Roiling Markets Around The Globe
A big Thursday reversal saw an 8 cent bounce from an early selloff in refined products, which pushed ULSD and crude prices to fresh 3 year highs. Government intervention, or the lack of in some cases, is the theme of the week roiling markets around the globe. The US government seems to have gotten out of its own way to avoid the latest debt ceiling stand-off, but remains gridlocked on longer term spending & tax bills, not to mention the RFS rulings that are already almost a year overdue.
The big story Thursday was the Chinese government has reportedly ordered energy companies to secure supplies “at all costs” this winter, reminding many market veterans of a similar plan that helped oil prices reach record highs 14 years ago. Here’s the cliff notes:
2008: Beijing hosts Olympics: Chinese government mandates fuel suppliers stock up ahead of the games to ensure no outages on the world stage. WTI reaches $147 and ULSD surpasses $4 in the months leading up to the games….before crashing to $32 and $1 later in the year as the world financial markets get hammered by housing & banking crisis, and Chinese suppliers stop their artificial purchases.
2022: Beijing host Olympics: Chinese government orders fuel suppliers stock up ahead of the games to ensure no outages on the world stage, coal and natural gas prices trading at record highs, crude and diesel prices reach 3 year highs.
Does this mean we’re in for another record high in oil and diesel prices? Some options traders are definitely betting that way as $200 call options on Brent have been trading this week.
Three big reasons why this time the Chinese fuel hoarding will be different than the last time, and why $200 (or even $100) seems like a stretch:
First, OPEC & the US have a combined 10 million barrels of spare capacity for oil production, which in 2008 was less than 2 million barrels.
Second, international spectators won’t be allowed at the games due to COVID, so the desire to window dress for millions of spectators may be substantially less than it was 14 years ago.
Third, most of the globe is still dealing with a refining capacity overhang, meaning that if prices continue to rally there will be an incentive to figure out a way to get oil or diesel on a boat and make money to solve the problem, and perhaps offer a life line to those refiners who have been contemplating shutting their doors.
Of course, we’ve seen plenty of evidence this year that turning spare capacity back on isn’t like flipping a switch, and logistical hurdles mean new supplies will take at least months to come back online. Here too the government intervention may get in the way as US drillers already struggling with worker shortages (like just about every other industry these days) are concerned that things could get much worse if vaccine mandates are passed.
While the China story earned much of the credit for the big price bounce on the day, it seems that another big rally in RIN prices may have been more of a factor as refined products outpaced crude gains on the day by a wide margin. There is still no official word from the EPA or the White House on the RVOs, and each day that passes without an update seems to be giving the market more confidence that the numbers “leaked” last week were fake.
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.