Technical Traders Push Late-Week Rally Into Monday Morning

The recovery rally continues for energy futures with ULSD up 22 cents from last Thursday’s low trade, while RBOB is up more than 17 cents, and WTI has earned back nearly $10/barrel. 

Besides the double-edged sword of a healthy April jobs report, there hasn’t been much in the way of news to pin this rally on, so it feels more technical in nature than anything fundamental. Bulls will say that the market overshot to the downside in a fear-driven sell-off setting the stage for a much bigger rally, while bears may argue this is a dead cat bounce, and we’re still set up for more selling ahead. 

Weekly charts suggest that the bear market for distillates is still intact, and we’ll need to see a move back closer to $1.50 to break the downward trend that took futures from $4.68 in October to $2.15 last week. A big part of that decline in futures has been a collapse in the forward curve from extreme backwardation last fall to a gentle contango in the front of the curve today.  

Betting on a collapse: The CFTC’s weekly COT report showed another big influx of speculative funds betting on lower energy prices as of last Tuesday, pushing ULSD to a net-short position for the first time since November 2020. Whether or not we see those new shorts accumulated during the past few weeks get squeezed out by this bounce in prices since that report was released may go a long way in determining whether or not the rally continues. Producers have been reducing their hedges during this sell-off, with diesel hedges dropping to a 3.5 year low in another sign that the big physical players still see upside potential for prices ahead.

Baker Hughes reported a drop of 3 oil rigs, and 4 natural gas rigs in the US last week as producers continue to shy away from spending at current values. The Permian basin accounted for the majority of the decline last week, with a decrease of 5 rigs.

A fire hit Shell’s chemical facility in Deer Park TX Friday, and reignited over the weekend forcing the company to dump excess waste water into the Houston ship channel. So far it doesn’t appear to have impacted operations at the adjacent Deer Park refinery that Shell used to own, and so should be a non-factor on refined product prices.

Nigeria announced it would be commissioning the world’s largest single-train refinery in 2 weeks, which could add another 650mb/day of refining capacity to the Atlantic basin. Then again, many view the “grand opening” as more of a political stunt on behalf of the outgoing president, with actual output not actually expected soon. If true, that would be similar to what we’ve seen at Mexico’s Dos Bocas refinery which was commissioned nearly a year ago, but still isn’t producing refined products.

Today’s interesting read from the FT. Why tax incentives are driving new clean energy commitments.

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