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Disappointing Demand Readings From The DOE
Disappointing demand readings from the DOE, and the latest war of words between the U.S. and China are getting credit for a weak finish to May trading, dampening the results on what has otherwise been a very strong month for energy contracts. June RBOB and HO futures expire today, so watch the July numbers (RBN/HON) to see where spot markets will be heading for the weekend.
Total petroleum demand in the U.S. declined last week, disappointing many looking for the Memorial Day bump to keep the recovery rally in place. While gasoline demand did tick higher on the week, inventories outside of the West Coast continued to build. Diesel continues down its unusual path of being the weak link in the energy chain, as soft demand and exports send inventories towards record highs. While there have been numerous stories of refineries ramping up run rates or bringing idled units back online to match the demand recovery, these inventory overhangs and soft margins may limit both the capability and desire to do so.
The EIA’s unaccounted for crude oil calculation reached a new record for a third straight week at -999,000 barrels/day, suggesting actual U.S. oil production is about one million barrels/day lower than the official output estimate, a testament both to the scope and flexibility of the U.S. energy industry, and to the challenge of gathering statistical data in real time.
Lies, damn lies and…The EIA isn’t the only one struggling to keep their data accurate these days. The IMF noted how the abrupt nature of the pandemic has disrupted the production of statistics, which is likely to hamper policymakers in their efforts to spur recovery.
The latest example of how oil output cuts are easier said than done: A Reuters report this morning notes that Russia’s Rosneft Oil Company is unable to reduce output to mandated levels while still fulfilling its long term contract obligations.
Week 21 - US DOE Inventory Recap
[Click here to download a PDF of the DOE Week 21 Report.
Energy Complex Teeters On Edge Of Technical Breakdown
Rising inventories are checking demand optimism this week as the energy complex teeters on the edge of a technical breakdown that could knock another 10 to 20 cents off of refined products, despite a strong rally in U.S. equity markets.
The API was reported to show a large build in U.S. crude oil inventories of 8.7 million barrels last week, which sent the complex on an immediate selling spree after the report was released. However, Cushing, OK saw another large draw down of 3.3 million barrels, which has helped WTI prices recover most of their overnight losses. Gasoline inventories were said to increase by 1.1 million, while distillates continue their recent trend as the weakest link in the energy chain, as inventories had another large build of 6.9 million barrels last week.
The relative weakness for diesel is an unusual phenomenon that hasn’t been experienced in more than a decade. In fact, diesel started the year in the strongest position fundamentally, with many concerned that IMO 2020 marine specs would create a run on low-sulfur grades that refiners wouldn’t be able to keep up with. Two months ago, diesel was once again looking strong in the early stages of stay-at-home orders, as a surge in distribution demand kept distillate demand high while gasoline consumption collapsed. That pendulum has swung to another extreme. Distillate inventories are reaching extreme levels as demand stagnates and the export market isn’t strong enough to balance the equation for U.S. producers.
The DOE’s weekly status report is due out at its holiday-delayed time of 10 a.m. Central time, with the “unaccounted for” crude oil figure perhaps the most interesting number to watch.
PADD 2 diesel stocks are also worth watching in today’s report, as evidence mounts that inventories in the Midwest may be swelling to record levels as the typical post-planting demand slowdown hit just in time for April Arbitrage barrels to arrive from the Gulf Coast. Group 3 ULSD basis values have collapsed to record lows in recent days as inventories along the local pipeline systems reach new all-time highs, and collapsing basis values in Chicago-area pipelines suggest those inventories are rapidly rising as well.
D6 RIN values have reached multi-year highs this week, as refineries start to ramp up production – increasing their RFS obligation – and concerns are mounting that next year could create another structural shortage in RIN availability as U.S. gasoline demand won’t recover enough to clear the mandated bio-fuel blending requirements.
The EIA marked another milestone in the changing landscape of U.S. energy consumption, noting that renewable fuel usage surpassed coal for the first time in 130 years, when firewood was the country’s main source of heating fuel. It’s interesting to note that according to this report, the EIA can apparently approximate fuel consumption from 1776 but they still don’t know how much oil is being produced in 2020.
Rally In Energy Prices Stall While Awaiting Weekly Reports
The rally in energy prices looks like it’s stalled out as we await the weekly inventory reports, and charts suggest we may be due for another round of selling after prices have failed to hold at two month highs. There is little in the way of news that seems to be driving the action, and U.S. equity futures are still pointed higher, suggesting this may be a largely technical sell-off.
ULSD futures have traded up to $1.02 in five out of the past seven sessions, but have failed each time to settle north of that level, and haven’t settled north of $1 in over a week. RBOB is seeing a similar pattern, with the $1.07 - $1.09 range acting as a bit of a technical ceiling over the past week. That lack of conviction by buyers looks like it’s left products susceptible to another sharp selloff, although so far the upward trend-lines have not been broken. If those trend lines do break down, there’s an easy 15 cents or more of downside room for products in the next week or two.
The IEA published its World Energy Investment report for 2020 this morning, and predicted the largest annual decrease on record as emergency measures force companies and governments to slash spending. The report notes that all forms of energy investment are being negatively impacted by COVID-19 related issues, but oil investment is seeing the worst of it, with predictions for 50 percent declines in spending, versus 10 to 20 percent declines for gas, electricity and renewables.
Another IEA report released this morning takes a closer look at the change in transportation behavior in recent months, and looks at previous events to help determine the deciding factors in whether or not the shift in transport modes will last.
The EIA published a comparison of 10 North American crude oil contracts this morning, using the April 20 price plunge to show their interconnected pricing structures. Similar to the physical refined product markets around the U.S., the prices among crude grades are similar, but vary based on location, quality, and timing.
The Dallas FED’s survey of Texas manufacturing companies shows that while things are still bleak (near the lowest levels of the 2008 financial crisis), they are improving noticeably since April.
Signs Of Economic Recovery Continue To Appear
Energy and equity markets are rallying again this morning as signs of hope for economic recovery continue to appear. Specific to energy, comments from the IEA Director and Russian oil minister over the past few days seem to be encouraging buyers that the supply and demand equation is balancing.
From a technical perspective, the buying after Friday’s selloff helped heal some of the overbought condition on the charts, but we will need to see prices break through last week’s highs to say that the upward trend is fully back online.
Baker Hughes reported another 21 oil rigs were taken offline last week, marking a 65 percent drop in active oil rigs since March 6. The combined oil and gas rig count also fell by 21 rigs, which sets a new all-time low.
Money managers seem to be encouraged by the drop in U.S. drilling activity, adding to their net length in WTI for a seventh straight week, and approaching the top end of the five-year seasonal range for bets on higher prices. The net length increases have been primarily driven by new long positions rather than short covering, suggesting that the big funds are betting on a price rally in the back half of the year.
The managed money category of trader is much less optimistic for Brent and refined products than they are for WTI, with only minimal changes last week and net positions well below historical averages. That lack of buying suggests the enthusiasm for WTI has more to do with the U.S. oil industry’s ability to rapidly change course, than it does with expectations that global demand is rapidly healing.
The Dallas FED published a new study on the impacts of social distancing and economic activity, noting that while states are reopening, the pace of recovery for businesses is lower and may stay that way for a while.
Snapping A Six Day Win Streak
The energy rally finally looks like it’s run out of steam temporarily with lower values across the board, which would snap a six day win streak for WTI. With little in the way of news, and low volumes suggesting many have already started a four-day weekend, this move lower screams of profit-taking rather than the end of the upward trend.
There is some concern that prices have out-kicked their coverage as U.S. fuel demand remains 20 percent or more off normal levels for this time of year, and charts are showing another rounding top pattern that could mean another sharp selloff to end the month.
Today is often one of the busiest demand days of the year for gasoline as stations prepare for the holiday rush, and the weekend that unofficially kicks off the summer driving season. This year is unlike any before it for U.S. driving demand, but there continue to be plenty of signs that things are slowly improving on that front.
Apple’s mobility data reports continue to show steady improvement in driving activity, while public transit continues to lag far behind. Google’s mobility reporting parses the data into different categories, but shows a similar pattern with demand for driving to residences and parks now higher than pre-COVID-19 levels, while travel to workplaces is still down 24 percent and transit stations are down 34 percent.
While the increase in driving demand so far in May is allowing refiners to begin ramping rates back up, it isn’t yet doing much to help their overall margins as the rally in crude largely driven by the collapse of the super-contango in WTI is pushing crack spreads lower and diesel – which for years has been helping prop up margins, is now dragging them lower.
As if those refiners didn’t have enough to worry about already this year. NOAA is predicting a busy Atlantic Hurricane season, with up to 19 named storms, and potentially six major hurricanes, similar to the devastating 2005 season that wreaked havoc on the country’s energy infrastructure. On the bright side, if a storm does target the Gulf Coast, those events typically bring a boost to margins for any plants that can continue operating.