Traders Digest Impacts Of New Oil Sanctions
Energy futures are bouncing this morning as traders try to digest the impacts of new oil sanctions, after a heavy wave of selling Monday pushed prices below the floor of the trading range that’s held for the past 2 weeks. Diesel prices are leading the move higher this morning (up 3 cents at the moment vs ½ cent for gasoline) as yet another major winter storm sweeps the country and boosts heating demand.
While the extreme cold temperatures are likely to cause issues at terminals across the Eastern half of the country (vapor recovery units are especially vulnerable to extreme cold) the market reaction suggests there’s more concern about a negative impact on gasoline demand than there is about a disruption to supplies. Midwestern gasoline cash markets dropped below their Christmas eve lows during Monday’s sell-off, even though futures are still about a dime higher than their December floor.
The big news Monday afternoon was that the US will be imposing sanctions on Venezuela’s oil industry, in an attempt to force a transfer of power in the country. While the sanctions aren’t officially an embargo, they will act like one if the current leadership doesn’t relinquish control.
Citgo is allowed to continue operations in the US and oil on the way to the US that’s already been paid for will be left alone, but new oil purchases will be required to be done through “blocked” accounts that will be held until the regime change is complete. Product sales to Venezuela will be limited according to the Treasury secretary, but the details of those restrictions were not made clear.
Oil prices did not have a dramatic reaction to the news, although it seems to be helping limit any additional downside after Monday’s big sell-off. The feeling seems to be that there’s plenty of oil around, particularly with US refiners heading into maintenance, even though localized shortages of heavy crude are an ongoing concern.
The FED kicks off a 2 day Open Market Committee (FOMC) meeting today. According to the CME’s FEDWatch tool, traders are giving a zero percent chance of interest rates changing as a result of this meeting. It’s worth noting that based on where treasury futures are trading, there’s a 23% probability of at least one more interest rate increase in 2019 priced into current values, but also a 10% probability of a 25 point reduction in the FED’s interest rate target by next January.
Meanwhile, the Dallas FED reported accelerating growth in Texas Manufacturing in its monthly survey. Another positive sign for long term manufacturing in the state? Exxon reportedly approved plans to nearly double the size of its Beaumont TX refinery, which would make it the largest plant in the US when work is completed around 2022.
The EIA offered some more color to its Annual Energy Outlook projections made last week in a new note this morning detailing how the US will become a net exporter of energy in 2020.
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Values For Space On Colonial’s Main Gasoline Line Continue To Drop This Week
The petroleum complex continues to search for a price floor with relatively quiet price action this week suggesting some traders are going to wait and see what OPEC and Friends can decide on at their meeting Thursday.
Values for space on Colonial’s main gasoline line continue to drop this week, with trades below 10 cents/gallon after reaching a high north of 18-cents earlier in the month. Softer gasoline prices in New York seems to be driving the slide as the 2 regional refiners who had been down for extended maintenance both return to service. Diesel linespace values continue to hold north of 17-cents/gallon as East Coast stocks are holding at the low end of their seasonal range while Gulf Coast inventories are holding at average levels.
Reversal coming? Yesterday we saw basis values for San Francisco spot diesel plummet to the lowest levels of the year, but then overnight the Chevron refinery in Richmond was forced to shut several units due to a power outage which could cause those differentials to quickly find a bid if the supplier is forced to become a buyer to replace that output.
Money managers continued to reduce the net length held in crude oil contracts, with both Brent and WTI seeing long liquidation and new short positions added last week. Perhaps most notable from the weekly COT report data is that funds are continuing their counter-seasonal bets on higher gasoline prices. The net length held by large speculators for RBOB is now at its highest level since Labor Day, at a time of year when prices tend to drop due to seasonal demand weakness.
Click here to download a PDF of today's TACenergy Market Talk.
After Another Black Friday Selloff Pushed Energy Futures Sharply Lower In Last Week’s Holiday-Shortened Trading
After another Black Friday selloff pushed energy futures sharply lower in last week’s Holiday-shortened trading, we’re seeing a modest bounce this morning. Since spot markets weren’t assessed Thursday or Friday, the net change for prices since Wednesday’s settlement is still down more than 6-cents for gasoline and almost 5-cents for diesel at the moment.
OPEC members are rumored to be nearing a compromise agreement that would allow African producers a higher output quota. Disagreement over that plan was blamed on the cartel delaying its meeting by 4-days last week which contributed to the heavy selling. The bigger problem may come from Russia, who announced plans last week to increase its oil output once its voluntary cut agreement ends now that price cap mechanisms are proving to be ineffective.
While an uneasy truce in Gaza held over the weekend, tensions on the Red Sea continued to escalate with the US Navy intervening to stop another hijacking and being rewarded for its efforts by having missiles fired at one of its ships.
RIN values came under heavy selling pressure Wednesday afternoon following a court overturning the EPA’s ruling to deny small refinery hardship waivers to the RFS. Those exemptions were a big reason we saw RINs drop sharply under the previous administration, and RINs were already on due to the rapid influx of RD supply this year.
More bad news for the food to fuel lobby: the White House is reportedly stalling plans to allow E15 blending year-round after conflicting studies about ethanol’s ability to actually lower carbon emissions, and fuel prices. Spot prices for ethanol in Chicago reached a 2.5 year low just ahead of the holiday.
Baker Hughes reported the US oil rig count held steady at 500 active rigs last week, while natural gas rigs increased by 3.
The first of perhaps several refining casualties caused by the rapid increase in new capacity over the past two years was reported last week. Scotland’s only refinery, which has a capacity of 150mb/day is preparing to shutter in 2025.
The CFTC’s commitment of traders report was delayed due to the holiday and will be released this afternoon.
Click here to download a PDF of today's TACenergy Market Talk.