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Week 26 - US DOE Inventory Recap
Multiple Equity Indices Holding At All-Time Highs
Energy futures continue to hold near multi-year highs, and multiple equity indices are holding at all-time highs as recovery optimism fueled by increasing jobs & manufacturing data seems to be edging out concerns about new travel restrictions keeping the upward trend lines intact for both asset classes.
It’s the last (trading) day of June, ending the second quarter and the first half of the year. It’s been another strong month for energy contracts (marking a seventh month of increases out of the last 8) with most blowing away pre-COVID price highs and trading to levels last seen in 2018 or earlier.
Most cash markets have already flipped to trading vs August futures, but for the remainder, make sure to watch the RBQ & HOQ contracts today as the expiring July (RBN/HON) contracts have minimal liquidity. As of this writing the last trade for both July contracts is nearly a penny/gallon lower than that for the august contracts, and the July Heating Oil hasn’t had a trade in more than an hour.
The API reported a large drop in oil inventories of more than 8 million barrels last week, while refined products had modest builds of 2.4 million barrels for gasoline and 428k barrels for distillates. The EIA’s version of the weekly data is due out at its normal time this morning.
The second tropical system churning across the Atlantic is given 80% odds of development as it moves towards the Caribbean, and will need to be watched next week since there’s still a chance it could make it to the Gulf of Mexico. While the first system being tracked by the NHC is only given 10% odds, it may act like a lead blocker for the second storm and provide a favorable atmosphere for development. The 3 systems on the map this week are more typical of August than June according to one expert, and makes this non-expert a little hesitant to think of what August (and September) might look like.
Energy Prices Bounce After Worst Daily Selloff In A Month
Energy prices are bouncing after their worst daily selloff in a month Monday, keeping the door open for an extended price rally.
New travel restrictions in a handful of countries due to COVID case spikes took some of the blame for Monday’s sell-off, although from a technical perspective the complex was due for a pullback after the bull rally has pushed prices to multi-year highs. Today’s bounce keeps the trend lines intact, so it’s too soon to say that the rally is over, and those calling for oil prices to reach $80-$100 this year will see the past two sessions as nothing more than a corrective dip.
Tropical Storm Danny made landfall in South Carolina Monday, and has weakened quickly as it moves inland. Two other storm systems are being monitored, but both look like long shots to get into the Gulf of Mexico and become supply threats.
After last week’s Supreme Court ruling that favored small refinery exemptions to the RFS, the EPA is now on the clock to finalize both the RVO requirements for the year (which are already 6 months past due) and to rule on 50 small refinery waiver requests. Not surprisingly, industry groups are not wasting any time lobbying the EPA to see things their way. RIN values did trade higher Monday from where they left off Friday, making for an unusual divergence between RBOB futures which sold off heavily despite the bounce in RINs. Given the close relationship between the two contracts, that could help explain why RBOB is leading the recovery rally this morning.
It’s worth noting that money managers appear to have made a wrong way bet on crack spreads ahead of that Supreme Court ruling, increasing net length in RBOB and ULSD, while reducing length in WTI and Brent. It’s possible that yesterday’s reaction was an unwinding of that trade when it became clear that the latest ruling would not be bullish on crack spreads, but it’s impossible to say given the limited scope of position data available. It’s just as possible that the bullish stance on crack spreads is a play on the St. Croix refinery closing indefinitely after numerous operational mishaps over the past year.
While the big money funds appear mixed on the outlook for oil and refined products, carbon credits remain a hot bandwagon trade with California Carbon Allowance (CCA) positions seeing an increase in net length (bets on higher prices) by money managers for a 6th straight week, even as prices trade at record highs. Given that climate change has become a dominant headline, it’s not surprising to see an influx in hot money into the few contracts that are easily tradeable, and this phenomenon could continue creating volatile swings, similar to what we’ve seen with RINs over the past decade.
Today’s interesting read: How a Salt Lake refinery is using salt to make safer, cleaner, alkylate.
Click here to download a PDF of today's TACenergy Market Talk.
Big Story Out Of Washington Snaps Refined Product Winning Streak
Oil prices are holding steady, while refined products are facing modest selling pressure to start the week. The OPEC & friends meeting that officially kicks off Thursday should be the major price-driving story this week, after a big story out of Washington snapped the refined product winning streak on Friday.
RIN values traded up nearly a dime early Friday morning but fell sharply after the Supreme Court ruled in favor of small refiners seeking exemptions to the RFS, overturning a lower court ruling. D6 values reached $1.74 prior to the ruling, and ended the day trading around $1.48. Since the high/low range for the day was so large, most reporting agencies showed only small changes on the day, but should catch up with the larger downward move today, unless of course the RIN rollercoaster cranks back up.
Refined products saw a bit of a flash crash in the wake of the news, with RBOB prices dropping 8 cents in 5 minutes following the report, after reaching a 7 year high earlier in the day, only to quickly recover those losses as cooler heads trading algorithms prevailed. It’s important to note that while the ruling opens the door for refiners to petition the EPA for a waiver, the agency still gets to determine which plants qualify, which helps explain why RIN values – while lower on the day – remain at historically high levels.
The EIA’s refining capacity report showed total throughput capability in the US dropped nearly 5% last year, the largest drop since the great recession as plants struggled to survive the demand collapse caused by COVID lockdowns. The Supreme Court ruling on small refinery waivers may help prevent this list from continuing to grow in 2021 since the RVO nearing $10/barrel this year could certainly be the difference between profitability and insolvency for several facilities.
The U.S. launched air strikes on Iranian-backed militia in Iraq and Syria over the weekend. So far, there has not been further escalation from the attacks labeled as “self-defense” but they certainly don’t seem to be moving the parties closer to one another in the ongoing nuclear treaty negotiations.
A storm system off of the South Carolina coast is given 70% odds of development this week, but should reach land in the next day or two, preventing it from strengthening too much. It also happens to be in an area without any refineries, so should not be a supply disrupter except for traffic in the Charleston and Savannah port areas. The storm system moving across the Atlantic is now given 40% odds of development this week, although it still looks like a long shot to get into the Gulf of Mexico where it would become a supply threat.
RIN Rollercoaster Remains In Full Effect
It’s a quiet start to end another strong week for energy prices, as traders seem content for now to wait and see what OPEC & friends will agree to next week. We did see some modest losses overnight, but futures have since moved back into the green with small gains on the day and will mark 6 straight sessions of increases for refined products if they can hold on.
WTI is set to finish a 5th consecutive week of gains, even as prices pulled back modestly from the multi-year highs set on Wednesday. Refined products are also treading water near multi-year highs, continuing to threaten a technical breakout to the upside that could add another 20 cents to prices this summer, but so far lacking the momentum to make a big move.
The RIN rollercoaster remains in full effect, as the credits dropped 5-6 cents Thursday after a 50 cent recovery rally, that followed a 75 cent crash after prices reached record highs to start the month. That’s pretty good action for a year, and in this case it’s happened in just over 2 weeks.
A new infrastructure agreement was announced, which does not include an increase in federal fuel taxes, and sharply reduces the amount of money pegged for electric vehicles. While the White House & several senators on both sides of the aisle set the terms of the deal, it’s not yet clear if this bill will have enough votes to get through congress.
Today’s interesting read: Why consumers, not producers, are the key to climate change goals, and why they’re not ready to give up cheap energy. Producers meanwhile continue to shift their stance, with the API laying out a new framework for standardizing the way companies report their emissions data.
'Reversal Thursday’ Holding True To Form This Week
Futures prices are taking a breather today with American gas, diesel, and crude oil futures all sagging anywhere from .5%-1% so far this morning. ‘Reversal Thursday’ is holding true to form this week as energy prices have rallied Monday-Wednesday and have sold off (so far) today. The question now is, will the rally continue tomorrow?
Just as one tropical disturbance peters off another pops up as a point of interest, this time with a little more development potential: 40% chance over the next five days. While the proto-storm has quite a ways to go before being considered a possible threat to the mainland US, its origin point and projected path are very similar to that of major hurricanes in the past.
Ethanol inventory levels have popped back into their 5-year range after spending 10 consecutive weeks setting new seasonal lows. Much like D6 RIN prices, ethanol prices have skyrocketed with corn prices for the past year. Now producers are considering output cutbacks to combat feedstock prices, a move that might explain why ethanol prices have remained elevated while corn futures have pulled back.
Oil futures are easing off their run at the $75 mark but still look poised to try a technical breakout in the near future. Even before that hurdle can be properly attempted, oil execs and banks are calling for $100 oil, not seen since 2014. While history is not always doomed to repeat itself, it should be noted the last two rallies that pushed oil north of $100 (2008 & recover rally in 2011) ended with WTI futures prices getting cut in half.