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Energy Futures Try To Find A Bid
Energy futures are trying to find a bid this morning, in spite of headwinds from weaker equity markets, and a dire outlook for fuel demand. It’s the last trading day for April RBOB and ULSD (HO) futures, so watch the May contracts for price direction at the racks, while we could see some fireworks in the expiring contracts as we wind down one of the most volatile months on record.
With the U.S. more or less planning to stay on lockdown for all of April, and EPA restrictions being delayed or waived, it’s difficult to see a strong fundamental argument for prices to sustain any sort of meaningful rally in the next few weeks. The WSJ noted yesterday that cheap gasoline abounds at retail stations across the country, unfortunately - and largely because - no one is around to buy it.
Monday’s action could be seen as pivotal for gasoline prices trying to carve out a floor as early eight cent losses turned into a penny gain by the end of the day. Then again, that nine cent swing was less than half of the range that we saw in the previous three Monday trading sessions, so it could just be lost in the noise of volatility if prices don’t continue that rally this week.
WTI also dodged another technical bullet Monday, managing to hold above $20 by day’s end, despite trading below that level several times throughout the day. Here too, we’ll need to see prices rally above their downward sloping trend line this week to avoid another wave of technical selling.
The Dallas FED’s Texas manufacturing survey for March illustrates just how quickly the COVID-effect hit producers in the state.
The crack-spread charts below show the dire economic outlook for refiners over the next 6 - 12 months based on current forward curves, and help explain why it’s now more news worthy if a refinery isn’t cutting rates, as plants around the world are curbing production at unprecedented rates.
Another Monday Sell-Off For Energy Futures
It’s another Monday sell-off for energy futures, although so far without the fireworks of the previous three weeks. March 9, 16, and 23 all saw gasoline prices drop 20 cents or more, making this morning’s six cent losses seem relatively pedestrian. WTI is on the cusp of a technical breakdown, briefly dipping below $20/barrel overnight, and threatening a drop to fresh 20 year lows if that support breaks down this week.
The EIA this morning took a closer look at that record setting volatility in oil prices, which has dwarfed previous all-time highs. Since 1999 WTI has moved more than 10 percent in a single day one half of one percent of all trading days, and yet that’s happened six times already in March.
Baker Hughes reported a decrease of 44 oil rigs working in the U.S. last week, the largest weekly drop since the last time prices crashed five years ago. Using the 2016 lows as a guide, we would expect another 300 or so rigs to be taken offline (about half of the current total) in the next several months.
Oil refineries are also shutting down at a record pace, with several more reductions announced over the past few days due to negative economics and containment issues.
Want to know how quickly storage space is reaching capacity? A Bloomberg report says that some oil pipelines are already asking customers to curb output due to a lack of capacity. That phenomenon is also driving up rates for floating storage as traders seek to hold record amounts of oil at sea.
The EPA Friday announced delays in the spring RVP transition deadline, and for small refinery compliance with their RFS requirements.
Money managers continue to bail out of their long positions in Brent crude and RBOB contracts, licking their wounds after the large speculative category of trader went into the collapse betting heavily that prices would rise. Money managers have made small increases in WTI net length for a 3rd straight week, in a relatively small bet that the bottom may be in.
Mixed Energy Complex This Morning
The energy complex is mixed so far this morning with gas and diesel futures up 1.5 - 2 cents while American and European crude grades fall between 50 cents and a dollar per barrel. It looks like the gasoline crack spread carved out a bottom on Monday when it reached negative values for the first time since the 2008 collapse, and has traded up the rest of the week.
The EPA is supposed to announce its decision on fuel waivers later today. That announcement feels a bit anticlimactic after the EPA has said it is suspending enforcement of environmental laws in general.
WTI was dealt another fundamental blow after the new stimulus package left out funds for the previously announced SPR crude oil purchase, leaving the Department of Energy to suspend its buying plans.
Technically speaking, WTI still looks vulnerable to a drop below 20 dollars after failing to break out of its descending triangle pattern this week. On the other hand, the big drop earlier this month left a sizable gap on the chart and people that want to sound like technical traders often to say “gaps always get filled”.
For those looking for a fundamental reason for oil prices to rebound: New reports suggest Russia is working towards a new alliance with OPEC to deal with the drop in oil demand and prices.
Recovery Rally Running Out Of Steam
The recovery rally in energy and equity markets appears to be running out of steam this morning after some eye popping jobless claim figures puts the economic impact of the coronavirus shutdown in harsh perspective, suggesting the largest stimulus package in history may not be enough.
The U.S. Senate passed its two trillion dollar spending bill, which is expected to become law later this week. It does not appear that the bill will have immediate impacts on energy supply or demand. Several reports this morning are noting (with no lack of dismay) that “clean” energy funding wasn’t included in the stimulus package.
Weekly jobless claims were nearly four times greater than the previous records set in 2009, with more than 3.2 million Americans filing for unemployment last week. While we saw large drops in demand in the DOE report this week, that surge in jobless claims, coupled with the increased shelter in place orders this week suggests that the nine percent estimated drop in U.S. gasoline demand will be dwarfed in next week’s report.
More states are jumping on the RVP waiver bandwagon as the seasonal transition from winter to summer gasoline looks both impossible and unnecessary this spring. No official word yet from the EPA if they’ll follow suit on the federal level.
Week 12 - US DOE Inventory Recap
How Long Will It Last?
How long will it last? That seems to be the question of the day, whether in regards to the virus, shelter-in-place orders, or the recovery rally in stocks and energy prices after the DJIA had its best percentage gain in 87 years Tuesday.
Unfortunately, so far this morning it seems like the answer to the recovery rally is not very long as both stocks and energy futures have given back most of their overnight gains and several contracts are now moving lower. RBOB gasoline futures are holding to modest gains in the April and May contract, although remain well off their intra-day highs from Tuesday’s session.
From a short term technical perspective, this overnight pullback is looking bearish for energy futures as prices were unable to break the downward sloping trend-line that’s been in place since the March 9 price plunge. With fundamental supply/demand issues still just a guessing game, if those technical resistance layers aren’t breached this week, there’s a good chance we’ll see another round of heavy selling soon.
Worth noting in the political drama playing out in Washington: One of the sticking points in the stimulus package is the attempt to tie cleaner jet fuel requirements to any bailouts of the airline industry.
Speaking of Jet Fuel, the EPA is reportedly considering allowing temporary waivers to allow jet fuel to be blended with other lower-sulfur diesel grades to help the industry alleviate a glut of the suddenly unwanted product. The EPA is also considering a waiver or delay of the summer RVP requirements for gasoline, as winter grade inventories are piling up and may not be transitioned in time.
Following moves at numerous petroleum refineries this week, ethanol production facilities are announcing numerous cut backs to offset the plunge in ethanol-blended gasoline demand. On the bright side, as predicted, some ethanol producers (along with other alcohol distillers) are temporarily ramping up production of sanitizers instead of their normal products.
The API reported inventory draws across the board last week with Crude stocks down 1.2 million barrels, gasoline down 2.6 million barrels and distillates down 1.9 million barrels. The DOE’s weekly status report is due out at its normal time today, and the agency has not yet indicated that reporting would be delayed in the future due to the change in employees working remotely.