Spring Breakout Rally Sprung For Energy Prices
The Spring breakout rally has sprung for energy prices with futures moving higher for a 4th straight day, showing strong momentum after technical resistance was broken earlier in the week. Most contracts are trading at fresh 3-month highs this morning, and the charts suggest there’s plenty of more room to run to the upside.
Strength in equity markets continues to at least appear to be helping energy prices find a bid as the correlation between the two asset classes remains strong, and the US/China trade talks appear to be progressing.
Unplanned Refinery maintenance, whether based in mechanics or economics, seems to be the other major theme helping prices rise with at least a dozen different events reported in the past 2 weeks of record setting cold, and record setting weakness in gasoline margins for some parts of the country. Yesterday, PBF announced in an earnings call that it too would be accelerating its maintenance schedule in an attempt to slow down now in order to be running full strength when margins are expected to improve later this year.
For a reminder on the seasonal nature of energy prices in general, and gasoline prices in particular, look up any of Walter Zimmerman’s writings on the subject. This 5-year old interview published by the CSP daily news seems particularly relevant as we wonder how much higher prices can run this spring.
“Gasoline price trends are extremely seasonal. Averaging out the last 30 years of spot gasoline futures (from leaded, to unleaded, to MTBE, to RBOB), one finds that the average winter-to-spring price move has been a 57% increase in spot contract value. By Q4, everyone is typically bearish on gasoline because prices have been under downward pressure since Q2. Over the years we have observed that the more severely gasoline prices are pushed lower into Q4, the more vibrant the rally into Q2.”
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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.