News & Views
News & Views
News & Views
Are The Worst Demand Days Behind Us?
Energy prices are seeing a strong rally for a second day following some positive data points from the weekly inventory reports that suggest that the worst demand days are behind us.
The DOE’s weekly report showed a second weekly increase in domestic gasoline demand, and a tick higher in refinery runs as inventory builds appear manageable.
While refiners seem to be up to the storage challenge, and are now increasing run rates as demand ticks higher, crude oil stocks are now within striking distance of all-time highs, suggesting we’ll have to see a larger drop in domestic production in the coming weeks. Based on industry data, it seems as though the actual drop in crude oil production may be much larger than the DOE’s estimates have shown thus far.
Today is the last trading day for May RBOB and ULSD. The May RBOB contract hit its highest level of the month this morning, setting up an important technical test. If RBOB can hold above the $0.77 range, the charts show an open path back north of $1 in May, but if they fail, this recent optimism will look fickle.
It’s a busy week for Q1 earnings releases, offering a glimpse into the pain felt by oil producers and refiners. The major themes are large losses driven by inventory write downs, based on end-of-March valuations, while operating incomes are expected to get worse in the coming quarter as the Corona shock-wave didn’t hit until the back half of the first quarter.
Week 17 - US DOE Inventory Recap
Energy And Equity Prices See Strong Gains In Early Trading
It’s a Risk On Wednesday as energy and equity prices are both seeing strong gains in early trading with optimism for life after Coronavirus taking some hold.
The API estimated that U.S. gasoline stocks dropped by 1.1 million barrels last week, while crude oil built by just under 10 million barrels and diesel stocks increased by 4.5 million barrels. The DOE’s weekly report is due out at its regular time.
The drop in gasoline stocks is the latest in a series of signs over the past week that domestic gasoline consumption is picking up. While demand remains far from where it usually is this time of year, it's a positive change that helps alleviate storage concerns for now. Gasoline cash markets are also reflecting this optimism with continued buying across several regions this week, pushing differentials up by 40 cents or more in some markets since bottoming out earlier in April.
May futures for RBOB and HO expire tomorrow, and are already seeing much lighter volumes than normal, so don’t be surprised to see some wild swings as those contracts go off the board. The super-contango across energy contracts means that June RBOB should open up near the $0.77 range that held resistance for several days earlier this month. This should provide a good near-term test of the staying power of this recent rally.
The FOMC is wrapping up a two day policy meeting today, and will be making an announcement this afternoon. With the FED already pulling out all the stops, including buying up more than $2.5 trillion worth of various assets and slashing interest rates to essentially zero, no one seems to be betting on an interest rate change from this meeting. In fact, according to the CME’s Fedwatch tool, traders aren’t expecting any change in interest rates for at least a year.
Economic Shutdown Aims At New Part Of Oil Barrel
It’s a mixed bag for energy prices to start Tuesday’s trading as the economic shutdown takes aim at a new part of the oil barrel this week. What was a crude oil demand story in February, became a gasoline story in March, only to become a crude and diesel story in the back half of April.
Exports (or rather a lack of) seem to be the new cloud hanging over diesel prices, as U.S. refiners that became diesel suppliers to the world now struggle to find a home for those barrels. The Pemex force majeure debate continues to weigh heavily on futures and cash prices, with some U.S. spot markets dropping to 50 cents/gallon for ULSD, while futures reached a new 18-year low overnight.
Gasoline futures and cash markets are faring much better this week, as it appears driving demand may have reached a bottom, and refinery cut backs are starting to balance the supply/demand equation.
Another consequence of the May WTI shockwave: Liquidity in May refined products contracts, which expire Thursday, is already drying up with June seeing nearly 10x the May contract volume already this morning. Usually that disparity in volume is reserved for the last day or of the month, but may become the norm as traders are apparently afraid of becoming the next one stuck to sell a negative number.
Speaking of expiring contracts, more index funds are announcing that they’ll be moving positions further out along the forward curve, just as the U.S. oil fund was faced to do in order to avoid extinction. The announcement by S&P Global is getting early credit for the big drop in June WTI this morning.
The Dallas FED’s Manufacturing Survey gave another data point on how quickly things went from bad to worse, with several readings far exceeding the previous record low readings set in 2008. The survey did include supplemental questions to businesses that had applied for new SBA programs, with over half of those respondents suggesting their business would return to normal levels in six months or less once restrictions are lifted.
Not a good time for a reminder: The EIA this morning published a note highlighting U.S. energy production for 2019 exceeds domestic consumption for the first time in over 60 years. Unfortunately, this fact has become painfully clear for any producers in 2020, and isn’t a point to celebrate as it was just a few months ago. Petroleum continues to be the largest source of energy, while natural gas is the fastest growing, rapidly replacing coal in the energy stream.
Energy Futures Struggle To Find Price Floor
Energy futures are struggling to find a price floor as concerns over where to store supply in the short term outweighs global equity markets, cheering signs of gradual reopening.
June WTI is trading below $13, down more than 24 percent on the day, but that seems somewhat pedestrian compared to what we saw a week ago when the June contract traded as low as $6.50 in the wake of May’s epic meltdown. In the latest sign of the demand for tankage, Energy Transfer is now reportedly looking to idle two Texas pipelines to use the lines for temporary storage space.
Reports that Pemex was declaring force majeure on fuel import contracts seems to have driven much of the heavy selling in both time and basis spreads for distillates Friday. Those reports were later refuted later in the day, and since then we’re seeing ULSD try to lead the rest of the complex higher. As we saw in last week’s DOE report where a heavy drop in exports drove a large inventory build in distillates, this story could have major implications for U.S. refiners on both the Gulf and West coasts.
Baker Hughes reported that 60 more oil rigs were taken offline in the U.S. last week, 37 of which were in the Permian basin. At this pace, the total U.S. rig count, which has dropped by 305 rigs in just six weeks, is only one to two weeks away from breaking the low set in 2016.
Money managers increased their net long holdings in both Brent and WTI last week, although it’s worth noting that Brent did not see new longs joining in, just shorts liquidating what were likely to be very profitable positions. WTI did see new length added by both the money manager and other reportable category after “can I store crude in my swimming pool?” became a trending topic.
Growing long positions in ULSD and Gasoil Contracts among the “swap dealer” trader category shows the rapidly increasing interest by distillate consumers to lock in at these historically low prices.
A Week That Set Records
The recovery rally in energy futures ran out of steam Thursday as RBOB saw an early 10 cent rally wiped out in afternoon trading, while crude and ULSD futures saw similar but less substantial pullbacks.
The lifespan of the market influence behind a presidential tweet continues to shrink after the latest bit of saber rattling between the U.S. and Iran failed to hold prices up for even a day. It’s hard to believe just over three months ago, military strikes between the two countries had many fearful of a supply shortage that would drive oil prices north of $100.
This week will go on record as the most volatile ever in 37 years of the WTI futures contract, while also marking the only time that contract traded in negative territory. The repercussions of those price swings are still being sorted out, with new reports suggesting that international retail investors playing in complex structured products may have been left holding the bag. After all the drama this week, the June WTI contract is now down just one dollar/barrel from where it settled a week ago.
While refined products are starting Friday’s action with a whimper, and are on pace to end the week with substantial losses, there are some signs of optimism in strengthening cash markets, and various indications that domestic demand may have found a floor. In other words, for many producers of petroleum products, things may not yet be getting better, but at least they’ve stopped getting worse - for now.
Gasoline Futures Up Since Tuesday's Settlement
Gasoline futures are up more than 20 cents since Tuesday’s settlement, even as inventories reached a new all-time high last week, amidst signs that domestic consumption has bottomed out and refinery cut backs are keeping inventories from reaching critical levels. Diesel prices are lagging behind in the rally, only up about a nickel during that span.
While diesel demand didn’t fall nearly as much as gasoline over the past month, it saw a healthy increase in last week’s estimate. Diesel inventories continue to rise at a rapid pace due to refinery output holding steady, and exports backing up into the U.S., accounting for five million barrels of the seven million barrel build reported by the DOE.
Cash markets around the U.S. are seeing similar divergence, as gasoline basis values strengthen. Distillates are facing steady selling pressure, pushing Chicago and LA spot markets to record-low levels.
The CME Group (parent company of the NYMEX) chairman said its market for WTI futures “worked to perfection” this week in an interview, and gave a reminder that the exchange is not for average retail investors. That’s a lesson many are finding out the hard way, as the ETF that tried to make WTI available to retail investors is on the verge of an implosion.
The CFTC announced it was investigating the potential for insider trading surrounding the Russia/Saudi price war announcements in March. It doesn’t appear that had anything to do with the volatility this week, but it does shed light on some of the shadier influences the market is dealing with daily.
The EIA this morning published a closer look at the demand drop for petroleum products over the past month, noting that continued demand for distribution of supplies and home deliveries is likely the main contributor to the relative strength in diesel demand.
Week 16 - US DOE Inventory Recap
Energy Complex Tries To Claw Back Some Value
Gasoline traders seem to be taking the glass half full approach to inventories reaching new all-time highs with a seven cent/gallon rally in the early going Wednesday, as the energy complex tries to claw back some value after two days of heaving selling for most contracts, amid the mind blowing swings in the now expired May WTI contract.
The API was said to show more large builds in inventories across the board last week with crude stocks up 13.2 million barrels, gasoline stocks rose 3.4 million barrels and distillates rose 7.6 million barrels.
The DOE’s weekly report is due out at its normal time this morning. Beyond the headline stats that tell us where the government estimated inventories were last Friday, the key figures to watch are the refinery input and output levels which will give us more insight into where those inventories will be in a month. U.S. refiners have done a remarkable job so far of cutting back total run rates and gasoline production without sacrificing much output in ULSD, but seem to be reaching their limits of both capacity and yield that have pushed physical product prices to 20 year lows.
Chinese refiners are offering a glimmer of hope to beleaguered U.S. plants, as they begin ramping up rates and are estimated to be surpassing total U.S. output temporarily as the country returns to business. If a similar pattern plays out in the U.S., we should see refineries be able to start ramping up production in late May or early June.
Big Decision: The U.S. Oil fund – the giant oil-related ETF that investors often mistake for owning oil, announced it was shifting its portfolio further forward on the curve, and executing a reverse share split, due to the extreme volatility in the front month contracts that threaten to destroy the fund.
No decision: Texas regulators chose not to create limits on oil producers this week. The industry meanwhile continues to rapidly cut production at an unprecedented rate as it tries to catch up to the rapid demand drop around the world.
How Long Will This Crude Chaos Last?
May WTI is up $34/barrel this morning, the biggest rally in the 37 year history of the NYMEX contract. May WTI futures are up $34 this morning, and yet are still trading at a negative $3.50/barrel.
This ultimate lesson in the realities of futures contracts tied to physical delivery was provided in Monday’s epic 350% percent price drop, when the May WTI contract (which expires today) not only traded negative for the first time ever shortly after 1 p.m. central, but then traded at negative $40/barrel less than 20 minutes later.
Storage tanks at Cushing, OK – the delivery hub for the WTI contract - are on pace to reach maximum capacity in about a month – right when the May WTI contract would be due to deliver – meaning buyers became scarce as their ability to hold any additional barrels ran out and sellers were forced to pay in order to find someone to take those contracts off their hands. I’m sure there are plenty who will disagree with this point, but it seems that the negative value are a sign of free markets behaving as they should, and the physical delivery tied to futures contracts the ultimate tool to keep a market from being easily manipulated.
It’s likely we may never know who was caught in that unenviable position of paying nearly $1/gallon to sell crude oil futures, but it is certainly possible that the move may have caused, or perhaps was caused by, bankrupt companies being forced to liquidate positions. Perhaps a former FBI director will be hired to tell the tale someday like we saw in the aftermath of the 2008 debacle.
If you’re wondering how long this crude chaos may last, take a look at the forward curve chart below, and see the relative lack of reaction in values six months and more in the future, which also helps explain the minimal reaction in major oil company stock prices during Monday’s meltdown.
Today’s heavy selling in RBOB and ULSD seems to be at least in part the aftershocks of the WTI crash, with market players waking up to the reality that negative values can and do happen, and with U.S. gasoline inventories at record highs, there is a chance we could see a lack of storage options continuing to wreak havoc on both physical and futures prices until the country reopens.
Diesel prices meanwhile have reached a 17-year low overnight, caught up in the larger petroleum price swoon, even though U.S. diesel stocks are near the low end of their seasonal range. In some U.S. markets, we've already seen the lack of gasoline space creating diesel shortages due to pipeline and tankage constraints, and it appears that trend is likely to continue.
U.S. Energy Exports Officially Exceed Imports
The wheels have come off the May WTI contract (which expires tomorrow) as prices have dropped more than seven dollars/barrel so far this morning (a smooth 38 percent decline) to a new 21 year low at 11 dollars/barrel. The rest of the energy complex is under more reasonable selling pressure, with June WTI down around three dollars/barrel at 22 dollars, and July WTI down two dollars at 27 dollars.
Reports that Saudi Arabia is sending more oil to the U.S. seems to be contributing to the sell-off as those additional barrels will exacerbate the storage constraint issues already being felt around the country.
RBOB gasoline futures are maintaining relative strength, down just over a penny, less than a two percent drop on the day, while ULSD futures are down more than three cents for the first six months of trading, just over three percent losses so far. West coast physical prices ended the week with a strong rally, after reports that Marathon was shutting down its refinery in Martinez, CA, the second plant the company announced it was idling due to the rapid drop in fuel demand.
Major oil trader Hin Leong Trading filed for bankruptcy Friday. Reports came out over the weekend that the company had been hiding $800 million in losses from futures trading, bringing back memories of other epic busts involving hidden energy trading positions like Amaranth and SemGroup.
Baker Hughes reported 66 more oil rigs were laid down last week, half of which were in the Permian basin. The five week tally is 245 total U.S. oil rigs taken offline, roughly 37 percent of the total operating count.
Money managers made small additions to their net length in WTI, Brent and RBOB contracts last week, ending a seven-week stretch of speculative liquidation in the gasoline contract.
The EIA reported this morning that U.S. energy exports officially exceeded imports in 2019 for the first time in 67 years. Unfortunately, the country’s demand is now approaching levels from 67 years ago as well, which is not the way the industry wanted to celebrate.
Equity Markets Ride High On Hope Instead Of Fear
Equity markets are riding high on hope instead of fear to end the week, as stimulus is spreading in record amounts and countries are talking more about plans for reopening for business. Energy markets are having a hard time keeping pace as doubts about near term fundamentals are keeping a lid on prompt prices, even though forward values are finding buyers, pushing the correlation between the two asset classes to the lowest levels since the crisis began.
The May WTI contract seems to have decoupled from the rest of the energy train this morning, trading two dollars/barrel (10 percent) lower on the day, reaching a fresh 18 year low at $17.53. Most other contracts in the complex (including the forward month WTI contracts) are making small gains so far.
Setting up for failure? RBOB futures failed to hold above the $0.77 resistance layer for the fourth time in five trading sessions Thursday, and appear to be forming a dangerous topping pattern on the charts that could set up a test of the $0.37/gallon-lows set in March. While futures seem to have stalled out temporarily, basis values in several markets have rallied sharply this week on news of more refinery cut backs, and rumors that additional refinery closures may be coming soon.
A handful of states have formally requested a waiver of the RFS to help get their refining companies through the crisis. RINs drew back from multi-month highs following the report, but the selling was modest as no action from the EPA is imminent, and the Big Ag lobby will no doubt respond in force.
Energy Prices Carve Out A Floor This Morning
Energy prices are trying to carve out a floor this morning after WTI and ULSD both reached multi-year lows in Wednesday’s session. European grades appear to be leading the push higher this morning with ICE Gasoil (diesel) futures up more than seven percent on the day, while Brent is up more than one dollar/barrel, following a tentative outline for how the continent would reopen its economy.
Talk about super-contango: At this point, when the May WTI contract expires next week, prices will increase 30 percent just from the roll to the June contract that is worth six dollar/barrel more than May.
According to the DOE’s weekly report, U.S. refiners are doing a remarkable job of maintaining steady diesel production, despite dropping total run rates by 20 percent in the past week. The output by product suggests that some unwanted jet fuel components are finding their way into the ULSD pool, helping to maintain that total output of diesel even while gasoline output crumbles to keep up with the drop in demand.
Speaking of demand, total gasoline consumption appears to have found a temporary floor according to the DOE’s weekly estimate (albeit at a 50 year low) while it was diesel’s turn to get hit by the COVID-19 blues with a 25 percent decrease in consumption.
Both the West Coast and Chicago spots are seeing new all-time low price records broken this week, while the Group 3 spot market saw a furious rally after trading nearly 50 cents below futures last week as local refiners announced plans for further run cuts.
Week 15 - US DOE Inventory Recap
Fresh Lows Hit Overnight
WTI hit a fresh 18 year low overnight at $19.20/barrel, and ULSD futures briefly traded below $0.90/gallon for the first time since January of 2016. These losses seemed to be spurred on by the API inventory report which was said to show a 13 million barrel build in U.S. oil stocks, and a 5.6 million build in diesel inventories.
After spending most of March as the weak link in the petroleum chain, RBOB gasoline continues to put on its relative strength show, making modest gains for a fifth straight trading session. U.S. gasoline stocks built by a more modest 2.2 million barrels according to the API estimate. Despite doubling in value over the past three weeks, RBOB is still not managing to break overhead resistance at $0.77/gallon, leaving the contract susceptible to another wave of heavy selling.
In most years, this week would mark the beginning of the end of the spring gasoline RVP transition. Most pipelines have converted to summer-grades, and spot markets are trading exclusively on the more stringent product before terminals have their tanks turned by month end. This year however, there remains plenty of confusion as waivers and delays of varying degrees from the state and federal levels leave shippers and terminal operators unsure of their deadlines. Those with full storage tanks of winter-grade product are unsure of what they’ll do if further waivers aren’t granted. The EPA this week issued guidelines in how it is planning to streamline some of its refined and renewable fuel, including a less-complicated plan for summertime RFG VOC requirements, and separately issued a PSA on flushing toilet paper.
A marathon debate on whether or not to mandate reductions in oil output in Texas took place Tuesday, with tensions running high and conclusions running low. The very un-Texan idea of a government mandate on oil may end up being unnecessary, as the industry is already being forced to make drastic cuts due to a lack of capital in some cases, and tankage in others.
We’ll get to see how that tankage is holding up in today’s DOE weekly status report as producers race to keep pace with the largest demand drop in history. The IEA’s monthly oil market report pegs that demand drop globally at 29 million barrels/day for April (nearly 30 percent) and 9.3 million barrels/day for the year, wiping out a decade’s worth of growth in just a few months.
Battle Of The Forward Curve Breaks Out
Just as the oil price war was supposed to be ending, a battle of the forward curve has broken out as buyers are bidding up prices three months to three years in the future, while sellers continue to struggle to find a home for prompt supplies. Reports that Saudi Arabia is offering further discounts in Asian markets for May deliveries is the latest sign of a market running out of space to store its product.
Nowhere is the impact on the forward curve more evident than in WTI, where prompt values are down more than four dollars/barrel (16 percent) from a week ago, but three months and forward are all higher now than they were before the OPEC agreement. This is the market appearing to signal that while these unprecedented cuts will eventually balance the market, there’s not much of a solution in the short term until the stay at home orders come to an end.
A similar phenomenon is playing out in physical markets for refined products around the country, as it seems each day a new record is broken for discounts being sold to the futures contracts. Monday it was west coast diesel values that came under heavy pressure, with L.A. & San Francisco CARB diesel priced 15 cents below futures, finding themselves in the unusual position of being the cheapest diesel in the country.
The divergence between futures and physical prices continues to be most pronounced in gasoline. Three of the five largest spot markets hold discounts of 30 cents/gallon or more, as refiners and shippers struggle to adjust to the collapse in demand. RBOB futures continue to advance despite the negative signals in the physical market, currently trading at nearly twice the value they were at their March lows. There are some technical warning signals flashing for RBOB futures, as the contract now is overbought on some short-term indicators. If they can’t break above $0.77 this week, there’s a good chance we could see another wave of selling to end the month.
Ethanol and their associated RINs are also continuing to sustain a rally this week as shuttered production facilities are expected to ease a record inventory overhang in the U.S.
Oil Production Cuts Fall Short Of Demand Drop
The Oil Price War officially ended last week as Saudi Arabia, Russia, and the other members of the OPEC & Friends alliance agreed on the framework for the largest production cuts ever. Markets have not been impressed so far however as those cuts still fall short of the drop in demand we’ve seen in the past month, and as compliance is still in doubt, even though Mexico finally agreed to the pact over the weekend.
Friday’s meeting of G20 oil ministers won a Captain Obvious award when the group agreed that stabilization in the market is needed. Beyond that, the group was unable to come up with any sort of detailed plan, which may not matter since producers will be forced to cut on their own as they run out of places to store their product.
Baker Hughes reported 58 more oil rigs taken offline last week, marking a drop of 179 rigs in the past four weeks, 26 percent of the national total. That’s how capitalism deals with low prices.
An explosion and fire at one Gulf Coast refinery, and storm-related power outages that knocked another offline over the holiday weekend would ordinarily be enough to get markets stirred up, but in the current world where most – if not all – refiners are forced to cut production due to the rapid and record setting drop in demand, those two events seem to barely make a blip on the radar.
With basis values in several regional markets running near all-time lows, this week’s action looks like it could be pivotal in that we may see if the signals the physical market is sending on extreme oversupply create another wave of selling in futures.
Money managers increased their net length in Brent crude contracts last week for the first time in six weeks signaling that the large speculative class of trader thinks the floor may be in for prices. WTI and ULSD both saw minor increases in managed money positions while RBOB continued to see its mass liquidation event from the record number of bets that gasoline prices would move higher, when prices were actually more than one dollar/gallon higher than they are now.
Output Cut Plan Announced
Oil prices saw an old fashioned round of “Buy the rumor, sell the news” Thursday as prices dropped five dollars/barrel from early morning levels after OPEC & friends announced a 10 million barrel/day output cut plan. RBOB & ULSD futures both dropped more than a dime from their morning highs as traders seemed to emphatically vote that the deal – which still has hurdles to become reality - was too little, too late, to offset the drop in global demand.
Markets around the world are closed today for Good Friday, with no energy futures trading or spot market assessments.
G20 Oil ministers are meeting (virtually of course) today to discuss joining in with output cuts to try and balance the markets, and perhaps to put pressure on hold-out Mexico to get on board and avoid killing the OPEC deal.
Basis values came under heavy selling pressure this past week as U.S. physical players seemed to signal that the optimism in futures markets didn’t have much room in their tanks, suggesting we could see more downside to prices next week and more retail stations offering gasoline for less than one dollar/gallon.
Prices Tick Higher Ahead Of Virtual Meeting
Prices are ticking higher ahead of the virtual meeting among OPEC and its former allied nations that’s scheduled to start at 9 a.m. central. As the rumors from that meeting start to trickle out, don’t be surprised to see some extremely choppy action as the results of this meeting could be the difference between oil dropping below $20 and rallying back above $40.
While Russia may still be the lynchpin in any OPEC & Friends oil output cut deal, the country is having to consider banning gasoline imports from its European neighbors that are threatening their domestic refinery production. That scenario sheds light on a harsh reality facing oil producers these days. Even if the OPEC alliance cuts production by 15 million barrels/day, that is not enough to offset the drop in demand until the shelter in place orders are removed.
How crazy is the rush for storage becoming? As the traditional tankage on shore, at sea and in rail cars is quickly gobbled up, there’s now a suggestion we could see oil in bags just like your favorite boxed wine. Based on the DOE’s latest weekly data, the U.S. could handle four more weeks of the recent 13-15 million barrel/week increases in oil inventories before reaching the all-time highs set in 2017, and the SPR storage opening could offer another three to six weeks’ worth of room, although logistical bottlenecks will limit what is able to be stored.
Is the bearish sentiment coming to an end? U.S. gasoline stocks rose by 10.5 million barrels last week according to the DOE’s weekly report – the second largest increase on record - and yet gasoline futures ended the day with solid gains. Buyers may be encouraged by gasoline output dropping to keep pace with the fall in demand, but cash markets still aren’t showing that optimism with multiple regional grades still trading 40 cents or more below futures, forcing rack prices in a few distressed markets to drop below 10 cents/gallon Wednesday.
U.S. refinery runs have dropped to levels not seen since Hurricane Harvey knocked more than 20 percent of domestic capacity offline 2.5 years ago. The difference this time is instead of seeing cars lined up for blocks in a rush to fill up, we’re seeing retail gasoline below $1/gallon in more markets daily and empty pumps.
Weekly jobless claims in the U.S. were reported at 6.6 million last week, bringing the three week total north of 16 million since stay at home orders became widespread, dwarfing anything we’ve seen before.
Week 14 - US DOE Inventory Recap
Eye-Popping Statistics Continue To Roll In
The optimism that was pushing energy and equity prices sharply higher Tuesday morning faded away in the afternoon, sparking another wave of selling, albeit less dramatic than what we became accustomed to in March.
Energy prices are off to a quiet start Wednesday as traders appear to be taking a wait-and-see approach ahead of the OPEC & Friends meeting Thursday. There’s also a G20 oil minister meeting Friday that could have some bearing on oil production, but it falls on Good Friday, one of only three holidays all year when futures trading is completely shut down, and the only non-federal U.S. holiday in which this occurs.
The eye-popping statistics continue to roll in as economic reports start to catch up to the unprecedented slowdown we’ve experienced in the past few weeks.
The EIA’s monthly Short Term Energy Outlook highlights how the energy world has changed so dramatically in the past month, and predicts that the U.S. will return to being a net importer of petroleum products as domestic oil production is forced to slow down, and the global market for refined products slows down our exports.
The API estimated U.S. oil stocks rose by nearly 12 million barrels last week, while gasoline stocks increased by 9.5 million barrels and distillates continued to buck the trend with a small decline of 177,000 barrels. The DOE/EIA’s version of the weekly stats will be out at its normal time, and should have more record setting numbers.
They aren’t negative yet, but prompt values for conventional subgrade gasoline in the Group 3 spot market ended Tuesday around 17 cents/gallon, as regional stockpiles swelled north of 50 days’ worth of supply with demand crumbling, forcing sales to unheard of levels some 47 cents below futures. Chicago and LA spot values aren’t too far behind, both trading at record discounts 36 and 34 cents below futures respectively, putting outright values right around 30 cents/gallon this morning.
Signs Of Progress In The Covid-Wars
Optimism abounds as global markets cheer signs of progress in the Covid-wars, helping beleaguered energy futures move further away from their lows of the year.
RBOB gasoline futures doubled in value since reaching a low of 37 cents on March 23. Unfortunately for gasoline producers, the rally in futures has been largely offset by heavy selling in cash markets that has dropped basis values in several regions to all-time lows, and keeping outright values in the 35 cent range, well below the value of crude oil in most cases.
Diesel prices have outperformed gasoline for the past month as commercial demand remained relatively robust compared to the collapse in gasoline demand, but here too basis values are starting to come under more selling pressure as demand erosion starts to sink in.
Exxon announced this morning that it was cutting capital spending by 30 percent and operating spending by 15 percent to get through the pandemic. The report noted that the Permian would see a larger share of those spending cuts given the short-cycle nature of that production. The company also noted it was increasing production of chemicals used in hand sanitizes and masks to aid in the global response to Covid-19.
The forward curve charts below shows that as the pandemic curve has flattened, so has the contango in energy futures, although there is still a strong incentive for store and carry trades over the next six months.
Oil Deal Doubts Overshadowed
The stage was set for another Monday meltdown after the grand plans for a global oil production cut that had sent prices soaring last week went up in smoke over the weekend. Oil prices did drop around three dollars/barrel and refined products were off a nickel when trading resumed Sunday night, but those losses paled in comparison to what we saw the past three weeks, and have since been largely erased as new optimism in equity markets seems to be overshadowing doubts on the oil deal.
Baker Hughes reported a decrease of 62 oil rigs actively working last week, the fifth largest weekly drop on record. If the pattern we saw during the last price collapse continues, we should continue seeing more large reductions for the next several weeks.
The weekly commitments of traders reports are showing several notable changes in positioning during this extreme bout of volatility, along with large increases in open interest.
In Brent crude, the producer/merchant category has reached a multi-year low in short positions, meaning that producers seemed to be cashing in on their hedge positions and not putting on new shorts at these historically low levels. Another way to look at this could be that producers aren’t going to add short hedges that would effectively lock in a future loss if they did produce oil at these price levels.
RBOB positions are most notable for money managers that had been strangely optimistic now reducing their bets on higher prices to a two-year low, even as gasoline prices reach record lows in some markets. The “other reportable” category, aka small volume traders have increased their bets that prices will move higher to their largest level in two years. I would imagine the refiners having to shut down production due to a lack of gasoline demand are hoping that the small traders are right in this bet.
On the diesel side, perhaps the most notable detail of the commitments of traders report is that swap positions for both ULSD and LS Gasoil are moving steadily higher. This suggests that there’s a large amount of consumer hedging going on as commercial fuel users look to lock in at historically low values.
Oil Prices Rally After U.S. President Tweets His High Hopes
Oil prices rallied 25 percent in less than 40 minutes Thursday, after the U.S. president tweeted his hope that Saudi Arabia and Russia might come to an agreement on an output cut.
Despite the fact that the Saudi’s have subsequently made it clear that they will only cut if other producing nations join in the effort (including the U.S.) and the fact that a 15 million barrel output cut would only cover half of the drop in global oil demand, petroleum prices around the world are trading sharply higher for a second day.
Prices are also aided by the Department of Energy announcement Thursday, announcing that it is opening up the SPR for lease to struggling U.S. producers that are quickly running out of storage space. There’s a total capacity available of roughly 77 million barrels, which would accommodate roughly six days’ worth of total U.S. output, or six weeks of the record-setting inventory build we just witnessed.
The record rally following the worst month on record for oil prices has temporarily halted talk of negative oil prices; although, they did already happen on a very limited basis, with Wyoming sour trading below zero earlier this week. The more important part of that article is not that the values went negative, it’s that the negative values are a sign of a functioning market whereas some other markets are beginning to halt trading altogether.
The March payroll report just released showed a drop of 701,000 jobs in the U.S. last month, with unemployment rates jumping by nearly one percent for the headline rate, and 1.7 percent for the U6 unemployment rate. While those figures are a huge negative divergence change from the prior decade, they are also just the tip of the iceberg as most of the virus-impact was felt in just the last two weeks of the month.
Two weeks ago, the all-time official record for weekly jobless claims in the U.S. was around 700,000. Last week’s report smashed that record, with 3.3 Americans filing for unemployment benefits,. That figure was doubled again yesterday, with 6.6 million new filings reported in the past seven days, wiping out the previous four years’ worth of gains.
While the short term price action may be driven by the headlines, longer term prices may well be decided by how quickly we can get those people back to work.
Energy Prices Surge To Start Thursday's Session
Energy prices are surging to start Thursday’s session with both WTI and RBOB futures up more than 10 percent in the early going, following statements from the U.S. President that Russia and Saudi Arabia would be discussing options to stabilize the market. If you need a reason to sell this latest bounce, note the lack of news from either of those countries so far.
In addition to the emergency meeting rumored between Russia and Saudi Arabia, the White House is said to be working with industry leaders on measures to help them survive the storm. Ideas such as leasing out the 70+ million barrels of storage in the SPR, and issuing Jones Act waivers are making rounds, in addition to the various EPA waivers already enacted to help solve this most challenging logistical puzzle. The industry has been forced to get creative to reduce supply without shutting their doors.
The DOE report was full of big numbers that suddenly feel ordinary in this unusual environment. U.S. oil stocks rose by the second largest amount on record, with more than 13 million barrels on the week. It’s worth pointing out that it was during this same week three years ago that U.S. oil stocks reached their all-time high, some 65 million barrels above current levels.
Gasoline demand fell nearly 25 percent (2.2 million barrels/day) on the week according to the DOE’s weekly estimate, and based on data from sales over the past several days, it’s likely we could see another similar decline in next week’s report. For perspective, that decline is nearly twice as big as the previous weekly record set over the Christmas holiday week in 2016. This is more than one million barrels/day - more than the third biggest drop on record set in the week after September 11.
Diesel demand remained robust last week, as an uptick in delivery and distribution demand offset the drop in buses and other commercial vehicles on the road. This weak gasoline, strong diesel phenomenon is starting to create situations in a handful of markets nationwide. Refiners are forced to cut runs due to gasoline containment issues, creating an unintended shortage in distillate supply. Diesel prices have not been reacting much to the reality at the terminal level. ULSD futures reached a new four-year low Wednesday, as refinery’s maxing diesel output and a demand slowdown both appear inevitable in April.
The bankruptcies are starting in the oil patch, with many more predicted as oil producers' only calculations these days are whether it’s cheaper to shut in their operations – which isn’t as easy as flipping a switch – or continue at minimum rates and hope the shelter-in-place orders end in a month.
Week 13 - US DOE Inventory Recap
Optimists Feeling Foolish
Those that ended March with optimism are feeling foolish to start April as energy and equity markets around the world start a new month and a new quarter with another round of risk-off selling. We just lived through what is by some measures the worst month and quarter on record for some contracts as the world tried to wrap its head about a reality that no one has experienced before.
WTI is the strongest of the NYMEX petroleum contracts this morning, in spite of a 10 million barrel inventory build reported by the API. Gasoline stocks rose by more than 6 million barrels on the week according to the industry report, while distillates drew by more than 4 million barrels. The DOE’s version of the weekly stats is due out at its normal time, and could very well show the largest demand drop ever for some products, if the government’s estimates are able to keep pace with the reality on the street.
The only thing slowing builds in product inventories is the steady stream of refinery run cuts and unit closures that are now taking place at a majority of refineries around the world. Those slowdowns are unprecedented and mean crude oil will be backed up, ultimately to the well-head, meaning production will be forced to shut in due to lack of storage above ground.
While the dramatic sell-off in futures contracts has told most of the story, the pain felt by producers can be seen more clearly in cash markets, where Western Canadian crude now goes for $5/barrel, and WTI in Midland is going for $11. Numerous other physical grades are trading at larger-than-normal discounts to the already-depressed futures pricing as producers struggle to find a place to put that oil, making the predictions that we could see negative values before this is over seem more plausible than ever.
The beneficiaries of this unusual situation look to be anyone with storage capacity that can buy the distressed barrels today and leverage the super-contango forward curve for the inevitable price rally once the stay at home orders come to an end.