalate.
The weather across much of the US is going from bad to worse this week as record cold gives way to a large winter storm that’s expected to bring ice and snow from Florida to Maine. The good news is that the hurricane force winds are expected to stay off shore, which should minimize any longer term impacts to energy supplies.
Diesel demand across the eastern half of the country is spiking as heat and power generating systems switch to burning heating oil as regional natural gas supplies can’t keep up with the spike in demand short term, even though nationwide supplies are seen as ample. Prices for space on Colonial’s main diesel line spiked north 4 cents/gallon yesterday as suppliers race to bring replacement barrels from the gulf coast.
This type of event is a double edged sword for refiners. On one side they’re definitely benefitting from the best winter diesel demand spike in 3 years, while on the other they risk further destruction to gasoline consumption as drivers stay off the roads. So far reports of refinery issues have been minimal, although it seems unlikely the Gulf Coast refiners will come through this unscathed since most are not insulated to handle this type of a front.
We’re also seeing a rash of terminal issues across much of the country as equipment breaks down in the cold. Vapor recovery units in particular from Tennessee to New England seem to be going off-line frequently, stranding trucks waiting to load.
Today’s interesting read: Is the US a bigger wildcard than Iran for oil prices?
Petroleum futures are stumbling out of the gates a bit to start the year, after finishing 2017 at 2.5 year highs. The action in prices this week should tell us quite a bit about the legitimacy of the December rally with most traders expected to be back at the desk and volumes returning to normal.
Restarts on the Forties and Libyan pipeline systems that had been shut in recent weeks kept near term supply worries at bay, while protests in Iran – including unconfirmed reports of a pipeline bombing – are stoking concerns that there could be new threats to supply.
Speculators upped the ante last week, increasing the net long positions held by money managers to all-time highs for Brent and ULSD, and the 2nd highest weekly total for WTI. While the net length in RBOB is not near a record high, the managed money net length is still above the 5 year range for this time of year.
Baker Hughes reported that total US Oil rigs held steady for a 2nd straight week to end the year. The first half of the year was marked by steady increases in the rig count, with a streak of 23 consecutive additions, while the back half of the year saw the activity stabilize with the year-end figure of 747 rigs matching the count we saw in mid-June.
Oil and diesel prices look ready to end 2017 in style today, while gasoline futures are slumping into the new year. ULSD futures are trading higher for a 9th consecutive session, breaking the $2.08 mark for the first time since February 2015. WTI also set a fresh 2.5 year high overnight, and is currently holding on above $60. Yesterday’s DOE report was a mixed bag that didn’t cause much of a price reaction, leaving the market content to continue its low volume melt-up until most participants return to work next week.
There are plenty of questions to be answered in 2018, but perhaps the most pressing is how much longer can the 6 month-old energy rally last when US oil and refined product production is poised to break every record in the books?
Notes from the DOE weekly report:
US refineries set a record for December production last week, and will set an all-time high for annual throughput, despite the dramatic impact of Hurricane Harvey.
Refiners are clearly taking advantage of robust diesel margins with diesel production setting a new all-time high last week of 5.47 million barrels/day, which is 1.1 million barrels/day more than the domestic demand estimates, which have been aided by the recent cold-snap.
A strong gasoline demand figure for December wasn’t quite enough to prevent inventories from increasing for a 7th straight week. Early indicators suggest post-Christmas gasoline consumption has been especially weak with the cold snap hitting much of the country, raising concerns that we could see a soft start to the new year, similar to 2016 and 2017 when demand started out nearly 1 million barrels/day lower than the pre-holiday peak.
US Oil production dipped for the first time in 9 weeks, although most forecasts still suggest we should see that level break the 10 million barrel/day mark sometime early next year.
Just two trading days remain in 2017 and oil prices are holding steady near 2.5 year highs. At the time this was written, prompt month WTI and Brent futures were exactly unchanged for the day, which is an extremely rare occurrence for a market more accustomed to 5% swings than going nowhere. As has been the pattern over the past couple of weeks, an overnight sell-off attempt was short-lived as the traders who drew the short straw to be in the office this week aren’t willing to commit to a move lower.
Another pattern over the past several weeks has been to see large crude draws and healthy refined product builds as US refiners continue their record pace of production. Yesterday’s API report held that pattern, with the industry group said to show a 6 million barrel decrease in US Crude oil inventories, while gasoline stocks increased 3.1 million and diesel stocks increased by 2.8 million barrels.
The DOE’s weekly report will be released at 10am central today, delayed 24.5 hours by the Christmas holiday. Since the data is compiled as of Friday, it will take at least another week before we get to see the impacts of the record-setting cold snap that’s engulfed much of the country in the DOE data. The question for refiners is, will this system create enough demand for distillates to offset the damage its doing to gasoline consumption.
Diesel prices did trade briefly above their high from May 2015 during yesterday’s session before topping out at $2.0576, just 4 points above the 2.5 year peak. The next major chart top comes in at $2.35, a high set in February 2015 which is not-coincidentally the last time a winter storm created a major spike in heating-fuel demand.
The US dollar index has dropped to a 3-month low this week, and has been cited as a factor in the energy rally. Then again, the last time the USD was in the 92 range, crude oil was trading around $47 making correlation or causation a tough argument for the pair.