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Week 57 - US DOE Inventory Recap
Product Prices Pushed The Petroleum Complex Into Official Bear Market Territory On Tuesday
Another double digit drop in refined product prices pushed the petroleum complex into official Bear Market territory Tuesday, ending an 18 month price rally. December trading started on a much more optimistic note with product rallying 10 cents in lockstep with a big bounce in US equity markets overnight, but have already cut those gains in half, leaving the complex vulnerable to more big swings.
Refined product spot prices are down more than 30 cents so far this week as cash markets catch up with the Black Friday meltdown, and ethanol prices decided to join in on the fun Tuesday plummeting 50 cents in the New York harbor and 40 cents in other spots.
The two agencies with strongest potential influence on energy prices are OPEC and the US Federal Reserve. This week will feature both as comments from the Fed chair Tuesday helped spur another broad based sell-off that could be classified as a “Taper Tantrum” by the big money funds that expect their big money to be free and easily printed.
OPEC is now taking center stage as their technical committee meets today and then the full group meeting tomorrow, with several reports guessing the cartel may use Omicron as an excuse to pause their plans to steadily increase oil output. With several producers already struggling to meet their quotas, that change in the stated plan could help prop up oil prices, even if in real terms it doesn’t mean any less oil coming to market, and would also send a signal to the US & other nations that they shouldn’t bring their SPR knife to the oil price gun fight.
The API reported builds in refined products last week of 2 million barrels of gasoline and 800,000 barrels of diesel, while oil stocks had a small decrease of roughly 750,000 barrels. That report seemed to be largely shrugged off based on the price action Tuesday afternoon through the overnight session, as the larger macro issues continue to be driving the Risk-off/Risk On action across asset classes. The DOE’s weekly report is due out at its normal time this morning. While that report may have less impact than normal on futures, watch the refinery runs by PADD to see how plants are progressing through maintenance to get a feel for how quickly some of the supply shortages in pockets around the country may heal.
Science getting in the way again: California’s Air Resource Board published a study this week that shows Bio Diesel and Renewable diesel blends are actually creating more NOx pollution than “traditional” CARB #2 diesel in modern engines. The Next Steps listed by the Agency are to take several months to ask more questions, so it’s unlikely we’ll see any changes to the state’s current regulations any time soon, but it will create new challenges for the state’s biodiesel blenders.
Look Out Below? Energy And Equity Futures Are Pointed Sharply Lower Again
Look out below? Energy and equity futures are pointed sharply lower again Tuesday after Monday’s recovery rally started to fall apart in the afternoon hours. Omicron is once again getting credit for most of the selling, after Moderna’s CEO shared a much more pessimistic outlook for the variant than Pfizer’s CEO did Monday.
It’s the last trading day for December RBOB and ULSD contracts, and at this point, and given the heavy selling and backwardation in the market, we’re likely to see the January contracts take over the prompt position at prices we haven’t seen in 6 months or more. Already January RBOB is trading at $1.96, pushing several cash markets across the US to levels we haven’t seen since the spring RVP transition. ULSD futures meanwhile have already taken out Friday’s low trades, leaving the door open for another big push lower that may see diesel trading below the $2 mark this week as well.
The pullback in prices, and the post-holiday demand drop has also wiped out the premium to ship gasoline from the Gulf Coast to the New York harbor in just a few sessions. No such relief in ethanol however, as logistical bottlenecks keep prompt prices near the $4/gallon mark even as gasoline prices have crumbled.
It’s not just consumers who will enjoy the big drop in fuel prices: There was a big increase in new short positions in ULSD, WTI and Gasoil contracts last week ahead of the selloff, which pushed the net length held by money managers lower. A key point to watch this week will be how that length held by hedge funds weathers the selloff, as a mass liquidation often has a snowball effect pushing prices even lower.
With charts continuing to point lower and fear driving the action, the best hope for the bulls this week may come from OPEC, who postponed their technical committee meeting this week to take more time to evaluate Omicron. The cartel could pause their plans to increase crude output each month to try and stop the selloff, especially since many of its members are struggling to reach their production quotas given the supply chain issues impacting just about every industry in just about every corner of the world.
Speaking of supply chain challenges, a Reuters story this morning suggests things are about to get worse for traditional oil and gas producers as more than 40% of survey participants said they plan to leave their job in the next 5 years, with more than half of those aiming to move into renewables.
Today is the last official day of the 2021 Atlantic Hurricane Season, which ended with a whimper after a busy start that saw all of the names in the original list get used up. While this season brought us Hurricane Ida, one of the worst hurricanes on record, which continues to have impacts on oil and refined product supplies in the Gulf Coast today, the supply network is breathing a bit of a sigh of relief that things weren’t worse after 18 months of seemingly non-stop disruptions.
Black Friday Took On A New Meaning This Year
Black Friday took on a new meaning this year as markets around the world were pummeled by fears of a new COVID variant that prompted new lockdowns and travel restrictions around the world. The petroleum futures complex ended Friday with its biggest daily selloff in 19 months (you may remember April 2020 when WTI traded in negative territory) but since spot markets were closed for Thanksgiving, the 12% drop in futures didn’t carry over to physical prices in the US yet.
This morning we’re seeing a sigh of relief rally in both energy futures and equity markets as the drug makers signal confidence that Omnicron can be dealt with in a relatively short time frame, although only about 1/3 of Friday’s losses have been erased so far, suggesting the market still has major concerns.
From a technical perspective, we’ve been saying for some time that refined product charts looked like they could get a 20-30 cent sell-off, we just didn’t expect to see it happen in a single day. Now that the big flush lower is in the rearview mirror and an 11 cent bounce has already happened, we’re set up with a new range to determine the direction of our next trend. If Friday’s lows get taken out ($2.02 for RBOB and $2.09 for ULSD) there’s a good chance we see another 20 cent drop. On the upside, we’ll need to see the previous support around the $2.18 range for RBOB and $2.26 for ULSD be surpassed to get the charts to a more neutral footing heading towards year end.
The CFTC’s weekly report on NYMEX positions was delayed due to the holiday and won’t be released until this afternoon, but Brent and Gasoil contracts both saw heavy liquidation by money managers, suggesting the big funds may have already been heading for the exits well before things got exciting last week. Keep in mind that the data released today will be as of Tuesday Nov 23, so we won’t see how traders weathered Friday’s storm until the end of this week.
In less exciting news, the attempt to put a Cap & Trade program on transportation fuels across New England seems to have failed as the governors of Massachusetts and Connecticut both signaled they would no longer support the plan known as TCI in the face of already high gasoline prices (and an election year).
Unplanned refinery downtime continues to create many challenges for regional supply networks with the refinery in Toledo OH reportedly needing months to make repairs after an explosion and fire last week, while the flooding that swept across the Pacific North West forced a plant in BC to shutter until crude supplies can be restored. Last week’s DOE report showed that many plants are returning after a busy fall maintenance schedule, which should help limit the impact of these latest disruptions.
Week 56 - US DOE Inventory Recap
The Strategic Petroleum Reserve Disappointed Markets Yesterday And Led To A ~4% Rally In Energy Prices
Well that didn’t work: the volumes announced to be released from the Strategic Petroleum Reserve disappointed markets yesterday and led to a ~4% rally in energy prices. Even with the addition of the oil being liquidated from a handful of Asian countries, the grand total returning to the market was less than expected. Prompt month European crude oil futures are exchanging hands over $82 per barrel, American WTI is trading around $78 this morning.
The Department of Energy published an interesting note including some details about the specifics of yesterday’s announcement.
The American Petroleum Institute estimated a 1.3 million barrel drop in national oil inventory levels last week, accompanied by the rare ‘no change’ in gasoline stocks and a tame draw-down of less than a million barrels of diesel. The DOE’s version of events will come out at its regular time today (10:30 EST).
In case you haven’t heard, retail gasoline prices are high. While it’s anticipated that many will stay home on turkey day, this year’s COVID recovery is likely to cause a 13% YOY increase in auto travelers. It will be great to see family, too bad it’ll be the most expensive to do so since 2012.
Prices are drifting lower this morning as the market adopts a ‘wait-and-see’ approach ahead of a possible response from OPEC+ following yesterday’s SPR release. The cartel is scheduled to meet next week and news surrounding the continuation, cessation, or alteration of their typical monthly increase of 400,000 barrels of oil supply will be closely watched.