Product Prices Pushed The Petroleum Complex Into Official Bear Market Territory On Tuesday
Another double digit drop in refined product prices pushed the petroleum complex into official Bear Market territory Tuesday, ending an 18 month price rally. December trading started on a much more optimistic note with product rallying 10 cents in lockstep with a big bounce in US equity markets overnight, but have already cut those gains in half, leaving the complex vulnerable to more big swings.
Refined product spot prices are down more than 30 cents so far this week as cash markets catch up with the Black Friday meltdown, and ethanol prices decided to join in on the fun Tuesday plummeting 50 cents in the New York harbor and 40 cents in other spots.
The two agencies with strongest potential influence on energy prices are OPEC and the US Federal Reserve. This week will feature both as comments from the Fed chair Tuesday helped spur another broad based sell-off that could be classified as a “Taper Tantrum” by the big money funds that expect their big money to be free and easily printed.
OPEC is now taking center stage as their technical committee meets today and then the full group meeting tomorrow, with several reports guessing the cartel may use Omicron as an excuse to pause their plans to steadily increase oil output. With several producers already struggling to meet their quotas, that change in the stated plan could help prop up oil prices, even if in real terms it doesn’t mean any less oil coming to market, and would also send a signal to the US & other nations that they shouldn’t bring their SPR knife to the oil price gun fight.
The API reported builds in refined products last week of 2 million barrels of gasoline and 800,000 barrels of diesel, while oil stocks had a small decrease of roughly 750,000 barrels. That report seemed to be largely shrugged off based on the price action Tuesday afternoon through the overnight session, as the larger macro issues continue to be driving the Risk-off/Risk On action across asset classes. The DOE’s weekly report is due out at its normal time this morning. While that report may have less impact than normal on futures, watch the refinery runs by PADD to see how plants are progressing through maintenance to get a feel for how quickly some of the supply shortages in pockets around the country may heal.
Science getting in the way again: California’s Air Resource Board published a study this week that shows Bio Diesel and Renewable diesel blends are actually creating more NOx pollution than “traditional” CARB #2 diesel in modern engines. The Next Steps listed by the Agency are to take several months to ask more questions, so it’s unlikely we’ll see any changes to the state’s current regulations any time soon, but it will create new challenges for the state’s biodiesel blenders.
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Crude Oil, Gasoline, And Diesel Benchmarks Are All Trading >1% Lower To Start The Day
Energy prices are sinking again this morning, albeit with a little more conviction than yesterday’s lackadaisical wilting. Crude oil, gasoline, and diesel benchmarks are all trading >1% lower to start the day with headlines pointing to an across-the-board build in national inventories as the source for this morning’s bearish sentiment. The Department of Energy’s official report is due out at its regular time this morning (9:30am CDT).
WTI has broken below its 100-day moving average this morning as it fleshed out the downward trend that began early last month. While crossing this technical threshold may not be significant in and of itself (it happened multiple times back in February), the fact that it coincides with the weekly and monthly charts also breaking below a handful of their respective moving averages paints a pretty bearish picture in the short term. The door is open for prices to drop down to $75 per barrel in the next couple weeks.
Shortly after the EIA’s weekly data showed U.S. commercial crude inventories surpassing 2023 levels for the first time this year, their monthly short-term energy outlook is forecasting a fall back to the bottom end of the 5-year range by August due to increasing refinery runs over the period. However, afterward the administration expects a rise in inventories into 2025, citing continued production increases and loosening global markets hindering the incentive to send those excess barrels overseas. The agency also cut back their average gas and diesel price forecasts for the first time since February with the biggest reductions in the second and third quarter of this year.
The STEO also featured their famed price prediction for WTI, stating with 95% confidence that the price for crude oil will be between $40 and $140 through 2026.
Need a general indication of the global crude oil supply? Most headlines seem to be covering a shortage of a different type of oil, one that we haven’t turned into fuel (yet).
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The Perceived Cooling Of Regional Tensions In The Middle East Area Attributing To The Quiet Start To Today’s Trading Session
The energy complex is drifting lower this morning with RBOB futures outpacing its counterparts, trading -.9% lower so far to start the day. The oils (WTI, Brent, heating) are down only .2%-.3% so far this morning.
The perceived cooling of regional tensions in the Middle East area attributing to the quiet start to today’s trading session, despite Israel’s seizure of an important border crossing. A ceasefire/hostage-release agreement was proposed Monday, and accepted by Hamas, but rejected by Israel as they seemingly pushed ahead with their Rafah offensive.
U.S. oil and natural gas production both hit record highs in 2023 and continue to rise in 2024, with oil output currently standing at 13.12 million barrels per day and January 2024 natural gas production slightly exceeding the previous year. With WTI currently changing hands at higher than year-ago levels, this increased production trend is expected to continue despite a decrease in rigs drilling for these resources.
Less than a week after the Senate Budget Committee’s hearing centered on the credibility of big oil’s climate preservation efforts, a major oil company was reported to have sold millions of carbon capture credits, without capturing any carbon. Fraud surrounding government subsidies to push climate-conscious fuel initiatives is nothing new, on a small scale, but it will be interesting to see how much (if any) of the book is thrown at a major refiner.
Today’s interesting read: sourcing hydrogen for refining.
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Energy Contracts Are Trying To Find A Floor After Taking Their Largest Weekly Losses Of The Year So Far Last Week
Energy contracts are trying to find a floor after taking their largest weekly losses of the year so far last week.
There’s not much in the way of news yet this morning, so the modest buying is largely being blamed on reports that Saudi Arabia raised its prices for Asian and Mediterranean buyers in June, signaling that demand is strong enough in those markets to shoulder the increase.
RBOB gasoline futures have already dropped 28 cents from the high set April 12th, leading the argument that prices have peaked for the season. The 200-day moving average comes in just under $2.50/gallon this week, some 6.5 cents below current values, and helps set a pivotal chart support layer. If prices break there, there’s a strong case that we’ll see another 20-30 cents of downside, similar to what we saw this time last year.
Money managers continued to reduce their net length in NYMEX contracts last week, as WTI, RBOB and ULSD saw a net decrease of more than 17,000 contracts of speculative length. The hedge fund liquidation seems to have run its course for this latest news cycle however, as new short positions accounted for the majority of the decrease, and WTI and Brent both saw new length added by the big speculators. Money managers are now net-short on ULSD, which could be another reason to think the bottom is near if you subscribe to the theory that the bandwagon-jumping hedge funds usually are wrong.
Baker Hughes reported a decline of 7 oil rigs and 3 natural gas rigs last week, bringing the combined total rig count to its lowest level in more than 2 years. Perhaps most noteworthy in this week’s report was that Alaska saw 5 of its 14 active rigs taken offline in just 1 week. It’s not yet clear if this may have anything to do with the startup of the transmountain pipeline which will have Western Canadian crude now competing more directly with Alaskan grades.
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