Bearish Trio Of Factors Hammering Energy Prices
A bearish trio of fundamental, technical and trade factors are hammering energy prices, with most futures down another 2% this morning, marking 5-6% losses on the week, and 12-14% losses for the month.
The DOE inventory report got the selling started in earnest Thursday morning, as US crude output regained its all-time high at 12.3 million barrels/day, and inventories held steady even though oil exports once again surpassed 3 million barrels/day last week. To put that in perspective, all else being equal, if the US wasn’t allowed to export crude oil as in year’s past, inventories would have climbed by more than 21 million barrels in a week.
Gasoline demand figures were also disappointing, holding below their seasonal 5 year average for a 3rd straight week just in time for refinery runs to start increasing across all 5 PADDs. Reports that the Ozark pipeline which feeds Midwestern refineries was back online after a brief storm-induced shutdown added to the negative sentiment for products. The good news for refiners was the distillate demand rebounded sharply last week after a dismal 2 month stretch of below-average estimates.
If the DOE stats weren’t enough, a report that the US would allow countries to continue buying Iranian oil until they’d reached a negotiated limit seemed to also contribute to the tidal wave of selling Thursday afternoon, and no one seemed to notice when that report was rejected later in the evening.
Unlike Thursday’s collapse, this morning’s heavy selling seems to be tumbling stock markets that were shocked by the latest tariff threat, this time levied against Mexico, the United States’ largest trading partner, just as the new version of NAFTA was ready to be ratified. IF Mexico chooses to retaliate, it could be bearish for refined products as the US has been steadily exporting more fuel south, whereas in years past this could be bullish for prices when the US relied more on Mexican oil.
In addition to the tariff surprise, there’s a strong technical argument for the selling today after support layers broke in Thursday’s session, creating a snowball effect to the downside. It seems likely given the size of the move this week and the volumes traded that we’re witnessing a liquidation event for a good portion of the speculative longs that have built up so far in 2019.
So, where to from here? We are nearing some new layers of technical support that helped hold up prices last winter, so it would not be surprising to see the selling end – or at least take a break – right around current levels. Then again, if we are witnessing another mass liquidation of speculative funds, those sell-offs tend to overshoot, which could mean we see another $5 taken out of crude and 20 cents or more taken out of products in June.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
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Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.