News & Views
News & Views
News & Views
Oil and Diesel Prices Selling Off
Oil & diesel prices are selling off for a 4th straight day, while prompt gasoline prices were clinging to modest gains overnight as an unseasonably tight East Coast market keeps the buying pressure under gasoline spreads.
It’s Halloween, which means it’s the last day of trading for November product futures, so watch the December (RBZ and HOZ) contracts for direction today, which are both trading lower.
Diesel inventories fell for a 5th straight week and gasoline dropped for a 4th, but you’d have never guessed that was the case based on the big selling that took place following the report. The selling was particularly puzzling given some strong demand estimates on the week, particularly for gasoline, suggesting the declines were less driven by fundamentals than other factors.
US crude oil stocks did build on the week, Cushing OK saw a 4th straight week of inventory increases, and oil output held steady at its all-time high which seems to be keeping WTI under pressure relative to Brent.
As was widely expected, the FOMC announced another rate cut Wednesday, its third consecutive cut, but markets seem to be unimpressed by the FED’s signal that it would pause its monetary easing.
[Click here to download a PDF of today's TACenergy Market Talk.
Week 43 - US DOE Inventory Recap
Heavy Selloff Ended On A Bounce
What looked like a heavy selloff yesterday ended on a bounce with RBOB futures adding .0129 on the day and HO losing just 55 points. Prices look similar this morning if a bit muted ahead of inventory data due out from the EIA at 9:30 CDT.
A good reminder as to why the market typically waits for the EIA data as some can’t seem to agree on the API’s crude oil inventory change last week:
Without choosing which number to believe, some are attributing the slight downward pressure felt this morning to US-China trade war resolution delays, which may not be ready to execute next month.
WTI futures held above a main resistance level at $55.50 yesterday after testing waters beneath it. A bearish EIA report could press the issue and cause crude prices to break out to the downside, possibly leading to the $54 level.
Energy Complex Likely to Open Lower
The energy complex will likely open lower this morning, continuing to retrace last week’s gains. Uncertainty surrounding potential OPEC+ (read OPEC+Russia) production cuts and anticipated inventory builds are being blamed for the lower price action today. While it seems most headlines preceding decisions from the oil cartel and its main ally seem mostly to be conjecture, we won’t have to wait long to see if cuts are in the cards since the next supply meeting is set for December 5th & 6th.
The S&P 500 hit record highs yesterday, widening the gulf between energy and equities prices that traded in tandem just a year ago. Unrelated asset classes trading independently is typically a sign of a healthy market; that may not mean much to production rigs which reached a 2 year low last week due to unviable economics.
Tropical activity is pretty quiet for now, with only one area that could potentially develop into a system out in the mid-Atlantic. While we are on the tail end of the 2019 Atlantic Hurricane season, we could still see development going into the end of the year. On this day 7 years ago Hurricane Sandy made landfall on the US mainland and went on to be the most destructive storm of the 2012 season.
WTI futures are testing support levels this morning helping keep the crude benchmark above $54.50. If broken there is little in the way to keep prices from threatening the $51 range. It’s a different story with refined products futures, facing a slew of resistance levels in between current prices and a likewise 6.5% drop.
Mid Selloff in Energy Prices
Profit-taking from last week’s rally is taking the credit for the mild selloff we are seeing in energy prices so far this morning. Gas and diesel are both down around half a cent per gallon while crude oil benchmarks are shedding 10-20 cents per barrel.
Tropical storm Olga came and went this weekend and brought tornadoes and heavy rainfall to the Louisiana and Mississippi coast. As of now it doesn’t look like there were any interruptions to energy operations due to the storm.
Baker Hughes reported a drop in active US oil production rigs last week, dropping the total active platforms to 696, the lowest level since Spring 2017. Just looking at the crude oil output chart you wouldn’t be able to tell there’s a clear downward trend in number of production units as output has consistently climbed (albeit with a few interruptions) since mid-2016.
Money managers added net length to both their WTI and Brent crude oil positions last week after reaching hitting the lowest levels of the year the week prior. Some technical indicators are lending more towards higher prices as prompt month refined product futures head into their last week of trading. It will be interesting to see if prices will continue their trek higher, which seems likely for today’s trading as the board has flipped into positive territory at the formal market open.
Energy Prices Are Stumbling To Start Friday's Trading
Just when it seemed like a technical breakout was underway, energy prices are stumbling to start Friday’s trading, putting a temporary damper on the upward enthusiasm after a strong showing this week. The big 4 petroleum contracts were all able to break and hold above their October highs in Thursday’s session, leaving room on the charts for a push towards the levels reached in the wake of the September attacks on Saudi infrastructure.
The early weakness is getting blamed on new economic concerns, although it is just as likely to be caused by profit taking by those suspicious of this market’s staying power. If today’s early losses hang on through the close, yesterday’s highs start to look like a bull trap as the seasonal window for a substantial price rally is quickly closing.
There’s a system churning through the Gulf of Mexico that’s given a 70% chance of becoming a named storm by the NHC, and the early projections point it right at the heart of US refining. The good news is a cold front is (currently) expected to prevent this system from becoming a hurricane, but it will bring heavy rains to large parts of the US, with forecasts of 5” or more extending north all the way to the Tennessee valley for the weekend.
The EIA published a report on the issue of small refinery exemptions to the RFS this morning that’s worth reading for anyone looking for a bit more perspective on the issue than the typical lobbying efforts posing as news that have become common over the past few years.
Good news for Citgo: The US treasury granted the refiner a 3 month shield from a potential seizure by creditors, which is seen as an attempt to buy time to negotiate a better long term solution for the company caught up in the Venezuelan debacle.
Prices Are Trickling Back Into Their Sideways Pattern
It’s another quietly red start for energy futures as the enthusiasm for some bullish headline numbers in Wednesday’s DOE report starts to wear off and prices are trickling back into their sideways pattern. There is a chance for a technical breakout however, with product prices near the top of their recent range following a strong couple of days, but we’ll need to see RBOB hold above $1.65 and HO above $1.97 before confirming the chance for a substantial move higher.
Although across-the board inventory declines were enough to spur a solid 1-day rally, that enthusiasm may be tempered by a large increase in refinery runs that suggest US plants have made the seasonal turn out of fall maintenance, and production rates should increase for the next 8-10 weeks. That increase in refinery runs was most notable in PADD 5 (West Coast) where rates have gone from below the low end of the 5 year seasonal range, to above the high end in just 3 weeks, which is no doubt to the drop of $1/gallon in CA gasoline prices in October.
Diesel inventories across most of the country remain tight, with the nationwide Days of Supply calculations holding below their 5-year seasonal range for a 2nd straight week. The East Coast looks to have the most concern after PADD 1 stocks dropped for a 5th straight week, which has pushed NYH basis values higher, and sparked a resurgence in activity for space on the Colonial pipeline.
Although total US gasoline inventories have declines for 4 straight weeks, they remain above their 5 year average for this time of year. With refinery runs cranking back up, and the seasonal demand slowdown looming, it’s becoming hard to make a fundamental argument for stronger gasoline prices over the next few months.
The EIA published a look at US product exports this morning, highlighting the continued growth in refined product sales overseas. The product mix is worth noting however as gasoline exports have declined this year, while the bulk of the growth came from sales of propane.
Week 42 - US DOE Inventory Recap
Choppy Action Continues for Energy Markets
The choppy action continues for energy markets as a failed Tuesday rally turned into a round of modest Wednesday selling. A build in crude oil inventories and some new pessimism over Brexit and the trade wars are all getting credit for the early round of selling, although none of that changes thus far are threatening the recent trading range.
Prices did briefly spike in Tuesday’s session, following a Reuters report that said OPEC was considering further output cuts. A couple of hours later, once people or their trading algorithms were able to read past the first paragraph of that article, the market gave up all of its gains as it was clear that Saudi Arabia was not yet in favor of more cuts.
The API was said to report a 4.4 million barrel build in crude oil inventories last week, while refined products saw declines of 3.5 million barrels of diesel and 700k barrels of gasoline. The EIA report is due out at its normal time this morning.
California gasoline prices have now made national news after the governor called for an investigation into why the state’s retail price spike. Nice timing on that request as prices have now dropped by more than $1/gallon in October as the seasonal RVP transition, refinery repairs, and more imports combine to heal the recent supply shortage.
Maybe this should have been the OPEC headline… (See picture 3)
Saudi Arabia, OPEC’s de facto leader, wants to focus first on boosting adherence to the group’s production-reduction pact with Russia and other non-members, an alliance known as OPEC+, before committing to more cuts, the sources said.
Energy Futures are Ticking Quietly Higher
Energy futures are ticking quietly higher to start Tuesday’s session, offsetting Monday’s losses in the early going. The complex continues to look like it’s stuck going nowhere on the charts, so this back and forth action should be expected until something shakes things up.
Trade optimism is getting some credit for the early tick higher, although the daily trade headlines seem to be having less influence on prices than they did earlier in the year.
As energy prices have stalled out in their neutral pattern, their correlation with daily movements in US equity values has started falling apart. In some ways this can be a sign of a healthier market, since each asset class is trading on its own merits vs. simply “risk on” or “risk off”. On the other hand, if energy futures are going to fall under the weight of trade pessimism and not rally when trade optimism is pushing stocks higher, it’s hard to see what will allow them to make a sustained rally near term.
While futures prices seem to be going nowhere, basis values across most US regional spot markets have come under heavy selling pressure in recent days as refineries come back online just in time for a seasonal demand slow-down, and the severe weather that stretched across the country this week puts a damper on harvest demand. The exception to the rule has been the East Coast, where the ongoing threats of a refinery strike at Bayway, a major refinery turnaround at Trainer, on top of missing PES volumes has kept a bid under most contracts.
The EIA this morning highlighted another milestone in the great US transition from importer to exporter as the country now sells oil to more countries than it buys from.
Energy Futures are Starting the Week with Modest Losses
Energy futures are starting the week with modest losses, as the complex continues to slog through an extended period of sideways trading. Brent crude prices give a good example of the lethargic trading, as they’ve been stuck between $57 and $62 for 9 of the past 12 weeks, with only the brief price spike following the attack on Saudi oil production moving prices out of that sideways range.
Part of the reason for that lack of action is that money managers are unenthused with energy contracts, with net-length in both WTI and Brent reaching the lowest levels since January. Refined products are also uninspiring in terms of total outstanding positions, but also intriguing as RBOB positions are ticking up towards the high end of their seasonal range, while ULSD positions barely hold onto a positive bias, both counter to seasonal norms as driving slows down and heating demand ramps up.
Baker Hughes reported 1 more oil rig was put to work last week, marking a 2nd week of gains. While adding 3 rigs in two weeks isn’t exactly newsworthy, the two week break from declines does suggest the rig count may have found a temporary floor.
Ethanol RIN values have dropped back to around 15 cents/RIN after trading around 25 cents 2 weeks ago. The EPA’s proposal for spreading renewable volume obligations in the coming years is taking the blame for the latest drop in RIN values.
Week 41 - US DOE Inventory Recap
Large Crude Oil Inventory Build
It seems that the large crude oil inventory build published by the API late Wednesday was to be believed: the EIA showed a 9.3 million barrel addition to the US oil stockpiles last week. The build comes amid lower US exports and a busy refinery maintenance season, also responsible for the drawdowns in refined products. Gas and diesel inventories dropped by 2.5 and 3.8 million barrels last week, respectively.
Tropical Cyclone Sixteen has picked up some speed in the Gulf of Mexico and is expected to make landfall somewhere along the panhandle or Big Bend of Florida. There is a Tropical Storm Warning issued for several cities along the Gulf Coast including New Orleans, Pascagoula, and Mobile, all of which are home to one or more crude oil refineries. While a direct hit isn’t likely on any of those facilities, extensive rainfall could cause flooding and operational disruptions.
Rates for the candidly named Very Large Crude Carriers (VLCCs) came crashing down yesterday after rising over 125% in the last 4 weeks. Anticipation for the upcoming IMO regulation change, US sanctions against China, and a borderline blacklisted Venezuela fueled the spike. While we might see a blip in crude exports next week, the large anticipated drop isn’t likely materialize.
American energy benchmarks are posting gains so far this morning with prompt month RBOB and HO up around 1-1.2 cents per gallon and WTI up about 50 cents per barrel. The positive action is tentatively being attributed to the US-Turkey ceasefire even though it doesn’t look like the definition of ‘ceasefire’ was agreed upon. Nevertheless the energy complex is buying up this morning, hoping to end the week in the green.
Increase in Crude Oil Stocks
The American Petroleum Institute published their weekly inventory estimates yesterday, reporting a 10.5 million barrel increase in crude oil stocks. While a build was likely with the busy refinery turnaround season, one that large seems exaggerated especially given it’s about 3 times larger than analysts’ estimates. Nonetheless, prices are pulling back this morning with WTI down about 30 cents per barrel and RBOB and HO down 2 cents and ~1.5 cents, respectively.
The EIA report, comprised of data that is mandated to be shared by industry parties rather than volunteered, may have a more conservative crude inventory number. We will be watching for the data release at 10am CDT.
We’ve gotten a bit more directional guidance with the storm developing in the Gulf of Mexico. The National Hurricane Center is projecting the system will head towards the western Florida coast, which would keep it away from the vast majority of energy infrastructure in the area. Both 2-day and 5-day forecasts put the chances of development at 80% for each time frame; tropical activity in the area seems imminent.
Refined product charts seem to be forming a coil pattern that looks set to break out over the next few days. A fundamental push in either direction could be all that’s needed for a larger-than-usual market move. RBOB has about 9 cents of open water on either side of unchanged before running into support/resistance. HO’s price is more technically constrained, it’s got about a nickel to run in either direction.
[Click here to download a PDF of today's TACenergy Market Talk.
International Tanker Rates Have Increased
International tanker rates reached an elevated $10/bbl yesterday, sending crude benchmarks lower Tuesday. Traders anticipate more crude will stay parked rather than being shipped for transcontinental arbitrages, leading to higher US stockpiles. That combined with an EIA estimate of an increase in shale oil production for November sent WTI 1.5% lower yesterday.
Two San Francisco Bay Area refineries experienced production disruptions yesterday in the wake of a 4.5 magnitude earthquake as measured by the US Geological Survey. Spot market reaction to the news was relatively mild for LA, with California grade diesel up about 2 cents on the news at yesterday’s settlement. The earthquake also caused a couple of ethanol tanks to catch fire at NuStar Energy’s Crockett plant. Fortunately the fire was quick contained and extinguished with no reported injuries.
The system in the Gulf of Mexico has cleared the Yucatan Peninsula and now has a 50% chance of organizing into a tropical storm over the next 5 days. Forecasts on its direction are still vague, placing its destination somewhere along the Texas and/or Louisiana coast. Refiners will be keeping a close eye on its progression and potential impacts.
The energy complex is mixed this morning, with RBOB and Brent crude sinking lower while HO and WTI are showing green. Save any more drama from the Middle East or US-China bickering, traders will be looking to the inventory reports due out today and tomorrow for price direction. It will be interesting to see if the anticipated impact of the premium over crude carrier services will bring down American crude oil exports, which have set seasonal highs every week this year, over the next month.
Selloff Snowballs Mid-Morning
Yesterday’s selloff in gasoline prices, inspired by news of a delay in the first step to a US-China trade resolution, snowballed mid-morning but settled off of the lows. Prompt month RBOB was down well over a nickel but ended the day just 2.5 cents lower. WTI and HO futures likewise settled above their respective lows but only just, each shedding over 2% in yesterday’s formal session.
The tropical disturbance currently passing over Guatemala and Belize is now projected to move into the Gulf of Mexico in the next 5 days. Forecasts still give the system a low 30% chance of development over the next week but Gulf Coast refiners will be keeping a close eye on its progress.
The American Petroleum Institute and Department of Energy will both release their respective reports a day later than usual this week since yesterday was a bank holiday. The Institute will publish theirs tomorrow afternoon and the DOE will release Thursday morning.
Refined product futures are 50-70 points positive this morning, perhaps feeling a bit oversold after yesterday’s action (uncertainty over international trade is nothing new after all), but upward action seems muted. Slowing global demand growth estimates from multiple agencies/organizations still looms over the complex and will likely keep at least some buyers at bay.
Crude Oils Benchmarks Leading Energy Complex Lower
Crude oils benchmarks are leading the energy complex lower this morning on news that a trade agreement between US and China has been delayed. Brent and WTI futures are down just over $1 per barrel while American gas and diesel prompt month contracts are down around 2.5 cents per gallon.
Some new tropical disturbances have popped up over the weekend but none of them are likely to make landfall on the American mainland in the next week. Tropical storm Melissa, named late last week off the northern east coast, is forecasted dissipate in the Atlantic over the next few days. Attention will be directed to the system just off of the African West coast which has an 80% chance of organizing into a tropical storm over the next couple days. Another system looking to make its way across the Yucatan Peninsula this week has a low probability of organizing before reaching the southern Texas coast.
Concern over the tanker drama in the Middle Eastern waterways has cooled today despite Iran’s claims that missiles were used to attack one of the country’s oil transports on Friday. Oil demand growth estimate cuts by OPEC and IEA seem to be taking a front seat ahead of fears that international tensions overseas could lead to outright conflict.
Money managers seem to be taking a risk-off approach to oil prices last week, dropping their net position further into seasonal lows. Net positions in gasoline and diesel dropped in kind but to less dramatic levels.
Another Attack On Oil Tankers
Another attack on oil tankers has energy markets moving modestly higher this morning, but the reaction seems to be muted thanks to a healthy dose of skepticism, along with a bearish IEA report.
It would be just as easy to say that oil prices are up nearly $1/barrel because DJIA futures up nearly 300 points this morning, thanks to fresh optimism over US/China trade talks. If anything the lack of reaction to the latest attack on oil shippers is a bigger story than the attack itself.
Details on the attack are scarce, with some reports suggesting it was rockets, others saying it was missiles. Considering that the reports are coming from Iranian officials, there seems to be more than a little skepticism, but at some point I wouldn’t be surprised to see prices rally as this event off the Saudi coast could be setting the stage for further Iranian retaliation.
The IEA reduced its global oil demand forecasts for 2019 and 2020 in its latest monthly report, and suggested that rising non-OPEC production should keep downward pressure on prices. The report also highlighted the impressive recovery of Saudi production after last month’s attacks, and suggested that the world now has “a big insurance policy” thanks to healthy inventories of oil. The lack of reaction to today’s news seems to be another sign of that policy in action.
Want another sign of the futures market’s lethargy? ULSD futures are trading higher for a 7th straight session, but are only up 7 cents total over that span. For a market that regularly sees that size of a price move in a single day, this lack of enthusiasm is notable.
California gasoline prices are still holding some 80 cents/gallon above most other US regions, but help appears to be on the way as the state fuel reports showed a large increase in refinery output last week.
Week 40 - US DOE Inventory Recap
Energy Futures Ticking Modestly Higher
Energy futures are ticking modestly higher to start Thursday’s session as equity markets continue to focus on China drama in various forms, while OPEC just sent a signal that they may want to act to keep prices from dropping any further.
OPEC’s monthly oil market report was highlighted by yet another reduction in global demand forecasts. The Cartel suggested all options will remain open at its December meeting, although getting Saudi Arabia and Iran to cooperate on anything this year seems to be easier said than done. OPEC’s output dropped sharply as expected in the wake of the attacks on Saudi facilities, but all indications are that most if not all of their production is back online already.
Ethanol prices stole the show Wednesday with spot values rallying some 13-15 cents around the country after the DOE’s inventory report showed the largest weekly drop in inventories on record. RIN values did not join in on the binge buying of fuel-grade alcohol as doubts appear to be creeping in on the impact of the EPA’s “deal” to update the RFS.
The most notable data point for petroleum in the report was another large drop in refinery runs (even though PADD 5 rates recovered) as maintenance activity this fall surpasses most forecasts. PADD 1 was particularly notable as it approached a decade-low as Monroe’s refinery is off-line for work. That low run rate seems to be driving counter-seasonal strength in RBOB calendar and basis spreads.
US diesel inventories continue to trend near the low end of their seasonal range in most US markets, and helping to keep upward pressure on futures which are now up for a 6th straight session. The notable exception is the Midwest, which is now staring down a winter storm that will hamper harvest efforts in the latest bit of bad news for agriculture interests in a brutal 2019.
Still wondering why west coast gasoline prices spiked by more than a dollar in the past couple of weeks? Take a look at the PADD 5 gasoline inventory chart below.
Trade Deal Optimism and Equity Markets Moving Higher
Trade deal optimism has energy and equity markets moving higher to start the day. Prices were treading water overnight, but started to rally around 3am following reports that China was “open to a deal”. Energy and equity prices moved sharply higher over the next hour and have been holding around those levels ever since.
The EIA’s monthly short term energy outlook was highlighted by a forecast for a warmer winter that will limit heating demand across the US. This news came just in time for the first big winter storm of the season to sweep across most of the US.
The report also noted the brief reduction in US oil production due to Hurricane Barry and expects output to continue to grow beyond 13 million barrels per day in 2020. That rising production, and sluggish demand has the agency forecasting lower prices next year, and we’ll just get to wait and see if they’re better at predicting price than weather.
The API was said to show a build in crude oil stocks of 4.1 million barrels, but draws in products of 5.9 million barrels of gasoline and 4 million barrels of diesel. The gasoline draw would be the largest in 6 months if confirmed by today’s DOE report.
West Coast gasoline stocks continued their tumble from extreme highs, and are now trading some 50 cents/gallon below their peak levels of a week ago. Ironically, Tuesday’s large drop in gasoline basis values came despite reports of 2 unplanned refinery issues that had diesel values rallying by a nickel. Watch the gasoline import numbers in the DOE report to see if any cargoes were able to divert and take advantage of the $1/gallon opportunity.
Recovery Rally Runs Out Of Steam
The 2-day recovery rally in energy futures ran out of steam Monday, and now looks like a dead cat bounce. Energy and Equity markets around the world are selling off after the latest signs of escalation in the US/China trade war, and more troubling economic data from Europe.
While the trade war is often seen as more of a threat to global energy demand as it hinders economic growth, the recent sanctions added to Chinese oil tankers is creating a squeeze on certain heavy crude grades, and sending rates for VLCC tankers (the largest in the world) soaring. So far that squeeze isn’t showing up in the futures market, but could have trickle down effects for some refiners if those sanctions continue.
Not over yet: the National Hurricane center is monitoring 3 storm systems in the Atlantic this week, two just off the US East Coast, one of which looks like it cause some trouble for boat traffic around the NY Harbor and New England regions, even if it’s unlikely to become a hurricane.
It’s data deluge week, the EIA will publish its monthly Short Term Energy Outlook later today and the API releases its weekly inventories this afternoon. Tomorrow we’ll get the DOE’s weekly status report, Thursday brings OPEC’s monthly report and Friday we’ll get the IEA’s monthly oil market report. At this point, the most important question seems to be will anyone care, or will fear keep driving the action?
Oil Prices Attempt to Rally
Attempting to rally for a 2nd straight day, after oil prices reached 2 month lows last Thursday. The sustainability of the rally this week may be pivotal to determine if the rout in oil prices is over, or just taking a break.
RINs were rallying again Friday after the EPA announced an agreement to talk more about updating the RFS. The only firm details of the press release were that the EPA would “seek comments” on actions to ensure more than 15 billion gallons of ethanol are blended annually, and to account for relief expected to be provided to small refineries. That means the law hasn’t changed, but they’re going to talk more about changing it, which the biofuel markets seem to be saying is good enough for now.
Money managers had the largest reduction of net-long positions in WTI of the year last week, as old longs bailed out and new shorts were added after it because clear that the Saudi attacks weren’t going to sustain a price rally. Brent, RBOB and ULSD all saw reductions in their net-long holdings by money managers as well, but on a notably smaller scale than WTI.
Baker Hughes reported 3 more oil rigs were laid down last week, bringing the total count to a fresh 2.5 year low at 710 total active oil rigs. The Dallas FED shared a note last week giving more detail as to why the rig count doesn’t react quickly to geopolitical disruption.
Energy Prices On The Move Higher
Energy prices are on the move higher, snapping a streak of 8 consecutive losses for WTI, spurred on by new violence in the Middle East, some optimism on the economic front, and what appears to be some technical buying of an oversold market.
Prices had been holding modest gains overnight, and then started a more meaningful move higher following the September payroll report that showed 136,000 jobs were added during the month, while both the July and August estimates were revised higher. The headline unemployment rate dropped to 3.5%, the lowest reported level in nearly 50 years, while the “U-6” unemployment rate (also known as the “real” rate) dropped to 6.9%.
Gasoline basis and calendar spreads remain unseasonably strong across much of the US, as threats of a refinery strike on the East Coast, and sky high prices on the West Coast keep a bid under prompt values.
The tropics remain relatively quiet as we move past the peak of hurricane season. There is a disturbance off the Yucatan peninsula but that’s being given a zero percent chance of developing in the next 5 days by the NHC.
Another Quiet Start
It’s another quiet start to trading as energy markets try to find a floor after 2 weeks of steady selling. Another sharp drop in equity markets had traders more in touch with fear than fundamentals Wednesday.
One way you can see that fear is driving the bus: ULSD prices dropped to pre-Saudi-attack levels despite US inventories falling to a 2 month low, and hovering at the low end of their 5 year seasonal range. The drop in diesel inventories looks to be driven by a sharp decline in distillate production as US consumption is holding right at the 5 year average for this time of year.
Declining refinery runs were another major point in the DOE report that was largely ignored by the market during the mid-day selloff, although the late bounce in refined products suggested that some traders were able to peel their eyes away from the equity selling long enough to take a bet that this market is now in oversold territory. This fall was supposed to be a relatively quiet year for fall maintenance, due to plants wanting to maximize output ahead of the IMO change, but a rash of unplanned issues on the Gulf and West Coasts has cut total US runs to the bottom end of their fall range.
Speaking of which, the California gasoline price bubble now looks like it’s deflating as spot prices have dropped 20 cents or more in the past two days, amid reports that refiners were getting their run rates cranked back up after more unexpected down time. Still, it’s not exactly a price collapse when prompt values are still $1/gallon over futures, but the history of that extremely volatile region suggests we could see huge moves lower in the days to come.
Concerned about running out of ethanol due to the 25 cent/gallon price spike last week? Don’t be. The DOE report showed that ethanol inventories continue to hover near record-high levels.
Week 39 - US DOE Inventory Recap
Energy Futures Going Nowhere
Energy futures are going nowhere to start Wednesday’s session, as it appears that demand fear continues to outweigh supply fear.
Tuesday’s session was highlighted by a failed rally attempt, that seemed to run out of steam mid-day when US equity markets reversed course from early morning buying to heavy selling. A decline in US manufacturing is getting credit for the selling in both asset classes.
Oil prices did attempt to rally back after the API was reported to show a large draw in US crude stocks in their weekly report released Tuesday afternoon, but as has been the case frequently over the past few weeks, were unable to sustain that brief buying spree. The industry group reported a 5.9 million barrel decline in oil inventories, a 1.7 million barrel draw in distillates, while gasoline stocks increased 2.1 million barrels. The EIA’s weekly report is due out at its normal time this morning.
While normally an afterthought in the weekly inventory reports due to its “island” status in the fuel supply world, PADD 5 activity should be watched closely for signs of what may happen next in the epic gasoline rally taking place along the West Coast. LA spot markets did see their first decline in 7 trading sessions Tuesday, but remain more than $1/gallon over futures and most spot markets in the rest of the country. Today’s inventory report may give a signal if that pullback is a temporary respite, or the first sign that the bubble is about to pop.
RIN values got a boost Tuesday after reports that the White House had forged a compromise between Big Ag and Big Oil groups to reallocate some of the RINs exempted from small refineries. Details are yet to come, and similar rumors have been floated for more than a year, so there’s definitely a bit of wait and see in the market reaction.
Q4 Kicks Off With Modest Gains
The 4th quarter is kicking off with modest gains for energy prices, after they ended the third quarter with heavy losses – despite the attacks in Saudi Arabia that took more than 5% of the world’s oil production capacity offline. The early bounce this morning may have more to do with technical factors (buyers stepping into an oversold market, or funds reallocating capital to start a new quarter) than it does fundamental, as the Saudis are claiming their output is now fully restored.
When will the bubble burst on West Coast gasoline prices? Monday saw another casual 15 cent price increase for CARBOB prices that are currently trading about $1.30/gallon above NYMEX futures, and $1.20 above the next most expensive market east of the Rockies. The price spike is bad news for drivers in the area that are now dealing with prices above $4/gallon, but may open up a window for retailers once the inevitable price collapse takes place.
Ethanol prices have continued their rally, surging more than 25 cents in the past week, with the latest move higher coming on the heels of a bullish USDA crop report. Ethanol RINs have not fared nearly as well, pulling back sharply in the past week as it becomes clear the latest rumors about changes to the RFS do not appear to be coming to fruition with little things like impeachment taking center stage in congress.
Want another reason why oil prices are no higher now than they were before the attacks in Saudi Arabia? The EIA published a note this morning highlighting production in non-OPEC nations, that are seeing historically low outages.