Market Talk

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Oil Prices Moving Higher

Oil prices are moving higher to start the week, while gasoline futures are having a hard time deciding if they want to go along for the ride.  The charts for petroleum futures are in neutral territory, and until we see a break above the July highs, or below the June lows, it looks like we could be stuck in a choppy sideways pattern.

Reports that Saudi oil production dropped in July seem to be behind the strength in crude oil – even though these estimates are different from multiple other sources.  ULSD futures are right on the heels of the crude rally, while RBOB gasoline futures have given up almost all of their overnight gains as the strength in the forward curve we’ve watched the past couple of weeks is beginning to fade.

Baker Hughes reported a decline of 2 oil rigs in the US and a decline of 2 oil rigs in Canada last week.  The US total is at 859 active oil rigs, and has held between 858 and 863 for the past 11 weeks as producers appear to be coming to terms with the Permian pipeline wall.

Money managers increased their net length in Brent, ULSD and RBOB last week, but trimmed back on their net long position in WTI.  RBOB saw the most meaningful change with speculative length increasing by more than 16% on the week, which is somewhat counter-seasonal since we’re approaching the end of summer driving season.

While the Pacific is full of tropical activity, the Atlantic remains relatively quiet thanks to cooler than normal water temps and heavy Saharan dust limiting storm development.  There is an area of investigation given a 30% chance of development in the central Atlantic this week, but given its location, it will not pose a threat to the US.

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Energy Prices Pulled Back From Brink Of Technical Breakdown

Another reversal Thursday pulled energy prices back from the brink of a technical breakdown.  There did not appear to be a headline to support the swing from morning losses to afternoon gains, so it seems that the buying had more to do with traders willing to buy the dip as prices neared technical support layers than any change in fundamentals.  The back and forth action leaves short term indicators stuck in neutral, which may mean another period of choppy, but ultimately sideways trading is upon us.

China announced that it would not stop buying Iranian oil, but also suggested they would not buy more as US sanctions begin.  Meanwhile, China’s largest refiner announced plans to suspend US crude imports until its clear what tariffs will be imposed on them.

The EPA & NHTSA formally announced their intent to change the fuel economy targets set under the previous White House administration, and freeze the average at the 2020 target of 37mpg.  The change isn’t necessarily bullish for motor fuel demand – the targets are still above current levels – but it does reduce the risk of forced demand declines in the future.  There is still no word yet from either agency on their plans to regulate rental scooters.

The July jobs report showed an increase of 157,000 jobs, while both May and June’s estimates were revised higher.  Both the headline and “U-6” unemployment rates ticked lower on the month.  The market reaction to the report has been fairly muted as it seems the report is “good enough” to keep the FED’s current plan for monetary policy as is.

Today’s interesting read:  Why US Oil production may be much lower than we thought.

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Source:  EIA Monthly Crude Oil production

Energy Futures Selling Off For 3rd Straight Day

Energy futures are selling off for a 3rd straight day as sell-off in global equity markets (thanks to the latest escalation in the US/China trade war) adds to the downward momentum sparked by bearish supply data earlier in the week.  We did see a momentary recovery rally in the wake of the DOE report Wednesday, as the headline values weren’t quite as bearish as the API, but within an hour of the report, the selling continued and picked up again overnight.

Crude oil exports dropped by 1.3 million barrels/day last week, meaning 9.6 million fewer barrels were sent out of the US last week than the week prior, which suddenly makes the inventory build of 3.8 million barrels less surprising.  With the great race to build takeaway capacity from the Permian to the Gulf Coast expected to take another year or more to finish, expect the inconsistent export figures to continue creating large swings in weekly inventories.

Refinery runs moved higher on the week, regaining their record-setting pace for the year, led by strong gains in the Midwest.  With the Atlantic basin still showing little sign of any tropical activity it seems refiners have an 8 week window open to set new all-time production records before a busy October maintenance schedule kicks in.

The FOMC left interest rates unchanged Wednesday, noting that the US economy was growing at a “strong rate” which suggests they plan to continue with 2 more interest rate increases this year as previously forecast.

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Charts from the DOE weekly status report.

July Ended On Weak Note For Petroleum Futures

July ended on a weak note for petroleum futures, with heaving selling Tuesday pushing WTI to its largest monthly loss in 2 years, and have picked up on an even softer note to begin August trading as easing global supply concerns and rising US inventories both seem to be weighing heavily on prices.

The list of geopolitical concerns for oil markets may not be getting any shorter, but things do seem to have calmed down a bit in the past few days.  Reports of a sort of truce between the Saudi’s and Houthis over oil shipments in the red sea, the US President signaled he was willing to re-open talks with Iran on its nuclear program, and OPEC’s production was estimated by Reuters to reach its highest levels of the year.

The API was said to show a large build in crude oil stocks of 5.5 million barrels, although Cushing inventories drew yet again.  Diesel inventories increased by roughly 2.9 million barrels while gasoline stocks declined by around 790,000.  The DOE’s weekly report is due out at its regular time of 9:30 central today.

The FED’s Open Market Committee is meeting today, and will issue its latest statement around 1pm central today.  Most forecasts expect the FOMC to hold rates steady at this meeting, and then raise them again in September.  While rates may not be the story today, it will be worth noting how the FOMC handles the trade issues that have been roiling markets this year, as that could foreshadow their plans for the rest of the year.

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Energy Prices Limping Across Finish Line

Energy prices are limping across the finish line to end July trading, trading lower for a 2nd time in 3 days, putting an end to 2 weeks of gains.  It’s been a volatile trading month, and while most contracts will end the month lower, the bulls did manage to salvage the year-old trend lines, keeping the door open to higher prices in August.

The past week of earnings announcements has shown that the rising price tide has helped many companies in the energy sector, but refiners with access to distressed (aka cheaper) North American crude are faring better than the big oil producers.   Another theme of the earnings calls is a busy maintenance schedule for many US Refiners this fall and next spring as they prepare for the IMO 2020 diesel spec change.

It’s been a fairly quiet hurricane season in the Atlantic so far, with cooler temperatures and Saharan dust both limiting development in the open sea.  That said, we’re still more than a month out from the peak of the season, and the Gulf of Mexico is seeing above-average temperatures, which may allow for a storm to develop locally.

Those of you in Texas may be proud to know that the state broke multiple records for electricity usage during the July heat wave, according to a new study published by the EIA this morning.  Better news is that an unusual jet stream pattern is setting up to bring cooler temperatures as August begins.

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WTI Leading Energy Complex Higher

WTI is leading the energy complex higher to start the week, breaking back above $70 for the first time in 2 weeks.  We managed to go an entire weekend without a market-moving twitter moment, so the early strength seems to be a continuation of the late July recovery rally rather than a reaction to any news.

Baker Hughes reported 3 more US oil rigs were put to work last week – the first gain in 4 weeks – while Canada saw an increase of 12 rigs, continuing its strongest advance since the 2014 price collapse.  As the chart below shows, essentially all of the growth in US drilling activity this year has come from the Permian basin in Texas and New Mexico, in the latest boom that has consequences beyond just a discounted price for WTI in Midland.

Money managers added to their net-long positions in Brent, RBOB and ULSD last week, which is likely either the cause or effect of the bottoming action we saw after the price plunge mid-month.  Speculators in WTI cut back on their positions as the US contract seems to be continuing a trend of trading on North American news (most notably any reports from the Syncrude facility) while the other contracts are reacting more to global data.

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Gasoline Prices Moving Higher For 6th Straight Session

Gasoline prices are moving higher for a 6th straight session to start Friday’s trading, while oil & diesel prices are holding flat so far.

RBOB gasoline futures have been outperforming the rest of the complex during the July recovery rally, increasing in 8 out of 9 sessions since the mid-month plunge.   A key driver of the gasoline strength has been a move higher in the August/September contract spreads.

Typically that type of strength in the front of the forward curve suggests a supply disruption of some sort, but as the charts below show, basis values in most major cash markets have been moving lower – mitigating some of the futures strength and suggesting that there is not a problem with physical supplies.

While diesel futures have been lagging behind gasoline the past couple of weeks, there is reason to believe that supply/demand fundamentals may soon cause that trend to change.  The EIA publishing a report on US diesel stocks this morning, noting how historically low inventories are this year, owing to strong trucking demand and the cold winter in 2018.

Today’s interesting read on the 4 most important bottlenecks for shipping oil: 2 of which have been threatened this week.

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Futures See Buying Pressure From Iran Attack

Energy prices are moving higher this morning, following Brent’s lead, after Saudi Arabia reportedly stopped exporting oil due to an attack on two of their tankers. While the shipment suspension only affects the Kingdom’s ships, the added threat by Iran to block the Strait of Hormuz has got traders stirred.

The DOE’s headline values were down across the board yesterday with crude oil showing the largest draw in stocks at 6.2 million barrels. Although oil production remains unchanged from last week’s all-time high, a decrease in imports and a nearly barrel-for-barrel increase in exports pulled the nation’s inventories down last week. Diesel stocks and days of supply remain at seasonal lows, gasoline levels are above their five year averages.

Prompt month refined product futures have recovered almost all of the losses from the massive sell-off seen two weeks ago. This latest bull-run has both products slowly, and almost quietly, breaking through several technical resistance levels, with the 50-day moving average left as the sole barrier holding off higher prices for both products. WTI futures are grappling with their 50-day as well, but a price breakout would be met with resistance about $2 away from current prices in both directions.

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