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Energy Futures Taking A Post-Holiday Breather
After rallying to 8 month highs ahead of Thanksgiving, energy futures are taking a post-holiday breather, with small losses this morning on top of minor drops seen in the combined trading session from Thursday and Friday. This type of pullback was overdue after the 30%+ November rally, with several short term technical indicators moving into over-sold territory last week. It’s too soon to call an end to the rally however as the upward trend lines are still intact, and we’ll need to see products drop by another nickel before this move will start looking like a reversal instead of just a short term correction.
It’s the last trading day for November product futures, and since spot markets weren’t assessed Thursday or Friday, there’s bound to be a little confusion as to the actual price changes expected at the racks this evening. For markets like the Gulf & West coasts hat have already rolled to trading against January futures, it’s looking like 1.5 cent combined drops in futures (roughly 1/2 cent from last week, a penny from this morning) while those still trading vs December futures like the NYH and Group 3 spot markets are on pace for slightly larger declines.
OPEC & Friends are officially meeting today to discuss output plans, after informal weekend meetings struggled to figure out a way to factor in rapidly rising Libyan output that’s offsetting a large portion of the current agreement to limit production.
S&P Global (FKA Mcgraw Hill) the parent company of Platts, is reported to be in advanced talks to acquire IHS Markit, the parent company of OPIS. You may recall a decade ago when Platts tried to acquire OPIS directly, and was met with a flurry of objection from the energy industry before the deal was canceled. No doubt we’ll see a similar backlash now to the combination of 2 of the 3 major pricing platforms in US petroleum spot markets (not to mention numerous other competing services across industries held by these two giant companies) but given the enormous size of the deal ($44 billion), it seems like only federal trade commission rulings will be enough to stop the transaction.
The latest refining casualty: Neste announced it would shutter its Nanntali Finland refinery in the first quarter of 2021 in an effort to save costs and focus operations on other facilities.
A new facility on the chopping block? The Suncor refinery in Denver, already beleaguered by numerous operational upsets on top of the weak margin environment, is now facing the risk of shutdown as state regulators consider not renewing its operating permits due to environmental concerns.
A Rystad Energy report suggests that despite the rash of refinery shutdowns announced this year – 28 so far – capacity additions will still outpace closures globally forcing utilization rates to stay at relatively low levels. A move to replace older, smaller facilities with larger, more efficient plants is driving the net increase in capacity that’s expected to change several emerging market countries from importers to exporters of refined products.
Baker Hughes reported 10 more oil rigs were put to work last week, bringing the total US oil rig count to its highest level in 6 months. The Permian basin account for half of the weekly increase, while the Eagle Ford shale added 3 more rigs on the week.
The CFTC’s commitment of traders report is delayed until later today due to the Thanksgiving holiday, but the ICE report suggests large speculators are jumping back on the energy bandwagon as prices rally. Money Managers made large additions in net length held Brent and Gasoil contracts for a 2nd straight week. The increase in Brent net length was driven by new longs entering the market (betting on higher prices) whereas the move in gasoil was primarily driven by previous shorts getting out of the way.
Oil And Diesel Prices Hitting Fresh 8 Month Highs
Oil and diesel prices are hitting fresh 8 month highs this morning and the big 4 petroleum futures contracts are now each up more than 30% from the lows set November 1st with a variety of technical and fundamental factors contributing to the surge.
The DJIA breaching 30,000 seems to be giving plenty of sentimental boost as investors are taking a risk-on stance, and there is clear technical momentum now that the top end of the long-lasting sideways trading range has finally broken.
Perhaps most notable on the charts is that ULSD futures finally filled the gap in their chart left behind during the March collapse. There’s still another 20 cents of upside for distillates to reach their March highs, but short term warning signals are suggesting the contract is overbought following an 8 day streak of gains, and due for a corrective pull back in the near future.
Expectations that OPEC & Friends will be forced to extend output cuts, and another missile strike on Saudi Arabian energy infrastructure are both getting credit for the fundamental reasoning for this rally. The good news is the Saudi facility suffered minimal damage from the missile that was reportedly able to travel more than 300 miles through the air, but was apparently unable to break through the outer wall of a diesel storage tank.
The API was said to show builds in crude oil and gasoline inventories last week of 3.8 and 1.3 million barrels respectively, while distillates drew by 1.8 million barrels. The builds in inventory were getting credit for a pause in the rally overnight, but seem to be ignored now that the buyers have stepped back in. The DOE/EIA’s weekly status report is due out at its normal time this morning.
An EIA note this morning shows US gasoline prices are holding near their lowest in 10 years heading into what is traditionally the busiest travel day of the year. The note also highlights the expected reductions in travel this Thanksgiving holiday by car (4%) air (48%) and mass transit (76%) due to COVID.
That huge difference between automobiles (which primarily run on gasoline) and other transportation methods (which rely heavy on various distillates) is one of many challenges refiners are facing as they attempt to shift output to match the unprecedented changes in demand this year.
Speaking of which, there was yet another refining casualty this week as Total announced it was halting operations the Donges refinery in Western France due to poor economic conditions. The shutdown is expected to last several months, but the plant is moving forward with a major upgrading project suggesting that it could return to service once demand gets back to normal.
NYMEX contracts will trade Thursday and Friday, but only Friday’s trading will have a settlement. Spot markets will not be assessed either day, so most rack prices will carry through from tonight to Monday.
Week 47 - US DOE Inventory Recap
Markets Cheer News Of New U.S. Treasury Secretary
Energy markets are on the cusp of a technical breakout to the upside with diesel prices hitting eight month highs, while crude and gasoline prices follow close behind.
Markets around the world seem to be cheering the news that Janet Yellen – the relatively market-friendly former FED Chair – is being tapped as the new U.S. Treasury Secretary. That move is seen by many as a sign that the new administration will be more focused on economic recovery than reform. In addition, reports that the Presidential transition is moving forward seems to be easing concerns over a protracted legal battle.
ULSD is trading higher for a seventh consecutive day, reaching a new eight month high and moving half way into the chart gap left behind during the March price collapse. WTI came within three cents of hitting an eight month high of its own overnight, setting up a critical test of the sideways trading pattern that’s contained the price action for June. There’s an interesting potential move on the WTI monthly chart, as the short lived selloff Sunday, November 1 and subsequent rally could make an outside up monthly bar that breaks both the low and the high ends of that sideways range. If prices can settle the month by breaking through the top end (near $44) there’s a strong case to be made that we’re soon going to see $50 crude.
Diverging diesel markets: Midwestern diesel spreads are collapsing this week after hitting their highest premiums in years as the annual post-harvest demand slump seems to be in full force across the region. Gulf coast values saw modest weakness in sympathy as the window to profitably ship barrels north has closed. West Coast values meanwhile are trading at double digit premiums to futures, with LA spots rebounding sharply from a mid-November slump, in what seems to be a reaction to a handful of unplanned refinery issues in the area.
The CFTC published a report on WTI’s plunge to negative values on April 20th. The report cites numerous fundamental and technical factors, and stops short of placing blame, and in many ways suggests the market performed as intended. The results are disappointing many who were looking for a smoking gun, and those that have a hard time understanding how complex commodity futures trading can be. One interesting point brought up in the report is the relatively high open interest in WTI in April, and the amount of positions held by “non-reportable” trading groups, meaning those with small enough positions they aren’t required to report to the CFTC. Those findings are consistent with earlier reports that suggested retail investors – many in China - were left holding the bag when they started trading in WTI without understanding how the contract really works.
NYMEX contracts will trade every day this week, although there will be no settlements published Thursday due to the Thanksgiving holiday in the U.S. Spot markets will not be assessed Thursday or Friday, so most rack prices will carry from Wednesday night through the weekend, even though futures will continue trading.
Slow And Steady Climb In Energy Markets
The slow and steady climb higher in energy markets continues Monday morning with diesel prices reaching their highest levels since March, while oil prices are trading at eight week highs. As has been the case for most days during the November rally, optimism driven by progress with COVID vaccines is getting credit for the strength.
A third COVID vaccine has proven to be effective according to reports, and this version produced by AstraZeneca is stable at refrigerator temperatures, which will help avoid some of the logistical hurdles faced by Pfizer’s vaccine.
Baker Hughes reported five fewer oil rigs working last week, snapping an eight week string of increases. The Permian basin continued to tick higher, adding two rigs last week, while the Cana Woodford (Oklahoma) basin decreased by two, Williston (North Dakota) lost one, and the “other” category that captures activity outside of the largest 14 basins, dropped by four.
Money managers appear more optimistic about energy prices, increasing their net length across the board last week. Brent contracts led the move with an increase of more than 50,000 total net contracts, split fairly evenly between new long bets, and closing out shorts. The moves in the other NYMEX and ICE contracts were much smaller, and the overall positions remain well below levels we were used to seeing in previous years. Speaking of which, the total open interest for WTI dropped to a new 4.5 year low last week.
That lack of interest could be explained by new contracts deliverable in the Houston market making the traditional Cushing, OK delivery point less relevant, but that’s not the whole story as Brent open interest continues to hold near two to three year lows. Those two data points combined suggest that the broader financial markets are less focused on oil these days, which could be a sign of the boring markets since June offering fewer opportunities for speculators, or the larger trend from financial institutions being pressured away from traditional fuel sources.
Speaking of which, the U.S. Treasury’s comptroller office submitted a proposed rule last week that would make it illegal for banks to exclude entire industries in their lending.
U.S. refiners are dealing with the devastating combination of poor demand, and poor public opinion forcing them to increasingly look to renewables as a way forward. One consequence of this rapidly changing landscape: a new report suggests that China may soon overtake the U.S. as the world’s largest petroleum refiner.
Cautious Push Higher Continues Today
The slow and cautious push higher continues today as diesel prices attempt to lead a push through the top end of the trading range that’s held the energy complex since June. ULSD futures are trading higher for a fifth straight day after reaching their highest settlement since July, but have still not yet been able to crack the $1.30 mark. Oil and gasoline prices have also been moving higher, but the moves over this entire week are less than what we would have expected in a single day last spring, and indicate the cautious nature of any optimism this year.
The correlation between daily moves in energy and equity prices has strengthened in the past few weeks as the markets have become fixated on the vaccine race versus the new shutdown orders amidst record COVID case counts. Ultimately, whether or not stocks can continue their recent march higher may determine if we see a breakout to the upside in energy futures, or if prices will fall back into their range yet again.
The move higher in ULSD over the past couple of weeks has helped diesel margins for refiners, but that’s largely been offset by weakness in gasoline, keeping the rough estimates of refinery profitability near breakeven levels. The forward curve looks better for the facilities that can weather this storm, although numerous reports suggest we’re likely to see more refinery closures in Europe and/or the U.S. before this is over. Asian refiners meanwhile seem to be doing well which creates a new shift in global logistics for crude and refined products that is expected to help tanker rates and ship operators.
A new bill known as the “Streamlining Advanced Biofuels Registrations Act” was proposed this week, in an attempt to force the EPA to consider applications for cellulosic biomass fuel producers. While this bill may have minimal if any impact on supplies near-term, it is a good reminder of why Georgia is looking like the most important state for fuel producers in 2021 as control of the Senate hangs in the balance. D4 RINs continue to hold near three-year highs around 90 cents/RIN, while D6 ethanol RINs have retreated in the past week, along with ethanol prices.