Energy And Equity Market Daily Price Movement Correlations Highest In 2 Years

Market TalkMonday, Jul 24 2023
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The rally continues in energy markets with refined products jumping another nickel to fresh 3-month highs this morning, on the heels of US equity markets that are suddenly acting like the risks of recession are receding. The correlation between daily price movements in energy and equity markets is at the highest level we’ve seen in more than 2 years, which helps explain the recent run-up in futures even when fundamentals still suggest all is not well for oil producers and refiners.

WTI has broken through its 200-day Moving Average for the first time in nearly a year this morning, which could be a catalyst for more buying if prices can maintain these levels. Then again, the 3 other times in the past year we saw prices attempt to break this resistance layer, heavy selling followed soon after. ULSD prices are trading above $2.80 for the first time since March 28th and could open the door for another run at $3 if current levels hold.  Here too, there’s a cautionary tale, as the last time we saw distillates break $2.80, they dropped below $2.65 the very next day.

The strength in gasoline is somewhat counter-seasonal as we’ve already put the 2 biggest driving season holidays in the rearview mirror, but prices are now within just 5 cents of their highs for the year. Physical players don’t seem to be buying the futures hype with time and basis spreads both showing weakness while financial prices push to new highs, suggesting that supply tightness is not driving the recent upward momentum. There has been concern that recent unplanned maintenance at the P66 Bayway refinery, and the long-planned 5-year turnaround at the Monroe refinery in Trainer PA could cause some tightness along the East Coast, but the drop in basis values, and premiums to ship gasoline on Colonial all suggest the big physical players aren’t worried.

Money managers seemed conflicted last week after multiple weeks of strong buying in energy futures, which many believed was driven by hedge funds jumping on the Saudi Output cut bandwagon. Last week saw ULSD and Brent contracts face heavy liquidations of length and new short bets driving sharp reductions in speculative length, while WTI, RBOB and Gasoil contracts continued to gain.

Another mixed message: the surge in speculative bets on higher WTI prices coincides with a large decline in total open interest held in the legacy crude oil contract. Brent’s open interest is holding steady, suggesting the move away from WTI has more to do with new contracts competing with the land-locked NYMEX hub than a move away from energy completely. Refined products are also seeing a resurgence in open interest with both ULSD and RBOB touching 17-month highs last week as the decline in volatility seems to be bringing traders back that had been forced out of the market during last year’s costly chaos.

Maybe it’s just too hot out? Baker Hughes reported more heavy declines in drilling rates last week, with oil rigs dropping by 7 to a fresh 16-month low, while natural gas rigs dropped by 2. Texas continues to lead the slide lower with a net decrease of 7 rigs last week, while Utah of all places saw an increase of 2 rigs. So far this recent slowdown in drilling hasn’t impacted production much, with the EIA’s weekly report still showing steady output, particularly when including the 1-2 million barrels/day of condensate that’s not (yet) classified as oil.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk Update 07-24-23

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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Market TalkWednesday, Apr 10 2024

Week 14 - US DOE Inventory Recap