TAC Market Talk

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Choppy Action Leaves Markets in Short Term Sideways Range

Tuesday’s market action was all over the map with prices moving lower early, rallying to settle higher, only to be knocked down again in the afternoon and through the overnight session after more bearish news on the inventory front.

This time yesterday it looked as though we could see a technical breakdown after OPEC reported their oil output increased in May.  Prices stabilized however after the Saudi’s announced they’d be cutting back their July exports, only to give up most of those gains following more bearish news from the API and the IEA.

That choppy action leaves us in a short term sideways range between $45-47 for WTI, $1.41-$1.45 for ULSD and $1.47-$1.52 for RBOB that seems to be a resting point while traders try to make up their mind.

The API was said to report a crude build of 2.7 million barrels, and gasoline build of 1.7 million and a distillate draw of 1.4 million.  Last week we saw a 5% selloff after the DOE’s version of the weekly inventory stats showed a crude build while the API had reported a draw, so it’s possible yesterday’s figure was just catching up to the government data.  The gasoline build is more bad news for the bulls however as we’re now into the driving season but still not seeing inventories decline.  The DOE report is due out at 9:30 central.

The International Energy Agency’s Oil Market Report echoed many of the sentiments from OPEC’s report, showing that the global inventory overhang is taking longer than anticipated to cut into as supplies from the US, and several OPEC members, continue to increase.

The FOMC announcement is due out at 1pm Central, and the CME’s FedWatch tool now prices in a 99.6% probability of an interest rate hike being announced today.

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Energy Prices Slipping Back into the Red

Energy prices are slipping back into the red this morning, teetering on the edge of another big sell-off after Monday’s early rally failed to maintain its momentum.  The OPEC monthly report seems to be a catalyst for the selling this morning, as the reality of the global supply overhang just refuses to go away.

OPEC left its global oil supply and demand estimates unchanged in its latest monthly oil market report.  The cartel did admit that the rebalancing of the oil market they’ve been waiting on for almost 2 years is happening, albeit “…at a slower pace…”largely due to the increases in US supply.  The cartel also noted that its total output increased in May by more than 330mb/day, led by gains from Libya and Nigeria, countries that are exempt from the supply cut agreement, and threaten to make it irrelevant.

$1.47 for RBOB and $1.42 for ULSD look like they could be trap-door type support levels this week as they’ve held the sellers at bay for the past 5 sessions, but open us up to another 5 cents of losses (at least) should they finally break today.

Here’s a good read from Bloomberg on the logistics of global oil trade we don’t often think of, but are brought to the forefront as new Middle East tensions simmer and the US reconsiders its policy on being the police force to the world.

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Oil Prices Ticking Higher for Second Straight Day

Oil prices are ticking higher for a 2nd straight day, in a modest recovery following 3 straight weeks of losses.  There’s not much in the news to drive the action so far, so we may see some consolidation leading into the weekly inventory reports and the FED meeting on Wednesday.

Another 8 oil rigs were put to work last week according to the weekly count from Baker Hughes.  That keeps pace with the average we’ve seen so far this year, although what was unusual was that the count in Texas, which has accounted for the lion’s share of this year’s growth, was actually lower on the week and Oklahoma accounted for most of the new rigs added.  This is just one of many signs that the comeback in US drilling is beginning to expand to the shale regions outside of the Lone Star state.

There was a mixed reaction by money managers last week according to the weekly position reports.  The category of trader that includes large speculators (largely hedge funds) cut the net long position in Brent and Diesel while adding positions in WTI and RBOB.

The FOMC is meeting again this week, and the CME’s FEDWatch tool is showing that fed fund futures are pricing in a 96% probability of another interest rate hike at this meeting.  With that level of certainty already priced in, we may not see much of a reaction in prices unless the FED surprises (almost) everyone and doesn’t raise rates.

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Petroleum Complex Fighting to Find its Footing this Morning

The petroleum complex is fighting to find its footing this morning as we wrap up a 3rd consecutive weekly decline following the OPEC announcement.  The inventory surplus in the US and across much of the globe seems to be the black cloud that shows up to rain on the bulls parade whenever a rally gets going, and until real progress is made on that front, it may be difficult to see a reversal of this negative trend.  The May lows remain the key test to the downside for the near term, if prices can hang on there in spite of the negative sentiment controlling the action recently, there may be an argument to be made that the downside momentum has been lost.

Several US stock indices reached record highs Thursday, after the former FBI’s director turned out to be much ado about not so much.  S&P futures are at record highs this morning, shrugging off the surprising UK election results.  Unfortunately for energy bulls, the correlation between equity and energy prices remains largely non-existent this year, and is offering no help to stem the tide of selling.  What’s also worth noting is that while the news headlines sure seem like there’s plenty to worry about, both the S&P and Oil volatility indices remain at long-time low levels, suggesting traders in these asset classes just don’t care about the noise coming out of Washington, at least for now.

Later today we’ll get the weekly Baker Hughe’s rig count and the Commitments of Traders reports.  Rig counts have risen for a record 20 consecutive weeks, while the COT has been a case study in what not to do for speculative traders for much of this year.  Since the data is compiled as of Tuesday, it will be interesting to see how the big funds were positioned ahead of Wednesday’s big sell-off.

A good read from earlier in the week on how US oil exports are shaking up the global market.

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DOE Report Sparks Lowest Price Levels Since May

Just when it looked like the energy complex was carving out a bottom after 2 weeks of constant selling, Wednesday’s DOE report sparked another wave that pushed prices to their lowest level since the Cinco de Mayo overnight panic.  After a dead cat bounce in the latest overnight session, prices have fallen back into the red this morning, leaving the May lows as the only remaining chart support standing in the way of another price decline of 5-10%.

The key number seemed to be the increase in crude oil inventories when it seemed that most forecasts – not to mention the API report – were calling for a substantial decline in stock levels.  In addition, it was a rough week for refined product demand.   After reaching an all-time high in the previous report, the estimate for gasoline consumption plunged more than 5%.  Diesel meanwhile saw its demand guess drop sharply for a 2nd straight week, leaving it at the low end of the 5-year range.

When you dig deeper into the report, it doesn’t seem THAT bad to have incited the riot of selling we saw yesterday.  Crude oil output dipped lower, Cushing OK inventories declined, gasoline output dropped nearly 5% to offset much of the decline in demand estimates, and refinery run rates dropped 1.6%, with the key gulf coast refining region slowing down by 3%.  On the flip side, PADD’s 2 & 3 which account for 72% of all refinery throughput remain well above their seasonal ranges, and are on pace to keep the total US refining rates at record levels this year.  The US is producing 15-16 million barrels/day of gasoline and diesel fuel, while consumption is stuck around 13-14mb, and while exports have been high, they’re still not enough to make up that difference.

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Prices Pushed Higher for First Time in a Week

The release of the Energy Information Administration’s monthly Short-Term Energy Outlook pushed prices higher for the first time in a week. It reported that upward pressure could be seen on crude prices if OPEC carries out their extended supply cuts and US refinery run rates stay at their current levels. Substantial decreases in global oil production of .4 and .2 barrels per day  are expected 2017 and 2018, respectively.

In addition to seeing a price bump due to tightening crude oil production, refined products, gasoline specifically, is forecasted to see record demand this 2017 driving season. Gas consumption last month was .16 million barrels over May of 2016 and the gap is expected to widen heading into peak driving season. Consumption for the next three months is expected to come in .4% higher than that of the June-August 2016.

The American Petroleum Institute release their weekly inventory report showing a draw in crude oil consistent with expectations. The big number was in gasoline stocks, showing a surprise build of over 4 million barrels last week. Energy prices settled up yesterday, posting moderate gains to break the weeklong down trend, but opened lower than the official session’s gains after this data release.

A fight in fundamentals between record gasoline demand and record refinery runs will likely decide refined product price action going into the fall. The EIA’s inventory report is due out 9:30 AM central time.

CLICK HERE for a PDF of today’s chart

Energy Complex Trading Lower for Sixth Straight Session

Futures prices extended yesterday’s losses into the overnight session, briefly broke into positive territory early this morning, but have recently fallen and are set to open down about half a percent. New York gasoline and diesel front month contracts were last seen exchanging hands at $1.529 and $1.45, respectively. Both American and European crude oil benchmarks remain below the $50 level and down around 20 cents each this morning.

For the 21st week in a row, the United States oil production rig count has increased as reported by Baker Hughes. With refinery runs at all-time highs, crude oil exports are expected to rise again this week, even from the record levels published the week before. If exports remain strong and inventories draw down as expected, a case can be made for a healthy increase in global demand.

Yesterday saw a roll call in the Gulf region with almost every major country weighing in on their opinion on the Qatar situation. Concerns over OPEC’s ability to control their member countries’ production levels after diplomatically ousting one of their own seems to be weighing on oil prices.

While the entire complex is trading lower for a sixth straight session this morning, Brent and WTI crudes are showing relative strength, hanging above the low intraday trades from last Friday, while refined products are setting new lows for the past month.  This is setting up a critical test for WTI just below $47, and just below $49 for Brent.  If those levels break, we should see another $2-3 of downside, but if they can hold, it could be enough to end the downward momentum.

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Three Main Energy Futures Contracts Down Again

The three main energy futures contracts are down again this morning after closing last week on a lower note for the second week in a row. Prompt month gasoline and diesel contracts are down around 1.5-1.75 cents; American’s crude oil benchmark was last seen around $47.15, 50 cents lower than Friday’s settle.

Four middle eastern countries cut diplomatic ties with Qatar over the weekend siting the country’s support for Iran and the Muslim Brotherhood. While news of political unrest may have sent the energy markets into a frenzy a few years ago, the global supply glut (seemingly unaffected by OPEC’s recently extended supply cut) has kept prices mostly suppressed. This is especially true if the disruption may only affect a country whose max production is around 2.5 million barrels per day and most of that comes in the form of natural gas.

New York RBOB is leading prices down today, less than a week after demand for the same hit an all-time high. Another all-time high reported in refinery runs across the US kept product prices dampened. In addition to fundamental suppressors, technicals don’t look too promising for bulls at the moment with a few more hurdles seen on the upside than those keeping price from falling an additional 4-6 cents.

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Crude Oil Prices Selling Off Sharply

Despite a 6.4 million barrel draw in inventories last week, crude oil prices are selling off sharply again, in what appears to be a great example that this market doesn’t care where we are, only where it looks like we’re going.

The DOE report did not lack for noteworthy data points as all sorts of records were broken last week.  Refinery throughput at 17.5 million barrels/day, estimated demand for gasoline at 9.8 million barrels/day, gasoline production at 10.4 million barrels/day, and crude oil exports at 1.3 million barrels are all record highs, at least for the past 25 years that the DOE has been publishing the data.  The delayed head-fake reaction in energy prices that traded higher for several hours after the report only to collapse just before the close would be that demand is good, but supply is just better.

The May jobs report came in a little below the average forecasts at 138k, but since both the headline (4.3%) and U-6 (8.4%) unemployment rates declined to multi-year lows, it seems unlikely that this report will change the FED’s plan to raise interest rates 2 more times this year.

Peg the $47 area for WTI as the key pivot point today.  That marks the halfway reversion point of the May rally, and may determine if we’ll make another run at $44, or if we’ll take a breather after a week of heavy selling.

CLICK HERE for a PDF of today’s charts

Charts from the weekly DOE Inventory data.

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