Energy Markets Off To A Hot Start For September

September trading is off to a hot start for energy markets, with refined products up more than 3% and crude oil prices up $1.75/gallon, despite some bearish signals from equity markets to start what is historically the weakest month of the year for stocks.

October RBOB takes over the prompt position today and started out some 21 cents lower than the September contract due to its winter-grade specification, but don’t be fooled by that roll as today’s price change is actually looking to be up 6-7 cents at the moment.

The rally in petroleum contracts puts prices at their highest level since the big selloff we saw on August 1st, and is being blamed on supply concerns as more Russian production and export facilities have been targeted by Ukrainian drones, and European sanctions on Indian refiners seem to actually have teeth. An RBN blog article Friday highlighted how refining challenges in Europe, Russia, China and Latin America may all end up benefitting U.S. refiners.

Friday’s appeals court ruling that voided many U.S. reciprocal tariffs could be a big deal, but that ruling has been suspended to allow for a Supreme Court review. Most petroleum commodities have been exempted from tariffs already so it seems unlikely that this ruling will have a big influence on oil flows.

Money managers were modestly bullish on most energy contracts last week adding fresh bets on higher prices after support held on the charts during the August slump. RBOB gasoline saw a combined addition of 11,500 contracts of length through a combination of new longs and short covering, while the big speculators in Brent crude made a net increase of nearly 24,000 long positions despite some new shorts being added.

The exception to the bullish speculative behavior, once again, was in WTI which saw yet another reduction in net length held by money managers, pushing the total outstanding to a fresh 18 year low.

While the fundamental change away from the Cushing OK hub may explain a great deal of the lack of interest in WTI these days, the large combined short positions in WTI and Brent combined suggests that large speculators are vulnerable to a short covering rally that will force them out of those bets on lower prices, sort of like the one we’re seeing today.

Money managers were also adding to long positions in D4 and D6 RINs following the EPA’s announcement on Small Refinery Exemptions (SRE) to the Renewable Fuel Standard that set a surprisingly bullish tone by not allowing facilities approved for an SRE generate new RINs to make up for their prior purchases. RIN values jumped 10 cents in the immediate wake of that decision but gave up those gains late last week.

Hedge funds also made small increases in their bets on higher LCFS and CCA credit values in California last week, while Washington CCAs saw a small tick lower.

Baker Hughes reported a net increase of 1 active oil rig in the US last week, while the natural gas rig count dropped by 3. Year on year the oil rig count is down 71 rigs (14.7%) while natural gas rigs are up by 24 (25%). Don’t let the low rig count fool you on crude oil output however, as the EIA’s monthly data released Friday showed that U.S. production reached an all-time high (for any country, ever) during June at 13.58 million barrels/day, thanks to huge improvements in drilling efficiency made in the past 15 years, and a backlog of drilled but uncompleted wells.

The tropical wave moving off the African coast increased from 30% odds to 70% odds of development, and the development area means it could become a threat to the U.S if forms. In addition to this threat, AccuWeather forecasters suggest conditions for storm development will improve next week right as we approach the peak of the season, suggesting we could be dealing with multiple threats back to back.