Market Talk - 2018 december
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Starting Last Day Of The Year On A Stronger Note
Energy and equity markets are starting the last day of the year on a stronger note, as optimism over a potential US/China trade deal seems to be encouraging traders to go bargain hunting after a rough December (and a rough year) for the bulls.
While energy futures have a normal session today, and are closed all day tomorrow, most US physical markets aren’t active either day, which means trading volume will be light today, and could create more volatility like we saw the day after Thanksgiving, and on Christmas eve.
The DOE report released Friday did not have much to stir markets with both Crude oil and distillate inventories essentially unchanged. The weekly status report will be delayed until Friday again this week due to the New Year’s holiday.
Baker Hughes reported 2 more oil rigs were put to work last week, putting the US oil rig total at 885, compared to 747 this time last year. A report from the Dallas FED last week mentioned how job growth in TX may be at risk if lower oil prices cause drilling activity to slow in 2019.
DOE Week 52 - 2018 Report
Rollercoaster Ride Continues For Energy And Stock Markets
The rollercoaster ride continues for energy and stock markets as one of the largest daily reversals in equity markets on record Thursday spilled over into oil and refined product markets overnight, only to see those gains wiped out this morning.
The post-Christmas bounce for both asset classes may very well set the stage for a longer-term recovery, although we’ll need to see buyers hang on for the last couple of trading days in 2018 to have a chance at sustaining this rally. The correlations between Equity and Oil prices have surged in the past two weeks, which has been typical whenever the “risk on-risk off” pattern of trading (also known as “fear trading”) is gripping markets.
The API was said to show a 6.9 million barrel build in US Oil inventories last week, a 3.7 million barrel build in gasoline, while diesel stocks declined by nearly 600,000 barrels. The report knocked some of the wind out of the afternoon equity-fueled rally, although it’s hard to say if that report influenced the overnight swings of more than $1 for crude and 3-4 cents for products. The DOE’s weekly report is due out at 11am Eastern today.
While gasoline prices have led the way lower for much of the 3-month sell-off, reaching their lowest since February 2016 during the Christmas-eve melt-down, diesel prices led the drop Thursday. Gulf Coast ULSD prices settled at $1.56/gallon, the first time since Hurricane Harvey we’ve seen wholesale diesel prices posted that low.
Petroleum Futures Bought Back All That Was Lost
The bulls said no yesterday as the big three petroleum futures bought back all that was lost on Christmas Eve. On twice the traded volume as Monday, refined products popped between 4% and 6% this Boxing Day while crude added a whopping 8% with a gain of $3.50 per barrel.
On the physical side of things, since most benchmarks didn’t publish prices on Monday, buyers and sellers of wet gallons were looking at the net change between the 24th and 26th, which had gasoline gaining a relatively dull 1.2 cents while diesel remained flat .
The weekly inventory report published by the Department of Energy has been rescheduled to Friday at 11am EST. So far it doesn’t look like that agency has been affected by partial government shutdown, which so far has only impacted less important departments like Homeland Security.
OPEC has a laundry list of uncertainties facing it over the next 12 months, perhaps chief of which is proposed American legislation that would allow legal action to be taken against the cartel for price manipulation. The NOPEC Act is already being blamed for Qatar’s departure in November.
Prices are pulling back this morning, taking a breather from yesterday’s rally, and doing little to quell the idea that volatility will be the name of the game going into the new year. The Oil Volatility Index (OVX) is hitting levels not seen since Q1 2016 when WTI had enough of the 2014-15 price collapsed and started a new bullish trend.
While whether or not the capitulation in prices over the last three months is in fact the beginning of a new long term trend, 2019 is poised to be a wild ride.
Christmas Eve Not Kind To Energy Prices
Christmas Eve was not kind to energy prices Monday as the big three American benchmarks lost 4-6% on light volume. Gas and diesel futures lost over 6 and 7 cents respectively while the prompt month crude oil contract cut almost $3 off of Friday’s price.
The CFTC reported that short speculative positions have hit an annual high with the money manager classification of trader opening 20,000 outright short positions as of 12/18. While it may not necessarily indicate future price direction, it is important to note that bets on lower prices have not been this high since last October.
Premiums over Colonial Pipeline tariffs remain elevated going into the new year as traders vie to take advantage of favorable cash price differences from the origins along the gulf coast and the sundry delivery points up the eastern seaboard. Values for both the gasoline and diesel lines remain at levels not seen since 2016.
The charts are having a hard time offering any bullish sentiment as prices burned through flimsy support to levels not seen since early 2016. A bounce-back today could make a case for some level of overselling Monday. Currently, only the January ULSD contract is staying in the red so far today, but only just. RBOB is tacking on 1.5 cents as WTI tempts cutting Monday’s losses by a third by adding $1 today.
Wipeout Continues For Energy Prices
The wipeout continues for energy prices to start Friday’s session with most contracts down another 1.5-2% on the day and reaching fresh lows for the year some 40% below where they stood less than 3 months ago. Even a report overnight that Saudi Arabia would be cutting its production more than previously announced was not enough to keep the sellers at bay.
It’s been a brutal week for energy (and equity) bulls after a technical trap-door seems to have been triggered another wave of selling. Brent crude is now down $7/barrel for the week, while refined products are down around 13 cents/gallon each.
The sell-off can’t be purely blamed on technical factors however. As the forward curve chart below shows, energy futures have rapidly transitioned over the past month from a backwardated forward outlook expecting tighter supplies, to a contango curve that suggests a glut of inventory is coming.
All bets are off on where prices will go today as volumes are already dwindling with holiday travelers getting an early start. Nymex futures will trade on Christmas eve in an abbreviated session, and will be closed completely Christmas day. Spot markets will not be assessed either day however, so most rack prices published tonight will carry all the way through to Wednesday.