TAC Market Talk
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Energy futures are trying to move higher again this morning, after a failed rally attempt on Thursday. The recovery in prices after reaching their lowest levels since November this week puts us back into more neutral territory near term, although charts still give slight favor to more selling unless WTI can get back above $50 soon.
A fire at a Canadian Oil facility earlier in the week is now expected to back out more than 10 million barrels of imports into the US over the next 2 months. That news has provided strength to Canadian synthetic crude prices, and to similar spec grades like Bakken but does not seem to be a major influence on WTI futures as those barrels don’t directly impact Cushing, and a 10 million barrel draw down from current US inventory levels would still leave them above last year’s record highs.
Meanwhile, the fire at LyondellBasell’s Houston refinery had US gasoline prices moving higher early Thursday, but those gains were wiped out in the afternoon as it appears there won’t be a long term impact to production. While there may not be a lasting price influence from the fire, it certainly isn’t helping the company’s attempts to sell the facility.
Selling refineries has become a news theme this week as executives lay out plans to shareholders to improve profits after a tough year for many US Producers. While Delta Airline’s CFO is denying reports that it intends to sell its plant outside of Philadelphia after a brutal quarter, Calumet is reportedly shopping its refinery in Superior WI, not long after it sold its brand new plant in ND due to disappointing earnings. While the cyclical nature of the refining business is nothing new, this recent downturn shows just how difficult it can be for businesses to manage through the country’s transition to an exporter of petroleum.
Late this afternoon we’ll get to see how the managed money weathered last week’s storm of selling when the CFTC releases its commitments of traders reports. The pace of the sell-off after being stuck in a narrow trading range for so long has most analysts anticipating that heavy liquidations from the speculative funds betting on higher prices was a major contributor to the decline. The fact that prices held this week could mean that those funds were able to withstand the losses, or it could simply be that prices needed to consolidate before making their next big move.
Energy futures were moving higher for a 2nd day after a positive inventory report from the DOE and a steady outlook from the FED yesterday seem to have calmed things down a bit after 6 days of heavy selling. Immediately after the traditional futures opening at 8am however, the overnight gains in ULSD and WTI were wiped out, leaving the complex looking vulnerable to more downside pressure.
RBOB gasoline futures are leading the move higher today – after being the only contract in the complex to fail to settle higher yesterday – after news broke overnight of a fire at the LyondellBasell refinery on the Houston ship channel. So far it’s unclear what impact that fire may have on operations, but given the plant is more of an exporter than US supplier, there may not be a lasting impact on futures or cash prices in the Gulf Coast region.
The DOE report had some bullish headlines yesterday with inventory draws across the board, and strong demand for refined products. As has been the pattern of late, the market reacted somewhat counterintuitively, rallying for a minute or so before selling off based on numbers that one might think should propel them higher.
Bears may note that the headline said crude oil stocks were down on the week, but the charts say they’re still only 250,000 barrels from their all-time high, and inventories at the Nymex delivery hub in Cushing OK were up 2.5 million barrels.
The last 2 weekly reports from the DOE may have refiners in the US breathing a sigh of relief. After a brutal winter for demand, gasoline consumption estimates have stayed north of 9 million barrels for 2 straight weeks, which is well above the 5 year average for March. The start of the seasonal gasoline inventory drawdown before summer grade specs are required has brought gasoline days of supply back down to an average level of 26.6 days, down from a record of 31.5 back in January.
Diesel demand is also looking quite healthy, and inventories have rapidly moved closer to average territory from over-supplied as they’d been for many months. There’s no doubt that the increase in oil drilling activity has helped diesel demand in parts of the country, but most of the increase appears to be coming from positive over-the-road trucking activity.
It’s a number that often goes overlooked, but refinery capacity in the US ticked up by another 34,000 barrels/day last week. In the past 2 years more than 800,000 barrels of capacity has been added in the US as domestic producers have raced to expand their plants to take advantage of the local crude oil coming on stream This rapid increase is a major reason we saw simultaneous records for inventory levels and export activity in the past several months.
The FOMC raised rates as expected yesterday, and forecasted 2 more rate hikes this year, which was exactly in line with their December forecast. Equity markets reacted positively to the news, perhaps because the announcement limited the chance of additional increases this year.
After 6 straight days of selling that wiped 12% off of crude oil prices, we’re seeing a bounce this morning after a relatively bullish inventory estimate helped put in a temporary price floor Tuesday afternoon.
The API was said to report inventory draws across the board yesterday. While the draw in crude was minimal, refined products were both estimated to decline by nearly 5 million barrels. The EIA’s weekly report is due out at 9:30am central, with no reports of a delay due to the winter weather that hit the East Coast this week.
Tuesday’s low at $47.09 sets a good short term technical support layer after prices bounced $1.75/barrel off of it. Longer term support layers come in between $44 and $45. Refined products have similar short term support at $1.4784 for ULSD, and $1.5623 for RBOB, with an additional 10 cents of downside likely if today’s rally turns out to be a dead-cat bounce.
The International Energy Agency and OPEC both released their monthly oil market reports this week, which showed little change in the current supply overhang, or the projections for the eventual rebalancing of global supply & demand.
The IEA is predicting slightly higher demand growth in 2017 than OPEC is, but the two numbers are quite similar, with both reports showing China and India remaining the engines for global economic growth this year, even though their rate of increase is lower than years past.
Buried on page 37 of the OPEC monthly report is further evidence that for the World’s key swing producer Saudi Arabia, lower crude oil output doesn’t necessarily mean lower exports as the country’s oil consumption has dropped sharply due to a slowdown in economic activity and advancements in natural gas replacing oil to support their electric grid.
This afternoon all eyes turn to the FED, as the FOMC announcement comes out at 1pm central – the 3rd interest rate hike in a decade is expected to be announced – followed by a press conference with the FED chair that may give more insight to the plans for additional hikes later in the year. In December the group predicted that 3 rate hikes were likely in 2017, and any deviation from that plan may move markets more than the actual rate increase will.
The liquidation continues in energy prices this morning as WTI sells off for a 6th straight day, and a major winter storm threatens to further sap demand for refined fuels in a year that’s already been quite soft in terms of consumption.
Oil futures were ticking higher overnight, up around 30 cents a barrel until a round of heavy selling came in around 6:30am central that knocked WTI down to fresh 3 month lows at $47.59. That selling has also pulled refined products into the red for a 5th consecutive day. Volatility in oil prices has been increasing as prices have been falling.
If WTI can settle below the $48 mark today, there’s a strong case to be made for a push towards $45 in the next week or so, which could take another dime out of refined product prices. All contracts are quickly moving into over-sold territory however, which could mean a sharp bounce whenever the waves of, what appear to be, forced selling subside.
Blizzard warnings and state of emergency notices cover much of the North Eastern US this morning as up to 2 feet of snow is expected in several areas. There was a notable tick up in gasoline demand ahead of the storm as consumers raced to fill up on staples, but now that many highways are closed, it appears that demand will fall to almost nothing for the next couple of days.
The Federal Reserve’s Open Market Committee (FOMC) begins a 2 day meeting today that is expected to end with an interest rate hike tomorrow afternoon. Fed fund futures now give a 90% likelihood of an increase tomorrow, down from 93% on Friday after the February jobs report. With this level of certainty, it’s likely that the increase has been “priced in” to both energy and equity markets, and we may not get a dramatic price swing tomorrow unless something unexpected happens. There has been a pattern over the past several years that equity markets tend to rally ahead of the FOMC meetings, but so far this morning, equities look like they want to sell off on the heels of oil prices.
It’s a mixed start for energy futures this morning after WTI traded below $48 overnight, threatening to follow through with last week’s collapse now that the 2017 trend has finally broken down. Crude oil prices are trading lower for a 6th straight day, RBOB gasoline prices are down for a 4th, while ULSD prices are currently clinging to small gains on the day.
Gasoline and diesel prices are moving in opposite directions this morning as a major winter storm passes over the great lakes this morning and bears down on the East Coast. This system is threatening to shut down traffic for a day or two in the country’s largest population centers while giving at least a small bump in heating demand after an unseasonably warm winter in the region. Blizzard warnings are in effect from New York to Boston with 20 inches of snow and 50 mile an hour winds predicted in some spots.
This is a busy week for monetary policy with the FED expected to raise rates on Wednesday, while 3 other major central banks also making announcements this week. By Thursday afternoon, most trading will go quiet however as the annual ritual known as March Madness will take over the airwaves.
Money managers appeared pretty content last Tuesday, hanging on to most of their record-setting net-long position in WTI and Brent. The Brent position saw a slight net increase on the week while WTI saw a small decrease. Since the big price moves didn’t start until Wednesday, we’ll have to wait until late Friday to see whether or not the speculators were heading for the exits during the big wave of selling last week.
8 more oil rigs were put to work last week according to Baker Hughes’. While a steady increase in rig activity has been the norm for months, this week was a bit unusual in that Oklahoma and Colorado led the increase in activity, while the rig count in Texas was unchanged. Physical drilling activity won’t change as quickly as futures do, so expect another few weeks of increases before we might see a slow-down due to the recent fall off in prices.
It’s been quite a week with oil prices finally breaking out of their 3 month-long trading range, that marked the tightest trading pattern in a decade. Of course it happened during the CERA week conference that started with optimism for oil producers around the world, and seems to be ending on a much different note. This article from Reuters made waves yesterday as it suggested the Saudi’s made it quite clear to US producers during the meeting that they should not rely on OPEC to keep prices propped up for them.
Quite fittingly, yesterday marked the first day since November 30, the day OPEC officially announced its production cut plan, that WTI settled below $50/barrel. ULSD prices also reached 3 month lows during the sell-off, with Gulf Coast prices hit especially hard as refinery rates have picked up and put heavy pressure on basis values this week. Gasoline prices have fared relatively well during the sell-off with the spring RVP transition negating about a nickel’s worth of the 10 cent decline in futures this week.
The February jobs report showed more steady growth in employment. This report is the last major data point before the FOMC’s meeting next week, and seems to have all but guaranteed the next interest rate hike. FED Fund futures are now showing a 95% probability of a 25 point increase next week. Energy prices have reacted positively to the report, doubling their early-morning gains in the 15 minutes after its release.
So, where do we go from here? If prices can hang on to the small recovery they’ve had so far this morning, it’s likely we could see a short consolidation period as the market catches its breath and waits on the FED’s announcement next Wednesday. If these gains do not hold however, the perceived long-liquidation that’s going on could easily drive another 5% decline in short order. We’ll get to see the latest fund positions in the CFTC report later this afternoon after futures settle. That report may not show much however since the positions were compiled Tuesday, before the big sell-off occurred.
Total non-farm payroll employment increased by 235,000 in February, and the unemployment rate was little changed at 4.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment gains occurred in construction, private educational services, manufacturing, health care, and mining.
A fun thing about energy markets is that after going through periods of boring sideways trading, they tend to celebrate their eventual break-out with huge price swings. For the past 3 months WTI had been stuck in a $4 range between $51 and $55, then in the past 3 days it dropped by more than $5/barrel.
Of course that’s probably not so much fun for the folks holding a record amount of speculative funds betting on higher prices who watched WTI go from $53.80 Tuesday to a low of $48.79 overnight. The combined net long position held by money managers as of last Tuesday was over 855,000 so, this week’s collapse has cost them somewhere north of $4 Billion, and is likely a contributing factor in the snowball effect of selling we saw yesterday once support finally broke down.
The past few months of trading have been notable for the numerous head fakes we saw on nearly a daily basis as the market tried to decide where it was going. Perhaps the most notable head fake came yesterday after the DOE report when prices actually rallied for 10 minutes or so before a slow but steady bout of selling began that picked up pace throughout the rest of the session. The irony is that the DOE report actually had some of the most bullish numbers of the year, and yet it precluded the biggest daily sell-off we’ve seen in more than a year.
So, where do we go from here? Based on the overnight reaction (an early bounce followed by heavy selling around 4am) it seems like there may be some forced liquidation to get through as those long positions need to meet margin calls. The charts suggest there’s a case to be made for WTI to make a push towards $45 if it can settle below $50 today, which would mean roughly 15 cents of further downside for refined products. If the trading patterns this year have taught anything however, it’s that we should wait for confirmation before declaring a new trend… and right on cue those overnight losses have been chopped by 2/3s in the past 30 minutes.
From the DOE Report:
US crude oil inventories hit a record high at 528 million barrels, some 16 million barrels more than the record high reached last spring, and 150 million barrels more than the previous 5 year average for this time of year. Crude oil production increased another 50mb/day, and surpassed year-ago levels for the first time in more than a year.
Gasoline demand estimates reached their highest level of the year, and for 1 week actually surpassed year-ago levels. One data point does not make a trend, but it is certainly a good sign for refiners that perhaps the brutal winter in terms of gasoline consumption may be behind us.
Another record-setting inventory estimate has crude oil prices reeling this morning, while refined products are doing their best to resist the pull lower. After the latest attempted rally stalled out (again) yesterday, today’s pullback leaves the complex back in the middle of its trading range.
The API was said to report an 11 million barrel build in crude oil inventories yesterday – to a new record high – which pushed WTI to its lowest levels in a month. Refined products are faring much better, with a draw of nearly 5 million barrels in gasoline helping RBOB to hold onto slim gains this morning (although they’re less than half of what they were overnight) and a draw of close to 3 million barrels for diesel helping ULSD trade just a few ticks lower so far. The DOE/EIA’s weekly report is due out at 10:30 eastern.
The EIA’s monthly short term energy outlook is projecting US Crude oil production to average 9.2 million barrels/day this year (up from 9 million last week) and 9.7 million barrels in 2018. The outlook also painted a bleak picture for gasoline prices, noting the record high inventories on the East Coast in February. Globally, the EIA is predicting a relatively balanced oil market for the next 2 years – similar to the IEA’s projection earlier this week.
One bright spot for refiners is that diesel demand has picked up nationwide, despite another warm winter, as manufacturing and transportation activity increases. For anyone looking to buy diesel fuel in West Texas, there’s no doubt that the increase in drilling activity is contributing to the rebound in diesel demand in that region.
More warm and fuzzy headlines coming from the CERAWEEK conference in Houston: Yesterday OPEC’s secretary general said that not only did the cartel not have a war with US Shale producers, he actually credited their ramp up in production for preventing a global economic crisis. The news isn’t all good however, as the former head of the EIA pointed out yesterday, the tremendous uncertainty that’s left prices in a narrow trading range so far in 2017 could also fuel severe imbalances in later years as investors stay away.
As the 2nd chart below shows, the US Dollar and crude oil prices have resumed their mirror-like negative correlation over the past several weeks. This makes Friday’s jobs report and next week’s FOMC meeting more likely to influence energy prices than they may have last year when the correlations largely fell apart.