Struggling Energy Markets Searching For Stability

Energy markets are still trying to find a floor after a weak finish Friday left refined products at their lowest weekly closing level in several months. For RBOB futures, Friday’s drop left the contract at its lowest level since February, when the prompt contract was a winter spec that traded roughly 25 cents below the current summer values. That slide on the weekly charts leaves the contract in perilous technical territory with a slide into the $2.20 range likely if buyers can’t maintain the current push back north of the $2.50 mark this week. ULSD futures ended the week at their lowest since last July, and a similar slide towards $2.20 appears to have a good probability if the early buying today isn’t sustained. That said, both contracts are in oversold technical territory on the daily charts, so a bigger bounce is certainly possible.

Ukraine carried out more drone strikes on Russian energy assets over the weekend, with the Lukoil Volgograd refinery reportedly forced to take units offline. That facility was also hit by a strike back in February, and reported it was back at full rates in April. In addition, strikes were reported at a fuel depot outside Moscow that serves 3 local refineries.

A week ago, it looked like the cycle of hedge fund liquidation in energy contracts had run its course, but the latest CFTC data showed more heavy selling by money managers across the energy complex as of last Tuesday with a new decrease in bets on higher prices of more than 120,000 contracts. New short bets on crude oil contracts were also a theme for the week as the money manager category continues to show itself as the momentum chasers as those bets decided to wait until after prices had dropped $10/barrel over the prior month to decide to bet on lower prices. Based on the soft finish to end last week, it seems likely there was more selling from hedge funds that we’ll see in this week’s CFTC report, although the volume is probably less than the most recent report.

Baker Hughes reported a net decrease of 3 oil rigs drilling in the US last week while natural gas rigs increased by 1. Natural gas prices in the US had a healthy rally to a 3-month high last week after a brutal quarter for producers. It’s worth noting that the rally in US natural gas prices far outpaced the stagnant price moves of the main European contract, which suggests that the US market is starting to price in an increase in LNG exports while Europe maintains healthy supplies, in stark contrast to the market of 2 years ago when a dire supply situation in Europe created huge price swings in both US natural gas and diesel prices.

The EIA this morning highlighted how Brazil led a shift in countries buying Russian diesel exports over the past year, which has helped maintain the country’s product and cash flows despite widespread sanctions. The data provided showed an increase in year-on-year diesel exports as of March, which is when the refinery strikes picked up their pace, so we’ll still need to wait a while longer to get a good read on the direct impact of those strikes.

Chevron Pasadena, Valero Pt Arthur and Delek Big Spring all reported upsets to the TCEQ over the weekend, although none of the facilities appear to have had to reduce run rates as a result. The Big Spring filing noted a lightning strike as the cause of the upset, adding to the long list of weather woes at that facility.

Click here to download a PDF of today's TACenergy Market Talk.