Energy Markets Start The Week With Gains And Potential Supply Concerns

Energy markets are starting the week with modest gains as potential supply concerns once again take over the headlines, while demand concerns are put on the back burner for now. ULSD futures are leading the way up close to 3 cents/gallon, while RBOB futures are up about 1.5 cents in the early going.

U.S. equity markets continue to hold at record high levels ahead of the FED meeting this week that essentially everyone believes will include the first 25 point cut in the next cycle of falling interest rates.

The U.S. is pressuring European nations to stop buying Russian energy supplies as it mulls a new sanctions package. The Ukrainians are doing their part by continuing the onslaught of drone attacks on Russian refineries, with multiple facilities hit over the weekend. Russia certainly isn’t shying away as yet another incursion into NATO territory was reported over the weekend.

Meanwhile, India’s Nayara refinery which was hit by EU sanctions over its Russian oil purchases is looking for help securing equipment as it struggles to deal with the lack of international cooperation.

Money managers were bearish on crude oil and mixed on refined product positioning last week. The large speculative trade category slashed more than 55,000 combined contracts in Brent and WTI length last week through a combination of long liquidation and new short positions, with the combined short interest in the two crude benchmarks reaching its highest level in a year. For WTI, the speculative length held by money managers has dropped to a 20 year low, offering both a sign of disinterest from the big money bettors, and a signal that the benchmark for oil prices for 4 decades continues to lose its relevance as water-born contracts become more important.

The positioning for refined products was mixed on the week with U.S. diesel seeing speculative length reduced, while European diesel length increased by almost the same amount. RBOB gasoline saw very minimal movement on the week, almost as if the hedge funds were signaling they’re no longer interested in betting on gasoline prices now that the driving season has been put in the rearview for the year.

Hedge funds may want a do-over in their environmental credit bets from last week as the large speculators made their first noteworthy reduction in bets on higher California Carbon Allowances just before those prices spiked following news of the Cap & Trade program extension. Funds also continued to add to D4 (Bio/RD) RIN length as those prices dropped to a 3 month low, but they did start reducing their bets on higher D6 (ethanol) RINs during the week.

The NHC is now giving 80% odds of a named storm in the next 7 days as conditions improve for development for a tropical wave that moved off the African coast last week. The potential development area for this storm appears to be far enough north and east that it should hook out to sea and not threaten the U.S. coast, but it’s too early for any of the actual forecast models to even make a guess at its actual path.

The Citgo auction drama continues this week with 4 days of hearings scheduled for the rival bidders to plead their case. Given that it’s taken 7 years to get this far, and the court has already contradicted itself on who should be awarded the company in the latest round of bidding, it’s somewhat hard to imagine a resolution coming from this week. Meanwhile, an entirely different US/Venezuela drama is playing out in the Caribbean as the U.S. moves more military assets into the region, threatening to topple the Maduro regime, while the Vens threaten their neighbors in retaliation.

Baker Hughes reported an increase of 2 oil rigs operating in the U.S. last week, while the natural gas rig count held steady. That’s the 3rd straight weekly increase for crude rigs, which have added a whopping 5 active rigs in that stretch after declining by 78 rigs over the prior 6 months.