Energy Markets Having A Weak Start With ULSD Leading The Selloff

Energy markets are starting the week on a weak note with ULSD futures leading the selloff down a nickel after reaching a 2 month high on Friday. Reports that OPEC & Friends are planning another oil production increase are getting the credit for the early sell-off, even though Saudi Arabia is actually expected to increase its pricing to Asian buyers next month.

The 630mb/day Dangote Refinery in Nigeria, one of the world’s newest facilities that is heavily influencing the balance of capacity in the Atlantic basin, is reportedly offline after union workers have gone on strike and the company has reported dismissed more than 800 employees for “economic sabotage”. That shutdown seems to be contributing to the relative strength in RBOB futures vs the rest of the complex over the past 2 sessions.

Hurricane Humberto blew up into a category 5 storm over the weekend, and that size and strength is doing the southeastern U.S. a big favor by pulling tropical storm Imelda away from the coast. Imelda is expected to reach hurricane strength by Wednesday, but instead of a landfall and days of heavy rain as was predicted last week, now it will be moving east and will keep the majority of its energy offshore, drastically reducing the threats to land.

Money managers were making small reductions in their net length across the petroleum complex last week as most contracts saw a healthy amount of new short positions added following the 4 day sell-off that ended Monday. If you subscribe to the theory that hedge funds often get their timing wrong on these speculative bets as they chase momentum, you’ll probably enjoy the fact that those new short positions joined just in time to get run over by the rally in the back half of the week.

Money managers had a mixed reaction to RIN values dipping to a 4 month low last week with D4 RINs seeing a small reduction in speculative length while D6 RINs saw a small increase. Hedge funds were undeterred by a slide in California’s LCFS and CCA values recently and continued to add to their long positions on those contracts, while Washington’s CCA’s saw a net decrease on the week.

Baker Hughes reported a net increase of 6 oil rigs active in the US last week, marking a 5th straight week of modest increases totaling 13 rigs after the count reached a 4 year low in August. The additions during this stretch have been based in the Eagle Ford (+5), Cana Woodford (+5) and “other” basins not included in the top dozen or so basins, while the Permian has declined since early August. The natural gas rig count declined by 1 on the week.