Stairs Up, Elevator Down For Energy And Equity Markets

Market TalkMonday, Dec 21 2020
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It’s a case of stairs up, elevator down for energy and equity markets as a broad selloff overnight wiped out all of last week’s gains in just a few hours. It appears there’s a bit of “buy the rumor, sell the news” in today’s big drop as the long-awaited congressional stimulus package was finally passed over the weekend, but it came with strings attached – most notably some restrictions on the FED’s emergency lending capabilities

The U.S. Dollar has had a strong rally as it appears the money printing press will now have to get more approval before cranking up going forward, which matters more to Wall Street bankers than the $600 checks being sent to lower-income earners elsewhere. The bright side of this phenomenon is it brings back one of our favorite news characters, the “Head-in-hands trader” who tends to make an appearance any time we get a big sell-off.

In addition, there’s a new strain of COVID reported in England, that has much of Europe and Canada restricting travel to and from the UK as a result. Fears that the new strain could offset progress made with the vaccines seems to be spooking markets, but some reports suggest that the vaccines are still likely to be effective against the new strain.

Given the huge run-up in process we’ve seen since Nov. 1, we could easily see another 10-15 cents of downside for refined products in a normal correction of that rally unless buyers are able to get prices back above the upward sloping trend lines soon. That said, we saw similar rounds of steady buying capped off by a large sell-off in June, August and September, and each time the market recovered the losses within a week or two. 

Money managers continued to add net-length across the petroleum contracts last week, enjoying the seventh straight week of gains. Their reaction to this selloff, the largest in nearly 2 months, may make a big difference in whether or not this ends up being just a correction, or the end of the line for the rally.

Baker Hughes reported a net increase of 5 oil rigs drilling in the U.S. last week. The Permian basin increased by 5, while the Eagle Ford, DJ and Woodford basins all decreased by 1, which were offset by gains in other smaller plays.  

The increased drilling activity is also registering on the Dallas FED’s Texas jobs forecast, as one of several positive leading indicators suggesting the employment recovery from the spring COVID collapse should continue through December.  

Add another refinery to the scrap heap: Portugal’s oil & gas company announced it would shutter the smaller of its two refineries (which has roughly 100mb/day capacity) permanently due to the impact of COVID, and the regulatory environment.

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Energy Markets Are Ticking Modestly Higher Heading Into The Easter Weekend With Crude Oil Prices Leading The Way Up About $1.25/Barrel Early Thursday Morning

Energy markets are ticking modestly higher heading into the Easter Weekend with crude oil prices leading the way up about $1.25/barrel early Thursday morning, while gasoline prices are up around 2.5 cents and ULSD futures are about a penny.

Today is the last trading day for April HO and RBOB futures, an unusually early expiration due to the month ending on a holiday weekend. None of the pricing agencies will be active tomorrow since the NYMEX and ICE contracts are completely shut, so most rack prices published tonight will carry through Monday.

Gasoline inventories broke from tradition and snapped a 7 week decline as Gulf Coast supplies increased, more than offsetting the declines in PADDs 1, 2 and 5. With gulf coast refiners returning from maintenance and cranking out summer grade gasoline, the race is now officially on to move their excess through the rest of the country before the terminal and retail deadlines in the next two months. While PADD 3 run rates recover, PADD 2 is expected to see rates decline in the coming weeks with 2 Chicago-area refineries scheduled for planned maintenance, just a couple of weeks after BP returned from 7 weeks of unplanned repairs.

Although terminal supplies appear to be ample around the Baltimore area, we have seen linespace values for shipping gasoline on Colonial tick higher in the wake of the tragic bridge collapse as some traders seem to be making a small bet that the lack of supplemental barge resupply may keep inventories tight until the barge traffic can move once again. The only notable threat to refined product supplies is from ethanol barge traffic which will need to be replaced by truck and rail options, but so far that doesn’t seem to be impacting availability at the rack. Colonial did announce that they would delay the closure of its underutilized Baltimore north line segment that was scheduled for April 1 to May 1 out of an “abundance of caution”.

Ethanol inventories reached a 1-year high last week as output continues to hold above the seasonal range as ethanol distillers seem to be betting that expanded use of E15 blends will be enough to offset sluggish gasoline demand. A Bloomberg article this morning also highlights why soybeans are beginning to displace corn in the subsidized food to fuel race.

Flint Hills reported a Tuesday fire at its Corpus Christi West facility Wednesday, although it’s unclear if that event will have a material impact on output after an FCC unit was “stabilized” during the fire. While that facility isn’t connected to Colonial, and thus doesn’t tend to have an impact on USGC spot pricing, it is a key supplier to the San Antonio, Austin and DFW markets, so any downtime may be felt at those racks.

Meanwhile, P66 reported ongoing flaring at its Borger TX refinery due to an unknown cause. That facility narrowly avoided the worst wildfires in state history a few weeks ago but is one of the frequent fliers on the TCEQ program with upsets fairly common in recent years.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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Most Energy Contracts Are Ticking Lower For A 2nd Day After A Trickle Of Selling Picked Up Steam Tuesday

Most energy contracts are ticking lower for a 2nd day after a trickle of selling picked up steam Tuesday. ULSD futures are down a dime from Monday’s highs and RBOB futures are down 7 cents.

Diesel prices continue to look like the weak link in the energy chain, with futures coming within 1 point of their March lows overnight, setting up a test of the December lows around $2.48 if that resistance breaks down. Despite yesterday’s slide, RBOB futures still look bullish on the weekly charts, with a run towards the $3 mark still looking like a strong possibility in the next month or so.

The API reported crude stocks increased by more than 9 million barrels last week, while distillates were up 531,000 and gasoline stocks continued their seasonal decline falling by 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning.

RIN values have recovered to their highest levels in 2 months around $.59/RIN for D4 and D6 RINs, even though the recovery rally in corn and soybean prices that had helped lift prices off of the 4 year lows set in February has stalled out. Expectations for more biofuel production to be shut in due to weak economics with lower subsidy values seems to be encouraging the tick higher in recent weeks, although prices are still about $1/RIN lower than this time last year.

Reminder that Friday is one of only 3 annual holidays in which the Nymex is completely shut, so no prices will be published, but it’s not a federal holiday in the US so banks will be open.

Click here to download a PDF of today's TACenergy Market Talk.