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Trendlines Stayed Intact Through Yesterday’s Round Of Selling
The 1 ½ year old bullish trendlines stayed intact through yesterday’s round of selling. Prompt month refined products futures trimmed a neat 1-1½% during Thursday’s formal trading session. Both American and European crude oil benchmarks saw a similar pullback as traders chalk up the day’s price action as profit-taking.
It looks like all heating fuels are expected to be costly this winter as the EIA adds propane to the list. Low inventory levels caused by supply/logistics bottlenecks and an unseasonably cold winter seem to be the common threads behind the prediction for heating fuels.
4-D chess or lost in translation? While it seems the headlines are painting Putin as a welcher, the Kremlin has stated earlier their help may come with a cost. Regardless, natural gas futures prices have pulled back from the 13-year high that they set earlier this month and are currently trading at $5.30 MMBtu.
The energy complex will need to extend its buying today if futures are to add their fifth consecutive week of gains. While yesterday’s selloff was likely a healthy pullback, most technical indicators are still flashing ‘overbought’ signals. A sizeable pullback seems to be in the cards, its just the age-old matter of “when”.
Petroleum Product Inventories Boosted Futures
An across-the-board draw in petroleum product inventories boosted futures prices yesterday after the big three (gasoline, diesel, and WTI crude) tried to start the day with modest losses. Gas and diesel saw the largest drawdowns in stocks at 5.4 million barrels and 3.9 million barrels, respectively. Likewise, the two refined product contracts lead the complex higher, each posting a ~1.3% gain on the day.
While the combination of growing adoption of renewable fuel and collective abandonment of coal usage is expected to cut emissions over the next 30 years, the EIA still anticipates a 5% increase in the world’s CO2 footprint through 2050.
RIN prices are rallying this week after completely recovering from last month’s selloff surrounding the fake(?) email containing biofuel blending targets. Both ethanol (D6) and biodiesel (D4) credits added 5 ½ cents yesterday, bringing their price to $1.41 and $1.67, respectively.
Diesel prices in the Midwest have hit fresh 16-month lows against the New York Harbor Heating Oil contract. While it is common to see prices in the region slope off with the cooling weather, witnessing it happen this early, and in the middle of harvest season, is uncommon. Seasonally high days of supply seem to be the culprit for the dropping prices in the Heartland.
The European crude oil benchmark hit fresh multi-year highs in overnight trading before pulling back with the rest of petroleum futures early this morning. Whether this morning’s action is profit taking, ‘Reversal Thursday’, or the beginning of the sizable pullback some are anticipating is yet to be seen. What has been seen, over the past couple weeks, is early morning selling reversed mid-day as some traders find a reason to continue buying.
Week 51 - US DOE Inventory Recap
Pivotal Test For The Energy Complex In The Back Half Of The Week
Buy the dip was the theme of Tuesday’s session as nickel losses for refined products in the morning were wiped out in the afternoon. So far today we’re seeing a similar pattern, with 4 cent losses overnight being cut nearly in half this morning. This back and forth action after prices hit fresh 7 year highs Monday sets up a pivotal test for the energy complex in the back half of the week. Reports that the Chinese government was planning to intervene to halt the surge in electricity prices had coal prices dropping sharply, and was getting credit for sell-off overnight.
If the bulls can continue surviving these selloff attempts, the charts continue to favor higher prices, and a run towards $90 for crude seems like the path of least resistance. If they can’t regain the upward momentum this week however, expect to see products drop by about a dime in short order and make a more serious test of the upward sloping trend lines.
The API was said to show decreases of 3 million barrels for both gasoline and diesel last week, while crude stocks increased more than 3 million barrels. Based on the market reaction, that report didn’t mean much as refined products are leading the slide lower, further compressing crack spreads that have come under pressure this week, after a strong rally earlier in October. A Reuters article this morning highlighted how stronger crack spreads are encouraging refiners globally to increase run rates, which are expected to continue increasing through the winter.
The DOE’s weekly status report is due out at its normal time this morning. A few things to watch for in today’s report: US Crude production may have climbed back to Pre-Ida levels last week, even though roughly 250mb/day of production capacity in the Gulf of Mexico remains offline, showing the ramp up in onshore output the past two months. Also watch refinery runs to see how facilities are recovering from a rash of unplanned maintenance events over the past month that have contributed to tighter than normal supplies in many markets. Last, look at the swings between PADD 3 and PADD 1 refined product inventories to see the impact of the Plantation pipeline shutdown. The backwardation in NY Harbor spot prices through the end of Thanksgiving has shrunk by nearly a nickel this week suggesting the squeeze is behind us.
While refined product prices have stalled out this week, ethanol prices continue to surge, with spot prices on the East and West coasts both rallying north of $3/gallon this week. That strength in ethanol seems to be contributing to strength in the RIN markets, which are at their highest levels since Labor day.
Surging natural gas & coal prices have been front page news over the past month, and have contributed heavily to the rally in oil and refined products. An EIA note this morning highlighted the expected growth in natural gas demand from non-OECD countries in Asia (primarily China and India) and how US exports are set to double in the next decade to help meet that demand.
Momentum Is Waning In Refined Product Markets
Momentum is waning in refined product markets this week after prices stalled out early Monday and are slipping modestly lower again this morning. While the pullback of 5-6 cents from the 7 year highs set early Monday morning are noteworthy, we’ll need to see prices drop another 7-8 cents in the coming days before they threaten the bullish trend lines that have been in place since the August pullback. In other words, so far this week’s selling looks more like a correction to an overbought market, rather than a reversal of that upward trend.
While refined products are struggling, both WTI and Brent are moving higher this morning, putting downward pressure on crack spreads. Unfortunately for refiners, there’s a double whammy on their margins this week as RIN values reached their highest settlement in nearly 6 weeks yesterday, even though RIN values and crack spreads often move in the same direction.
Keep an eye on calendar spreads this week, as severe backwardation in futures that’s steadily grown over the past month’s rally seems to be having strong influence on regional cash markets and inventory levels. What we’re seeing today in the RBOB market, with November prices down a penny more than February values, could be a sign of what’s to come once the supply squeeze has passed. For both ULSD and RBOB, we could see 5-10 cents price drops in front month values just to get the curve back to a more normal level.
This phenomenon is perhaps most glaring in the Group 3 diesel market, where basis values for ULSD dropped to 8 cents below futures, a level we’re used to seeing during the demand doldrums in winter, not during the peak of harvest season where we are today. The weakness in Midwestern diesel values seems to be trickling down to the gulf coast, as shippers will want to avoid moving barrels north to sell at a net loss, which should eventually correct the pricing mismatch.
An EIA report this morning highlights how improvements in drilling and well completion over the past decade allow for more oil to be produced in the Permian basin with lower costs. Meanwhile, the EIA’s monthly drilling rig report highlights that output per rig is forecast to drop slightly in the coming month as producers sacrifice efficiency during the restart race, but total output is expected to continue climbing along with the drilling rig count.
Chinese Power Shortage Partially Blamed For Refinery Output Dropping
There’s a saying that market-based prices don’t go straight up, but if you just looked at the chart of energy prices over the past several weeks, you might think otherwise. The steady march higher continues this morning as the world remains without a short term solution to the energy supply crunch, and the big 3 NYMEX contracts all reached fresh 7 year highs again overnight, with refined products up 45 cents in the past month, and more than $2/gallon over the past 18 months.
While the bulls clearly have control of this market for a time being, there’s also a saying that energy prices like to take the stairs up and the elevator down, so it would not be surprising to see a big price drop when the upward momentum finally wanes.
(Not) adding fuel to the fire: The Chinese power shortage was partially blamed for refinery output dropping to a 15 month low, showing how a lack of one fuel can lead to less production of another. It’s not a completely fair comparison because the country’s quota system on oil imports is also playing a big role, but it is indicative of the challenges faced in the near term as the world tries to get back to normal.
It’s not just fossil fuels that are seeing big rallies. Ethanol prices have been surging alongside gasoline, with spot prices in the New York harbor surpassing the $3 mark last week. Note the unusually large spread between Chicago and New York ethanol prices in the chart below as a sign of the ongoing logistical challenges for delivering fuel via rail and truck around the country.
Not buying it? It wasn’t too surprising to see money managers continue jumping on the petroleum bandwagon last week, adding to their net length in WTI and ULSD contracts. Brent crude meanwhile saw a 9% decrease in the bets on higher prices held by large speculators, which suggests that some of the big money bettors think this rally is getting a overextended. RBOB contracts saw a small reduction as new shorts were added, which seasonally looks like a solid bet as gasoline demand is heading towards the winter doldrums.
Baker Hughes reported 12 more oil rigs were put to work last week, the largest weekly increase in 6 months, as the race to increase production at these lofty levels accelerates. Half of the additional rigs put to work last week were in the “other” basin category, suggesting that smaller operators are outpacing the bigger operators in the major US shale plays.
Today’s interesting read: This WSJ article taking a deeper look at the energy supply crunch and the impacts on both fossil fuels and renewables.