TAC Market Talk

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Easing Trade War Tensions Pave Way For Higher Prices

Energy prices had a strong day yesterday, topping last week’s highs among all three main products and sending Brent crude to a fresh high for the year. Calm words out of China soothing suspense and fear of a looming trade war took the majority of the credit for the large upward move. The uptick in uncertainty surrounding the Middle East, specifically Syria, seems to have contributed to yesterday’s run-up as well. The drop in tension with a demand center and a bump in tension with a supply center seemed to be a perfect combination to rouse some of the bulls that dozed off waiting on a spring rally.

Prices seem cautiously positive this morning after yesterday’s rally. Among an API report with mostly bearish figures, those that would see prices continue their climb are clinging to the ~4 million barrel draw in diesel inventories for upward momentum. Crude inventories built 1.8 million barrels and gasoline added just over 2 million barrels last week. NYMEX HO leads the complex with a gain of $.0170 so far this morning, dragging RBOB and WTI with it at gains just over flat.

Crude oil and its refined product counter parts’ prompt month futures charts showed some pretty interesting action yesterday. All three contracts started the day below their respective 10-day moving averages and blew past them through the day. Setting new highs for 2018 seems to be the only technical resistance keeping the complex from adding another 5-10 cents in the near term. As for the rest of this week, direction from the DOE report (due out at 9:30 central) will likely set the tone, with global news providing secondary cues.

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Markets Around The World Celebrating This Morning

Markets around the world are celebrating this morning after the Chinese president gave a speech that cooled off much of the trade war talk that has dominated the headlines over the past few weeks.  Although this story is likely to remain at the forefront for weeks to come, the conciliatory tone struck is helping both energy and equity prices get off to a strong start.

Oil & refined products have already recovered almost all of last week’s heavy losses, meaning the weekly bull trend line in place since last June’s low at $42 for WTI has held yet again.  The bounce off of technical support looks like it might set up a test of the top-end of the spring trading range at $66 for WTI, $71 for Brent and  $2.05 for both RBOB and ULSD.  Whether or not prices can break through those resistance layers will determine if we continue the choppy, sideways action, or if there’s another rally to come.

The latest chapter in the RFS saga started with several US senators writing a letter to the President, urging him to stop the EPA from granting any more small refinery waivers.  The letter came ahead of another meeting at the White House to discuss the political football known as the Renewable Fuel Standard.  It doesn’t appear that any changes came from the meeting, and 2018 ethanol RINs have held steady around the 35 cent mark.

In case you’re worried that only the US government is having a hard time dealing with energy politics, take a look at our friends to the north – and the largest importer of crude to the US – who are facing their own challenges getting their vast oil reserves to the global market.

 

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Trade War Teeter Totter Continues To Control Action

After another “risk-off” session dragged energy and equity prices sharply lower on Friday, both asset classes are climbing higher this morning as the Trade War Teeter Totter continues to control the action.

The new Saudi Crown prince is wrapping up his 3 week tour of the US with a visit to the US Gulf Coast, and floating the potential to expand the country’s largest refinery.

A cyberattack impacted several of the country’s largest pipeline operators last week as it forced a 3rd party provider to shut down temporarily.  While it does not appear that there were any notable impacts to energy supplies, it did create new concerns over the security of the country’s infrastructure, and caused at least 1 company to have delays in filing a new tariff with the FERC.

11 more oil rigs were put to work last week according to Baker Hughes, bringing the total count to a fresh 3 year high at 808.

Money managers trimmed back on their net-long holdings in Brent, WTI and RBOB last week, while adding a small amount to ULSD.

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“Trade War” Talks Continue To Dominate Market Action

The “Trade War” talks continue to dominate the market action this week, creating volatile swings in energy and equity prices as traders switch from risk on to risk off and back again depending on the latest headline.  There’s no shortage of articles filled with guesses on the winners and losers in the high stakes game of chicken being played by US and Chinese leaders, it’s increasingly difficult to know what might be a meaningful change, and what’s just a bunch of hot air.

The March jobs report was a bit slower than the previous couple of months with just 103,000 jobs added vs revised estimates of 326,000 in February and 175,000 in January.  The Headline unemployment rate held steady at 4.1%, while the U6 rate dropped from 8.2 to 8.0%.  Stocks and energy prices saw a very small dip in the minutes following the report, but there’s a chance we could see a rally off these numbers as the “Bad news is good news” camp reacts to the chance that this slowdown could give the FED pause in its monetary tightening plan.

The political theatre surrounding the Renewable Fuel Standard continued its nationwide tour this week.  RIN values plunged to a 2 year low Wednesday following reports that the EPA had granted Andeavor exemptions to the RFS for 3 of its smallest refineries several months ago.  Not surprisingly, biofuels groups were up in arms over the report.

While this week has had 2 major victories for refiners – the EPA’s settlement with PES was approved by a bankruptcy court – it’s too soon for the fossil fuel crowd to celebrate, as the EPA

 

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Historical Intra-Day Bounces In US Stock Market

Wednesday saw one of the largest intra-day bounces in the history of the US stock indices, and that recovery rally helped pull oil prices recover most of their early $2 losses, while refined products finished the day 4 cents above their early morning lows.

The bounce seems to have temporarily saved both asset classes from a technical breakdown that would have favored even more selling near term, although there are still bearish signals flashing on the charts that seem to favor lower prices over the next few weeks.

To put the volatility in perspective, in just over 3 months of trading, 2018 has already had 3 times as many 1% moves in US equity indices as we had in 2017.  For energy prices, it seems to be a daily dilemma whether or not to follow the herd and react to the big swings in stocks.

The DOE inventory report seemed to get lost in the shuffle a bit yesterday with so much focus on the stock market.  Notable items include new records set for US crude oil production and exports, while refinery runs continued to climb in spite of several forecasts calling for April to be a busy month for maintenance.

Wednesday also marked the first day of trading for 7.8lb RVP conventional gasoline in the Gulf Coast, which means today is the first day the supplemental summer pricing codes will be used across the South East.

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The energy complex is going nowhere to start April

The energy complex is going nowhere to start April after an attempt at an overnight rally fell apart this morning.  WTI is currently unchanged while gasoline futures are down around ½ cent and diesel futures are up about the same, some two cents lower than they were at their overnight peak.

After a strong spring breakout rally in March reached several technical targets, the outlook for April is conflicted, and the charts suggest we could be in for a period of choppy, sideways trading.  One thing to watch for this month, some forecasts call for more than 1 million barrels/day of refining capacity to be taken offline for maintenance, which could create more regional product shortages as we move through the RVP transition approach the driving season.

Money managers jumped on the spring breakout bandwagon, adding to their net long positions across the board the past two weeks.  Brent net-length held by the speculative category of trader reached a new record high north of 600,000 contracts last week.

Baker Hughes reported a decline of 7 oil rigs last week, leaving the total US count essentially flat over the past 2 months.

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Upward Momentum In Energy Markets Looks Like It’s Been Lost

It’s the last trading day for March, and the upward momentum in energy markets looks like it’s been lost as oil prices trade lower for a 4th straight day and refined products pull back to the $2 mark.

Yesterday’s DOE report followed the same general pattern we’ve seen for most of the year.  Record oil production and refinery runs, and exports balancing the supply demand equation.  Domestic demand remains good, but not good enough to keep pace with domestic supplies, keeping the export flow as the catalyst for weekly changes in inventory levels.

There’s a large difference in gasoline stockpiles from the East Coast (PADD 1) which has inventories below its 5 year seasonal range, and the Gulf Coast (PADD 3) which is well above its 5 year range.  This dichotomy has sent East Coast basis values sharply higher and kept Colonial line space values for gasoline in positive territory over the past 3 weeks, and is likely to create a bumpy RVP transition in many regional markets east of the Rockies.

If the export valve doesn’t balance the equation for Gulf Coast suppliers, there could be fire sales in April to make sure the winter barrels are out of the terminals in time, while the East Coast will likely see more outages than normal with less winter gasoline around to bridge the gap until the summer grades start hitting in a couple of weeks.

For those watching the stock market, there appears to be a descending triangle forming in S&P 500 futures with the 200 day moving average at its base.  If that support breaks, the chart pattern favors a drop of 150-200 points (roughly 6-8%) over the next few weeks.

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Energy And Equity Price Direction Temporarily Align

Tuesday looked like it was going to be a good day for the bulls in energy and equity markets with prices across the asset classes making impressive gains early in the session.  Easing fears of a trade war with China was the talk supporting a continuation of Monday’s huge stock rally.  Then, conflicting reports were released that suggested retaliatory tariffs were coming, and the sell-off was on.

After moving independently of one another most of the past couple weeks, equity and energy prices found themselves connected once again during Tuesday’s afternoon sell-off.  It’s hard to say if yesterday’s connection was a one-time event since China has been one of the major buyer of US oil exports, or just another example of fear taking temporary control of behavior.

So far the uptick in equity volatility has not corresponded to an increase in oil volatility.  There are concerns that the uptick in stock volatility is foreshadowing the end of the bull market.  For anyone thinking that means oil might be a relatively safe trade, take a look at the VIX vs OVX chart below and notice how a quiet oil market is still more volatile than equities that seem to have come unhinged.

The API did not help Oil’s cause yesterday when the industry group was said to report a 5 million barrel build in inventories last week.  Refined products are faring better so far owing to large draws of 5.8 million barrels of gasoline and 2.2 million barrels of diesel.  The DOE’s weekly report will be out at 9:30 central.

Whatever is driving the action, if oil prices can’t finish the trading week (which ends tomorrow) by breaking through the March highs, charts suggest the spring break-out rally may be stalled out, and several weeks of sideways action may be coming.

The CME will completely close its Globex trading for Good Friday – one of only 3 holidays a year in which there is no electronic trading of futures across asset classes.  Rack prices published Thursday night will carry through until Monday with few exceptions nationwide.

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