Tough Start To August Trading Turned Ugly
A tough start to August trading turned downright ugly for energy markets Thursday, with refined products wiping out two weeks of gains in what was the biggest day of selling in more than a year. The big news of the day was when President trump announced a new round of tariffs on Chinese goods, that moved the trade war from the back burner to the front as China has already warned of retaliatory moves.
Before the tweet stock markets had been rallying, taking back most of the post-FOMC losses, but quickly joined energy prices in a heavy wave of selling, highlighted by a 600 point intraday drop in the DJIA. In other words, equity and energy traders seem to have voted quite strongly that the only thing Trump’s trade twitter tirades are good for is alliteration.
The good news for those wanting higher energy prices is that a recovery bounce is underway, taking back about 1/3 of Thursday’s losses. There’s an interesting pivot point on the chart right around current levels that acted as resistance during June’s rally, and as support during July’s early selloff, and seems like a natural landing spot for prices to consolidate while they wait for the next shots to be fired in the trade or tanker wars.
The longer term charts meanwhile are showing triangle formations in most of the petroleum futures contracts that suggest there’s going to be a much larger price move coming this fall once one of those converging trend lines breaks, although which direction that breakout will take is unclear although product charts seem to be giving slight favor to lower prices, while crude charts are mixed.
The July non-farm payroll report showed 164,000 jobs added during July, with the official unemployment rate holding steady at 3.7 percent, while the unofficial “U-6” rate dropped to 7%. This report was about average for 2019, and the market reaction has been muted so far. Equities dipped briefly after the report which pulled energy prices back from their highs of the day, but both asset classes have since stabilized.
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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.
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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.