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A Wild January Comes To A Close
A wild January is coming to a close with energy prices clinging to small gains, and trying to avoid another wave of selling that has brought diesel prices to 17 month lows.
While equity futures are pointing lower again as the outbreak continues to grow, energy futures are clinging to small gains after new reports of violence across the MENA region remind us that there still are supply fears that could send prices higher, in addition to the demand fears that have taken over the headlines.
Fighting has resumed in Libya after cease-fire talks broke down. Roughly 750,000 barrels/day of oil exports have been taken offline as a result of this most recent flare up.
Saudi Arabia: Another attack on Aramco’s facilities was reportedly stopped last week. No impact on supplies was reported due to this latest attack.
Persian Gulf: An oil tanker caught fire west of the Strait of Hormuz. Still unclear if this was another attack like we saw last summer, or just a creative effort by the crew – who have been stuck on board for a year due to an ownership dispute – to get off the boat.
Earnings releases this week from several major oil producers and refiners shows a tough operating environment, with many reporting year on year declines in earnings, and several announcing plans to divest more assets as a result. Refiners are noting narrower crude differentials this year as a reason for lower profits, as new pipelines have eliminated the transportation bottleneck in W. Texas. For those plants that have access to Western Canadian crude, the picture is a bit brighter as those spreads have been widening again, although they’re still only half as wide as they were in 2018.
With product spreads crumbling in January, and most crude spreads not offering a bail out, it’s no wonder that we’re seeing more and more reports of elective run cuts at refiners this week.
Today’s captain obvious award: The EIA’s report that risk of oil supply disruptions can have an immediate effect on oil prices. Thanks for that.
Another Fear On/Risk Off Day
It’s another Fear On/Risk Off day for energy and equity markets after the recovery rally ran out of steam Wednesday afternoon. The weekly inventory report from the DOE seemed to matter for about five minutes yesterday, as did the FOMC announcement, and then trading seems to have refocused on the unknowns of the coronavirus.
ULSD prices are leading the move lower again, and are facing an important test on the charts as they hover around one-year lows near $1.65. The last time they traded down to this level at the end of 2018, they rallied 25 cents in under two weeks. That said, there is little other support on the charts, so if prices can break and hold below this level, there could be another 20 cents of downside in short order.
A five percent drop in refinery runs was the most notable figure from the weekly DOE report, with rates dropping in four out of five PADDs. A variety of planned and unplanned maintenance events throughout the country – foreshadowed by strengthening basis values over the past week – help explain the large drop, while discretionary cutbacks due to plunging crack spreads could also be in play. Typical seasonal patterns suggest we should see refinery rates continue to drop for another two to three weeks before starting the annual spring ramp up.
Despite the cut back in refinery throughput, gasoline inventories reached a new record high last week, with the gulf coast glut growing for another week. Inventory levels on the East and West coasts are holding near or below their five year averages for this time of year, but the gulf coast now has nearly five million barrels more inventory than we’ve ever recorded prior to 2020. That excess in the gulf could lead to stronger values for shipping, whether that be over the water or on pipelines, as PADD three suppliers will be challenged to clear that excess ahead of the spring RVP transition.
Week 4 - US DOE Inventory Recap
Sigh Of Relief Rally Extends
The sigh of relief rally is extending for a second day in energy and equity markets as more signs appear that the damage done by the coronavirus may not be as widespread as once feared.
It’s still too early to say that the we’ve seen the worst of the selling, the virus is still spreading and it seems to be nearly as contagious as the fear it produces. For energy futures, the first test will be whether or not prices can hold onto these gains and end the week higher. If not, this rally looks like just a speed bump on the road to lower prices.
The API was said to show U.S. oil inventories dropped more than four million barrels last week, while gasoline stocks increased by 3.3 million barrels, and distillates drew by a rounding error of 141,000 barrels. Once again, RBOB is a bit of a head scratcher, leading the move higher in prices this morning despite its stats looking the weakest in the latest API headlines. The DOE’s weekly report is due out at its regular time this morning.
The EIA published a look back at the biodiesel blenders tax credit, predicting that the forward reinstatement of the $1/gallon subsidy should lead to substantial increases in both domestic production and imports of bio and renewable diesels over the next two years.
The FOMC is meeting today, and the CME’s FedWatch tool shows zero expectation for a rate cut at this meeting, with a 13 percent chance of a rate increase. The forward outlook for rates has changed notably this week with traders now pricing in 40 percent odds of at least one rate cut by the summer, up from 30 percent just a week ago, as more people bet the FED will need to step in to minimize the impact of the coronavirus.
Desperation setting in: Venezuela seems to be throwing a Hail Mary, floating the idea of turning its oil industry back over to the private sector to try and save its collapsing economy.
Viral Selling Takes A Break
Viral selling is taking a break this morning as cooler heads are temporarily prevailing and equity and energy markets are managing a modest bounce after another brutal selloff on Monday.
The difference in price action today vs. the meltdown of the past few sessions doesn’t appear to be happening because anything meaningful has changed in the outbreak, but simply because people are taking a step back and paying attention to other fundamental factors besides the “what if” fears from the coronavirus.
OPEC ministers (and several banks) are suggesting that the market has overestimated the impact on oil demand from the outbreak, and noted that the cartel will be ready to act in March if needed to steady prices. Several are noting that the drop in Libyan output alone may mean that OPEC will not need to make further cuts to balance global supplies.
The treasury yield curve is threatening inversion for the first time since October, which for many is a sign of a looming recession, and to many more is a sign that the FED may step in to soothe the fears in financial markets.
While most risk assets were selling off Monday, RIN values were rallying after a federal judge ruled the EPA had overstepped its bounds in granting three small refinery waivers. There’s a chance this ruling could lead to other waivers being vacated since the EPA was only allowed to grant extensions after 2010, not new waivers. It’s unclear which other plants could be affected, or if any of the plants will be forced to meet past RIN obligations, which would have the most impact on RIN values near term.
Fear Takes Hold Of Global Markets
Fear has taken hold of global markets with equity and energy prices selling off sharply as the coronavirus outbreak accelerated over the weekend. Concerns about the impact to the global economy are far outweighing new threats to oil supply in Libya, Kazakhstan and Iraq, with energy futures reaching multi-month lows.
If you look back to the SARS outbreak in the early 2000s, oil prices dropped by 1/3 during a similar wave of panic selling, and took a year to recover those losses. With oil prices already down around 20 percent in the past three weeks, it’s not hard to imagine that prices could end up being cut by 1/3 during this contagion sell-off. A counter argument would be that SARS effected Hong Kong a major travel hub, while this virus is coming from a relatively unknown inland city which may mean less impact on demand.
ULSD futures have been the hardest hit during the past few weeks, reaching their lowest levels in a year overnight, more than 45 cents below their high trade from January 8.
Money managers were not scared off by the first wave of selling, with large speculators adding to their net long holdings in WTI, Brent and RBOB contracts last week. The COT report data is compiled as of Tuesday, so we won’t know how they weathered the larger round of selling to end the week until this Friday’s report, although given the crescendo of selling we’ve been witnessing, it seems likely the speculative funds are racing for the exit.
Baker Hughes reported an increase of three oil rigs last week, a second consecutive weekly gain after declining for most of 2019.