Energy Prices Stumble Into The Weekend
Energy prices are stumbling into the weekend after an impressive bounce-back Thursday seemed to stem the tide of selling. U.S. equity markets have followed a similar pattern, rallying sharply after heavy selling, following the FED’s announcement that it would roll back part of the Volcker rule that restricted banks from certain trading activities.
The weekly action has been rough for refiners as gasoline took the hardest hit, adding further pressure to crack spreads that are already treading in troubled waters. The forward curve charts below suggest that the market is expecting those margins to improve slowly over time, but at the current rate of demand recovery, prices suggest a challenging environment for the next nine months.
The EIA this morning reported that the U.S. reached new record for refining capacity at the start of the year. This report of capacity is less relevant than normal half way through the year, as it includes both the PES refinery capacity – even though it’s been closed for a year – and the Holly Cheyenne facility that’s being converted to RD production. The report did note the Limetree bay (FKA Hovensa) plant was reactivated last year, which is counted in the rarely mention PADD 6.
As U.S. oil output and refinery capacity has grown, the industry has been shifting away from the Cushing, OK hub, while the U.S. Gulf Coast is seeing more traffic. The race to profit from this shift goes beyond the physical markets as reporting agencies are rushing to add to the growing list of USGC based crude oil contracts vying to take share from the WTI contract.
The Dallas FED’s Energy Survey for the second quarter showed the largest drop in activity on record at -66%, which acts as no surprise to anyone who has been awake at some time during the past three months. What was unique in this report was that the FED included a section of special questions to better understand the industry reaction to the pandemic, and the results have several surprises. For example, of the 165 oil and gas firms that responded, only five percent reported pipeline or storage restrictions as a cause for reducing their output. In addition, 85 percent expect to have their shut-in production back online in September, and nearly half expect that even in the $30 range that production will come back online. Charts fall below.
Click here to download a PDF of today's TACenergy Market Talk.
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Gasoline Futures Are Leading The Energy Complex Higher This Morning With 1.5% Gains So Far In Pre-Market Trading
Gasoline futures are leading the energy complex higher this morning with 1.5% gains so far in pre-market trading. Heating oil futures are following close behind, exchanging hands 4.5 cents higher than Friday’s settlement (↑1.3%) while American and European crude oil futures trade modestly higher in sympathy.
The world’s largest oil cartel is scheduled to meet this Wednesday but is unlikely they will alter their supply cuts regimen. The months-long rally in oil prices, however, has some thinking Saudi Arabia might being to ease their incremental, voluntary supply cuts.
Tropical storm Rina has dissolved over the weekend, leaving the relatively tenured Philippe the sole point of focus in the Atlantic storm basin. While he is expected to strengthen into a hurricane by the end of this week, most projections keep Philippe out to sea, with a non-zero percent chance he makes landfall in Nova Scotia or Maine.
Unsurprisingly the CFTC reported a 6.8% increase in money manager net positions in WTI futures last week as speculative bettors piled on their bullish bets. While $100 oil is being shoutedfromeveryrooftop, we’ve yet to see that conviction on the charts: open interest on WTI futures is far below that of the last ~7 years.
Click here to download a PDF of today's TACenergy Market Talk.
The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.