TAC Market Talk
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Energy prices are on the move higher for a 3rd straight day, with the major futures contracts now trading 9-10% higher than they were during last Friday’s overnight sell-off.
Crude oil prices were moving lower overnight after OPEC’s monthly oil market report raised its forecast for oil production outside of the cartel by nearly 400,000 barrels/day led by the comeback in US Shale production. We’ll get the latest RIG count from Baker Hughes this afternoon.
Refined products have broken through their 14 day moving averages, leaving the door open to another nickel worth of upside should current levels hold. If WTI can hold on above the $48 level today, last week’s plunge below $44 will look an awful lot like a bear trap that could inspire some more short covering. The weekly charts are not nearly as bullish as the daily charts are however, so it’s too soon to say that the sell-off started when prices peaked 1 month ago today is finished.
Reports that the PES refinery in Philadelphia was having operational issues seem to have helped RBOB gasoline lead the charge higher this morning, even while WTI was trading lower and ULSD was close to flat an hour ago. There have not been any formal confirmations of what may be going on however, so it’s too soon to say what impact this may have on prices or supply longer term.
That refinery has been reported often over the past few years as struggling under the weight of challenging economics, and is now at the center over the debate surrounding the Laurel pipeline reversal which could hamper the margins for East Coast refiners even more.
The recovery rally in RBOB gasoline seems to be helping ethanol RIN values show a little life for the first time this month, rallying by more than 3 cents yesterday, the most significant bounce in weeks. Of course, that move could also have been aided by news this week that several senators are trying to investigate the world’s most famous RIN hater for potential market manipulation.
A draw down in inventories and reduced refinery runs sparked an impressive rally in the energy arena Wednesday, offering new hope to anyone hoping for higher prices that last week’s prices may have set a low for the year.
The decline in refinery runs is perhaps the most notable data point from the weekly report as the decline in inventories were all in line with seasonal expectations. Sure, crude oil inventories had their biggest weekly decline of the year, but as the chart below shows, inventories are still holding well above years past. The refinery runs were led by a sharp cut back in PADD 2, with several analysts suggesting this was due to a reduction in Canadian Syncrude output that is eliminating the economic advantage for Midwestern plants. What’s worth noting is that despite a drop of nearly 2% in refinery throughput last week, US Plants are still producing 10 million barrels/day of gasoline, nearly 1 million barrels per day more than we’re estimated to consume domestically.
Now that prices are rallying, here are some upside resistance levels to watch near term:
WTI has retraced nearly half of its $10 spring price decline since bottoming out last week, $48.75 would be the 50% retracement of that fall, and $49.93 is the 62% retracement – part of the Fibonacci sequence loved by many traders – which makes the $50 mark an important technical and psychological pivot point this summer.
RBOB gasoline had a bullish trend line put in place since futures reached 89 cents/gallon in early 2016. Last week marked only the 2nd time in more than a year that prices had traded below that line, which comes in around $1.56 today. If gasoline prices can get back above that trend support, we could easily see another 10 cents of upside near term. If not, that support may have just become resistance and perhaps a nail in the coffin of US gasoline prices for 2017.
ULSD prices have bounced more than a dime since bottoming out at $1.37 last week, and are currently testing the 14 day moving average after failing to breach $1.50 overnight. If the bulls can push through those levels there’s not much on the charts to prevent another 5-10 cents of upside.
A good read making the rounds this morning on why OPEC’s efforts may be in vain.
Diesel and crude oil stocks were reported to have shrunk according to the American Petroleum Institute’s data release yesterday afternoon. Inventory estimates showed a draw of about 6 million barrels for crude and 1 million barrels for diesel. Gasoline is expected to have built about 6 million barrels last week, but RBOB futures are rallying in sympathy with the rest of the complex. Both refined product benchmarks are up about 1.2-1.3 cents this morning, prompt month WTI future contract is up about 70 cents.
Crude prices are still hanging around the lowest levels of the year with the only semblance of fundamental relief coming from the OPEC meeting at the end of the month. Another production cut could help boost prices back over the $50 mark.
Confirmation of the API’s inventory report by the EIA’s data release at 9:30am (central time) is probable to extend today’s upward momentum. Barring any unforeseen events, these weekly inventory reports will likely be the major deciding factor in terms of overall price direction until the cartel’s meeting on May 25th.
Energy futures are flat this morning after a very busy Monday. Bullish sentiment had been reinstated after Saudi Arabia’s oil minister stated the country would cut production to bring oil inventories back to the five year average. Hints that OPEC plans to cut production further surely didn’t detract from the upward momentum of the day. The main three prompt month futures contracts settled up ~1.5% yesterday. Traders will keep an eye on OPEC cuts as their current supply agreement is set to end at the end of June.
So far, the market seems content to rest for today until inventory estimates are published by the American Petroleum Institute later this afternoon. Draws or builds in national oil and product stocks will likely determine direction for the next couple days.
Gasoline and diesel contracts inched closer to the first round of technical resistance levels yesterday. The first test of buyers’ resolve is waiting about a nickel higher than current levels. Crude oil still has about $2 to climb before a major resistance level is tested.
Refined products are struggling to hold on to overnight highs, giving back almost all gains early this morning. WTI crude oil futures will start the week in the red after dropping a full dollar from their highs as well. New York gasoline and diesel futures are up about half a cent each, crude oil is hovering just below unchanged showing an 18 cent loss so far.
Last week’s Commitment of Traders report showed a sizeable exit of managed (smart) money from energy futures/options. This type of capitulation is affectionately known as “exiting the clown car” as investors pile out of the energy market as it hits its third week of consistent selling. It is important to note that not only were 23,000 futures and options positions closed out, but 29,000 new short positions were opened, inferring that the banks are prepping for more downward action.
Technical indicators remain soft offering energy futures little-to-no help in the way of some sort of recovery rally. 2017 lows are the immediate support levels for RBOB and HO with both needing to drop 5 and 7 cents, respectively, to them. Prompt month crude oil futures are currently trading at the lowest levels since April 2016 with its next test around $43 per barrel.
It’s been a wild start to May for energy markets with volatility hitting 6 month highs while crude and refined product prices reach 6 month lows. The action since the March lows broke yesterday has been exciting, with a big sell-off yesterday sparking some fierce liquidation when Asian markets woke up overnight, only to recover back to flat this morning. A $2 swing in crude and 5-6 cents in refined products is certainly not unheard of, but for that to happen before most US traders are even awake is something we have not seen in quite a while.
Yesterday’s big slide lower, and the subsequent chaos that ensued overnight, is a good example of why chart support is often referred to as a “trap door” for prices. The lows reached overnight at $43.76 for WTI, $1.3748 for ULSD and $1.4500 for RBOB set up a decent short term objective to the downside. If those levels can be breached when most of the trading community is awake, there is a possibility of another $2-3 of downside for WTI and 5-10 cents for products, whereas if they hold, there’s a case that this could be a longer term price floor.
The April jobs report showed a solid improvement compared to March, with 211k jobs added during the month vs 76k in the prior reading. The headline unemployment rate (you know, the unemployment rate once you remove most of the unemployed people) reached its lowest level in 10 years at 4.4%, while the U-6 Rate is down to 8.6%. This report should be good enough to convince the FED to stick with its plan for at least 2 more interest rate increases this year.
The Baker Hughes rig count is due out at noon today while the commitment of traders report will be out at 3:30. With the near-constant selling that’s occurred over the past few weeks, and the near-record levels of speculative money that was long and wrong during that slide, the levels of liquidation may say a lot about where we go from here.
There is no such thing as a triple bottom in oil markets. This was proven this morning when WTI broke below $47 for the first time since OPEC announced its production cut plans November 30th of last year. Within a few seconds of breaking that support, WTI fell another 30 cents, dragging refined products down by another penny or so on top of their earlier losses.
The timing of the breakdown is a little curious given that prices dropped quickly after the DOE report yesterday, only to recover their early gains by the end of the day. That type of action seemed to suggest that buyers were willing to step in as prices neared their lowest of the year, only to have a bit of a ole effect this morning as they moved out of the way. The question to end the week with is if there are enough funds ready to buy this dip? If not we should see another $2 drop in crude and a nickel more for refined products near term.
The FED left rates unchanged yesterday, but held its forecast for more rate increases this year. That stance was largely anticipated and did not seem to have much effect on prices.
Notable items from the DOE weekly report:
US Crude production continues to ramp up, and is on pace to break the peak 2015 levels this summer.
After dropping 22% in the previous 2 weeks, US Diesel demand bounced back 16% in yesterday’s report. This is exhibit A in why it’s good to look at a 4 week average when analyzing the government’s weekly demand estimates.
Gasoline inventories are back to the top of their seasonal 5 year range after a 2nd straight counter-seasonal increase. Gasoline demand estimates have decline for 3 straight weeks at a time when they’re usually ramping up before the official start of the “Driving Season” memorial day weekend.
Although refinery production in the US ticked slightly lower on the week, it remains north of 17.1 million barrels/day a level that was literally off the charts before this year. In an average year, US Refinery runs ramp up by about 1 million barrels/day from April to July, and if that trend holds this year, we’ll have to re-write the record books for refinery output.
Charts from the Weekly DOE Report:
Inventory draws in the US helped energy prices recover overnight, after several contracts reached their lowest prices of the year yesterday. Trading is fairly quiet however as traders appear to be waiting on the DOE’s weekly inventory report and the FED announcement before making the next move.
The API was reported to show inventory draws across the board yesterday, 4.1 million barrels of crude oil, 1.9 million barrels of gasoline and .4 million barrels of distillates. Prices bounced immediately following the report, and seem to be the main driver of the overnight strength, although we’ve seen the gains in crude oil and ULSD cut in half in the past hour – as has been the pattern of late.
There is little margin for error for the bulls this week, as we stand just a few ticks away from the year’s lows and critical chart support. If this early morning rally is wiped out like yesterday’s was, it’s likely we could see another 5% slide in short order.
The FOMC is meeting today, and interest rate futures are only pricing in about a 5% probability of another interest rate hike, according to the CME’s Fedwatch tool.
Despite the heavy selling over the past few weeks, the charts below show that the forward curves on futures have not changed appreciably during the slide, which could be both cause and effect for the relative lack of volatility we’re seeing this year.
Another overnight rally attempt was snuffed out this morning, as energy prices are struggling to get up off the mat after reaching 5 week lows during Monday’s session. This is looking like it could be a pivotal week as key support levels for crude and refined products are being tested, which could determine whether or not we see another 5-10% of downside during the month. Refined products have given up the majority of their 2 cent gains they’d held just a couple hours ago, while WTI is now trading flat after being up nearly 50 cents overnight. If the bulls are going to hold up under the pressure, they’ll need to show much more conviction than they have over the past few weeks.
Last week it was news of increased Libyan oil production that was often cited as the cause for the drop in prices, while overnight we saw the opposite as Russian output was reported to have declined slightly last month. The articles note that the 50,000 barrel/day decline puts Russia near 95% compliance with its deal with OPEC, what it doesn’t say is that at 11 million barrels/day, the country is still producing nearly 1 million barrels/day more now than it was back in 2015.
RBOB futures tested their 200 day moving average yesterday, for the first time since February 28th. That chart point is notable as it’s an often-cited guide used by hedge funds in their positioning, but perhaps more so in this case since the last time RBOB was this low, it was winter-grade product, whereas we’re now testing those levels with a more-stringent summer grade spec. If the 200 day breaks for RBOB, the March lows are just a few cents lower and should provide a critical test. If those levels break there’s nothing on the charts to prevent another 20 cents of downside.
There’s an eerie bit of symmetry showing up in the ULSD charts over the past month. After ULSD futures bottomed out (for the third time) on March 27th, it took 12 trading sessions to rally 19 cents. Then, after the 19 cent rally topped out on April 12, it took exactly 12 more trading sessions to return within 3 points of the March 27th low. What does this mean for prices going forward? Probably nothing unless $1.47 breaks down, then we should see a run at $1.40, but it does make for a nice looking chart.
US equity markets are hovering near record highs, with the NASDAQ reaching a new all-time high during yesterday’s session. As the 2nd chart below shows, that doesn’t seem to be having any influence on the energy complex, unlike a year ago. There is a headline this morning suggesting that a weaker dollar was helping energy prices rally overnight. The last chart below shows how that typically-negative correlation has flipped of late, and if recent history was the only guide you had, you may think that a weaker dollar may actually mean softer oil prices.