TAC Market Talk
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After a rollercoaster Tuesday session, most energy futures are trying to push higher this morning as we await the weekly inventory report from the DOE.
This time yesterday refined products were dragging crude lower, and in the early going it appeared there may be enough momentum to break through chart support and create the next tidal wave of selling. It was not to be however as prices reversed course mid-day, with several contracts climbing all the way back into positive territory before stumbling lower into the close.
The timing of the Tuesday price swings suggests perhaps there was an early knee jerk reaction to reports that the Shell Pernis refinery – Europe’s largest – was restarting units that had been shuttered by a fire last week, which helped spark heavy buying in several markets. Once the details trickled in that only 1 unit was beginning restart, and that it would still be weeks until the plan was fully operational again, the early sell-off in futures quickly reversed course.
US Equity markets finally saw a small pullback Tuesday as concerns over the escalation in tensions with North Korea snapped a string of record setting days for the DJIA. As has been the case for most of the past year, energy prices seem to largely ignore the move in stocks, content to go their own way for now.
After a 10 cycle hiatus, Colonial pipeline announced it would be allocating its main gasoline line again yesterday. There was much discussion following the announcement about whether the move was due to a lack of gasoline exports from the gulf coast, or a backing out of imports on the East Coast due to the refinery issues in Europe. The cash markets have not shown much change in the spreads between Gulf Coast and NYH pricing recently, and linespace values are still negative, so it appears for now that the reality of the Colonial line being the key artery to deliver gasoline from the largest producing region to the largest consuming region in the country is just sinking in.
Late Tuesday afternoon the API was said to report a 7.8 million barrel decline in crude oil stocks, and a small draw of 157,000 barrels of diesel, while gasoline inventories grew by 1.5 million on the week. Perhaps more notably for gasoline prices, PADD 1 inventories were estimated to have built by more than 3 million barrels on the week, which explains why the September RBOB contract is the only one in the entire complex still trading in the red this morning. The DOE’s weekly report is due out at 9:30 central.
While tropical storm Franklin has been battering Mexico the past 2 days, the system known as 99L continues to puzzle forecasters as it slowly approaches the US. Forecasts now suggest there’s a potential threat to the SE coast of the US early next week, although the path and strength of this system remain unclear. At this point there does not appear to be a threat to energy infrastructure. Conditions remain favorable for more storm development in the Atlantic over the next few weeks.
Refined products are attempting to drag the energy complex lower this morning, while crude oil prices seem content to stick to their trading range. OPEC is wrapping up a 2 day meeting today, but so far there has been little talk of any changes to the cartel’s strategy, and the market is reacting as if they don’t expect anything to happen.
The reluctance by crude oil to join in on the product sell-off could just be traders wanting to wait and see what OPEC says before joining in on the fun, or it could be from signs that the refinery issues that sparked heavy buying in July are now resolved.
The low $1.60s for both RBOB and ULSD prices appear to be pivotal near term, as the charts offer little support between current levels, and a 7-10 cent drop should this support break.
While the daily changes in flat price have been lackluster ever since the July rally stalled out, there has been some notable selling in time and crack spreads over the past week that may influence refiners as the summer winds down.
The September/October RBOB spread (aka U/V, aka the Sunburn spread) has collapsed almost 3.5 cents in the past 7 sessions, as the end of the summer driving season – and the fall RVP transition – is now in sight. While that gasoline weakness has certainly had some drag effect on the rest of the complex, it has not been enough to break crude oil out of its trading range, and may not be unless the other contracts beyond September break lower as well.
Ethanol RINs have stabilized around the 87 cent mark over the past week, and yesterday CNBC explained how a major bet on lower RIN prices went so wrong.
Energy prices are slipping into the red this morning, testing the lower end of the recent trading range after failing to break the top end last week.
Refined products are leading the way lower this morning, and their short term technical indicators are beginning to favor more selling this week. A major question will be if products can pull crude below its $48 floor, or if crude can continue to hold us in the sideways pattern. We’ve reached the mid-month reporting deluge with the EIA’s STEO due out tomorrow, OPEC’s monthly report due Thursday and the IEA’s monthly report coming out Friday.
Speculators seemed to have gained some confidence in the past week, adding to net-long positions in all of the big 4 petroleum contracts. It’s worth noting that the increase in WTI was driven by new long bets being added to the market, while in Brent it was the same story of short bets leaving the market that caused the latest increase. One thing to keep an eye on in the next few weeks: Speculators are now net-short the US Dollar after fell to its lowest levels in over a year vs a variety of other currencies. As we’ve seen with oil prices several times over the past few years, extreme positions in either direction held by funds can be a contrary indicator, and could possibly have a bearish influence on oil prices if those dollar shorts are squeezed out of the market, just as we saw so many oil shorts squeezed out in July.
Baker Hughes reported a decline of 1 oil rig working in the US last week, continuing with the plateau we’ve been witnessing over the past 5 weeks. It’s possible that drillers will simply wait to see if crude can break back above $50 before resuming the upward climb.
Another weekend, another tropical storm. This time, TS Franklin is heading to the Yucatan peninsula and while it could strengthen to a hurricane before making landfall, it should stay well south of any US production or refining assets. Hurricane activity continues to ramp up this time of year, so expect a potential system to form at least once a week from now through September.
The back and forth action continues for energy prices as they remain stuck in their trading range waiting for the next big thing before making their next big move. Yesterday WTI traded up to $50 before falling off, and this morning it traded down to $48.50 before bouncing back to flat, showing the lack of conviction in a sustained move in either direction.
As long as crude can hold above $48, the bull trend line remains intact, but short term technical indicators are moving into neutral territory, and if we don’t get a push higher soon, we could see more selling as the trend lines fall.
The FERC can get back to business after 6 months without the quorum needed to make rulings on interstate pipeline projects and other energy issues. Two new commissioners were approved by the senate Thursday.
The July Jobs report showed 209,000 jobs added, with the headline (aka “manipulated”) and U6 (aka “real) unemployment rates holding steady at 4.3% and 8.6% respectively. Markets barely flinched after the report as it is in line with many forecasts, and should be another month of “good enough” growth to keep the FED on their current track.
The WSJ reported today that the Saudi’s are in talks to buy a large refinery in China, which would be another step in the Kingdom’s global plan to find steady homes for its exports beyond the US gulf coast.
We are rapidly approaching the peak of hurricane season and two different systems are being watched closely for potential development next week. Something to pay close attention to this year, given the growing reliance on exports to balance the US supply/demand equation, if a hurricane makes its way into the gulf but doesn’t damage refineries, it could have a negative impact (theoretically at least) on Gulf Coast basis values as the exports may temporarily be stranded at home.
Energy prices continue their struggle for direction this week after yesterday’s DOE report had a little something for everyone, and the bullish trend lines started in July managed to hold up through another attempted sell-off.
For the 2nd straight day the complex attempted to sell off heavily mid-morning, despite inventory draws across the board. Just as we saw Tuesday, the buyers stepped up in the afternoon and pushed most contracts into positive territory by the close. That push leaves the technical indicators generally more bullish, although most short term studies are in neutral ground, suggesting we may consolidate for a bit longer before the next push higher. The $48.5-$50.5 range seems to be the battle-ground near term that will decide the direction of our next big move.
The DOE’s weekly gasoline demand estimate reached an all-time high at 9.842 million barrels/day, while gasoline production held steady close to 10.3 million barrels/day as US refiners maintain their record-setting pace for annual throughput rates. Gasoline and crude oil exports dropped on the week, but remain above previous years’ levels, while diesel exports grew, but remain in the range we’ve come to expect over the last several years.
Gulf coast forward basis values finally saw some selling for the first time in weeks yesterday suggesting the race to lock up export barrels – whether they be destined for Mexico, South America or Europe – may have finally reached a stopping point. Reports now suggest that the Shell Pernis refinery – Europe’s largest – won’t be back online for at least a couple more weeks, while the Salina Cruz refinery in Mexico is beginning its restart.
Today’s interesting read on the efforts Google is making to tackle the energy storage conundrum.
Charts from the DOE weekly status report:
It’s a mixed bag for energy prices this morning with gasoline prices lower, diesel prices higher and crude trading flat as the complex tries to decide what to do now that the July rally finally stalled out.
Early on in Tuesday’s session it appeared like we could see a major sell-off coming as refined products were down close to 4 cents and crude was approaching a $2/barrel loss, setting up an outside down daily bar that has been the hallmark of the past 3 big sell-offs we’ve witnessed over the past several months. The buyers stepped up heading into the close however, salvaging the prospects that the July rally is just cooling its heels and not reversing completely.
The $48 mark is currently close to where the bull-trend line for WTI stands from the June low at $42, so as long as prices stay north of that level, the potential for another push higher remains.
Yesterday afternoon the API was said to report builds in crude oil inventories – 1.7 million barrels total US, 2.5 million at the Cushing OK hub – and draws in refined products – 4.8 million barrels for gasoline and 1.2 for diesel. The DOE report is due out at 9:30 central.
US equity indices set fresh record highs yesterday, as volatility remains abnormally low. As has been the case for most of the past year, energy prices didn’t seem to care as the correlation between asset classes remains low, although volatility in oil prices is also holding towards the bottom end of the range.
Energy futures are finally taking a breath after a relentless 6-day rally to end July that added 11% to prices, while reaching their highest levels of the summer.
Yesterday’s rally was aided by two major stories, an unplanned shutdown of Europe’s largest refinery due to a fire, and sanctions (both real and imagined) levied against Venezuela. Today’s pull back seems like the market now wants to wait and see what the lasting impact of those 2 events will be before making the next move. The $50 mark for WTI looks like it may become a pivot point this week and may well determine where prices go in August.
The impact of any sanctions on Venezuela have been hotly debated lately, with some expecting the move could push oil prices towards $60, while others suggest the global market will simply adjust the flow of oil to offset the typical import/export flow. There are also rumors that any sanctions on the oil industry may coincide with a release of the US SPR to minimize any physical impacts. For his part, the Venezuelan president has been humorously defiant in the face of the sanctions leveled on him yesterday by the US Treasury.
Meanwhile, the Shell Pernis refinery may be restarted later this week, which should calm down markets in the ARA hub where it’s located, and likely in the US Gulf coast where basis values have rallied in anticipation of increased export demand.
RIN Prices continued their strength, trading as high as 90 cents for D6 ethanol RINs Monday. Here too the industry seems a bit confused as to how the EPA will reconcile the court’s ruling, when the impacted years have already past. While it’s not clear how exactly refiners will be expected to re-comply with the law retroactively, there is some consensus that this will be the latest headwind for several beleaguered plants.
WTI broke $50 overnight for the first time since May as a slew of geopolitical issues temporarily stoked fears of a possible supply disruption. Those gains did not last long however as WTI is trading lower for the day while refined products cling to small gains.
Venezuela may be the most important situation to keep an eye on to start the week as the election results there could have a direct impact on crude oil deliveries refineries along the Gulf Coast, although based on the strong bids for similar crude grades from the US and Canada over the past week, it seems like those refineries are not waiting for the election to implement their Plan B.
RIN values traded up to their highest levels of the year Friday after a federal court rejected the EPA’s decision to lower the biofuel requirements in the RFS back in 2015. At face value, that means that the RVO levels set for the 2016-2018 are also in violation of the law and more biofuels will need to be blended to reach the statute. On the other hand, given the logistical issues in play – AKA the blend wall – it might be more likely that this ruling forces congress to change the RFS Law rather than force consumers and refiners into a corner. This news also seems to be helping refined products push higher even with lower crude oil prices as higher RIN prices tend to increase crack spreads since refiners will either have to pay more, export more, or cut runs to comply with the RFS.
Tropical Storm Emily popped up in the Gulf of Mexico over the weekend, and will be making landfall over Florida over the next few days. At this point forecasts suggest this system will stay clear of any major energy infrastructure and should not influence prices, although the port of Tampa is likely to see closures as the storm passes.
2 more oil rigs were put to work last week according to Baker Hughes’ weekly rig count. That puts the total count at the highest level of the year, but also hints that we’re witnessing a plateau in drilling activity as the net change in the past 3 weeks has only been an increase of 3 rigs, while during the front half of the year we averaged nearly 10 new rigs per week.
The net long position held by money managers in energy contracts increased for a 4th straight week last week, driven once again by reductions in speculative short positions that were betting on lower prices. Apparently losing money is out of fashion for the Wall Street crowd this summer as more than 160 thousand contracts betting on lower prices have been slashed during the July rally, which using some very basic assumption may have cost those speculators somewhere in the neighborhood of $800 million. The question that raises as we begin trading in August is whether or not that means our push to $50 for WTI will now stall out since the short-covering catalyst has been exhausted, or if the rise from $42 has more room to run.
It’s another strong start to end a bullish week for energy prices, with refined products trying to pull crude oil prices higher for a 5th straight day. Both RBOB and ULSD futures are closing in on 10 cent gains for the week as the entire complex tests new 2-month highs.
Energy prices have benefitted from a cocktail of fundamental, technical and sentimental headlines this week as inventories drew, the Saudi’s announced a new plan to reduce exports, the US dollar reached its lowest level in more than a year and US equity markets reached record highs. The big question now is whether this upward momentum can continue, or if the euphoria will disappear as WTI runs into chart resistance in the mid-$49 range. Next week’s action should tell us a lot about the staying power of this latest rally.
As the charts below show, during this week’s rally the forward curve for both WTI and Brent has flattened significantly, suggesting producers may be using this as an opportunity to hedge their forward output. The prompt spread for Brent (U/V) has actually slipped into backwardation this morning, suggesting there may be some physical tightness in waterborne crude grades near term.
US GDP was estimated to increase by 2.6% in the 2nd quarter, close to expectations, and a figure that on its own should be “good enough” to keep the FED on its current path. On the other hand, the Q1 GDP estimate was revised lower to 1.2% in this report so there is enough uncertainty to keep the market guessing. The early reaction to the report had the US Dollar continuing its recent downward trend.