Fear Seems To Have Taken Control Of The Trading to Start September

Fear seems to have taken control of the trading to start September with a widespread selloff and spike in the volatility for energy and equity markets showing investors to be on edge. Although the correlation between energy and equity markets has been spotty at best for the past year, whenever this type of fear-driven-trade emerges, the two asset classes often move more in lockstep.

RBOB gasoline futures had their biggest daily sell-off of the year, which pushed cash prices in multiple spot markets below the $2 mark for the first time . WTI meanwhile dipped below $70 for the first time this year, while ULSD prices dropped to a fresh 16 month low. After a modest bounce overnight, the selling has resumed for both RBOB and ULSD futures this morning in what could be some forced liquidation by funds who picked the wrong time to bet on higher prices last week.

Another factor adding to the bearish sentiment for gasoline were reports that the “game changing” Dangote refinery was producing gasoline for the first time, adding the potential for more supply to the Atlantic basin that already has multiple refineries struggling to turn a profit.

Need a real world example of the negative sentiment taking hold as this excess capacity hits the market? Europe’s most important energy hub had a widespread power outage that knocked multiple refineries offline Tuesday, and that did nothing to stop the sell-off in refined product prices.

While the big drop in futures was the story of the day, California’s CARBOB gasoline basis values continued to rally Tuesday after a pair of refinery hiccups in the past 2 weeks, while the continues selling 6lb RVP gasoline for another 2 months while the rest of the country begins to transition to winter grades. Overnight Marathon reported unplanned flaring at its Carson refinery, which could spur on even more buying, although spreads remain pedestrian compared to the huge premiums we saw the past 2 years.

Someone might need lessons in negotiating leverage: The teamsters union is set to begin striking at Marathon’s Detroit refinery today, right at a time when the region, and country, really don’t need their production and some refiners are already looking for an excuse to cut run rates.

With Chinese demand cooling, India is becoming the key engine for global oil and fuel demand growth. A big story in recent weeks has been the country’s new policies that promote domestic ethanol production, which is shifting the balance of global grain markets. No word yet if the US agriculture lobby has requested the EPA reduce their ethanol mandates so they can start sending more corn overseas. India is also rapidly increasing its traditional refining capacity, which will continue to put pressure on fuel supplies as the world awaits their demand growth.

The NHC is still tracking 3 storm systems in the Atlantic this week, but the odds of development are decreasing with a 30% chance the highest probability given for any of the storms. A “very unusual” pattern of rain over the Sahara Desert is being credited with the lack of development potential over the Atlantic, befuddling forecasters who said this would be one of the busiest storm seasons of all time. Meanwhile, the US Gulf Coast is facing days of heavy rain that are already bringing flooding to parts of refinery row, so some limited disruption to both refinery operations and shipping traffic is likely this week.