Market Talk - 2018 november
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Energy Futures Back On The Slide
Energy futures are back on the slide this morning as hopes for a new production cut seem to be fading fast. Rumors that Russia was planning to change its stance and support more oil output cuts to prop up prices took credit for Thursday’s recovery rally, and new doubts about those rumors are taking early blame for today’s selloff.
It was a bit strange to see gasoline leading the move higher after being the weakest link in the energy chain for the past 2 months as RBOB futures plunged by more than 75 cents/gallon. As the charts below show, RBOB calendar spreads have strengthened over the past couple of weeks even while crack spreads have remained soft. That strength in time spreads would suggest tight supply, but the DOE reports are showing the opposite – particularly in PADD 1 – so the recent strength may have to do with short liquidation rather than anything fundamentally driven.
Reuters reported that the EPA’s final renewable volume obligations for 2019 (due out today) would match the preliminary volumes proposed in June. If that proves true, it would increase the requirement for “advanced” biofuels by 15 percent while holding conventional ethanol requirements steady. RIN values have not moved much in reaction to that news, but reports that the EPA would review how it grants hardship waivers to small refineries does seem to have put a floor under values for now.
Energy Futures In Recovery Rally Mode
Energy futures are in recovery rally mode this morning after reaching fresh lows for 2018 overnight. It’s easy to blame yesterday’s DOE report on the sell-off that saw WTI drop below the $50 mark for the first time in almost 14 months, but there’s not (yet) a clear reason for the bounce this morning.
One key non-oil story to watch: US Stocks had a huge rally Wednesday after the FED Chair suggested that interest rate increases may end sooner than previously indicated. While Energy and Equity prices have gone their own way most of the past month, a bit of optimism may be exactly what is needed to end the selling in petroleum products.
US crude oil inventories increased for a 10th consecutive week, and will surpass year-ago levels for the first time in 2018 if that streak reaches 11. US oil production held steady at its all-time high of 11.7 million barrels/day for a 3rd week, a casual 2 million barrels/day higher than this time last year. For perspective, that 2 million barrels/day alone would make the US one of the world’s top 15 oil producing countries.
Diesel prices took a relatively unfamiliar role of leading the complex lower after outperforming for most of the past year. Look no further than a sharp increase in US Diesel output combined with a collapse in the weekly demand estimate from the DOE to understand why.
Refinery runs surged nearly 700,000 barrels/day last week as plants made the turn from fall maintenance and have resumed their record-setting pace of production.
DOE Week 47 - 2018 Report
Energy Futures Under Pressure
Energy futures are coming under pressure again this morning, after managing to pull themselves back from the brink of another collapse in Tuesday’s session. Inventory builds are taking the blame for the early selling, and we’ll just have to wait and see if this move lower will be sustained. If the black Friday lows get taken out this week, charts favor another 5-10% slide in short order, but if we continue to see early selling turn into late-day buying, that may be enough to spark a long overdue recovery rally.
The API was reported to show a build in crude oil stocks of more than 3.4 million barrels last week, along with an increase of more than 1.1 million barrels of distillates. Gasoline stocks were estimated to have dropped by 2.6 million barrels last week, consistent with the annual spike in demand ahead of the Thanksgiving holiday. The EIA’s report is due out at its regular time this morning. Refinery runs will be an important number to watch to see how quickly plants are coming back online after a busy fall maintenance season.
The G20 meeting this weekend is being watched closely as Oil’s new power brokers will be in attendance, and could possibly come up with a more meaningful agreement than whatever OPEC may decide in its meeting next weekend.
The EPA is expected to publish the final 2019 Renewable Volume Obligation figures by the end of this week. There have been plenty of last-minute statements from both the Oil & Ag lobbies, and both sides of the political aisle leading up to the announcement, but it appears that the EPA will not reallocate waived biofuel volumes as some had hoped, which should keep a lid on RIN values for now.
Modest Round Of Selling Picked Back Up
After a healthy recovery rally fizzled at the close of Monday’s trading, a modest round of selling has picked back up to start Tuesday’s session. It’s common to see a period of sideways price action as traders reassess, balance positions and/or lick their wounds following a heavy sell-off like we saw last week, so it’s possible that November will end with some choppy back and forth action.
The big drop in futures Friday when spot markets were closed created plenty of confusion across the downstream sectors of the industry, with many wondering why wholesale prices fell sharply on Monday even though futures were up on the day. The product price estimates in the daily market overview attachment show the net result from when spot prices closed Wednesday, until they reopened Monday.
Speaking of US Refiners, there was finally some good news for Citgo in the past week: Venezuela reached a settlement agreement to maintain control of its US-based refining arm. There still are some hurdles to clear however. A similar deal failed previously when Venezuela couldn’t make its agreed-upon payments, and a visit by the head of Rosneft over the weekend was a reminder that not all of the country’s creditors will allow being moved to the back of the payment line.
Large speculators cut their net-long holdings in all of the “big 4” petroleum futures contracts (Brent, WTI, RBOB, ULSD) for a 6th consecutive week last week. Given the size of the drop we saw on black Friday, it seems likely that we could see this reduction in bets on higher prices continue for a 7th week, but the pace of liquidation is slowing, which suggests the big money betters may already have left the energy building. If true, this could be a contrary indicator suggesting that prices may be near a bottom, at least in the short term.
Electronic Trading Seeing Bounce In Oil And Gasoline
After breaking below the $60 mark for the first time in 6 months just two weeks ago, WTI came within 10 cents of dropping below the $50 mark in overnight trading, and RBOB gasoline futures reached their lowest levels of the past 2 years. Brent crude joined in the “lowest in more than a year club” falling below $60 for the first time since October 2017 before bouncing back this morning.
There seem to be plenty of arguments on both the supply and demand sides of the equation for why prices have fallen so far so fast, with the big question to end 2018 whether or not they’ll continue to slide, or if Friday’s collapse marked the point of capitulation. The early buying this morning suggests that Friday’s move may have been exaggerated by light trading volume as most US Traders had the day off, and could lay the ground-work for a strong corrective bounce if the early gains can hold.
Baker Hughes reported a decline of 3 oil rigs last week, the first decline in the past 4 weeks. With the recent price plunge, expect to hear speculation on how US drillers may change their plans over the coming months. Given the project lead times, and the speed with which prices have dropped however, if we do see US drillers slow down, that likely won’t happen until next year.
The weekly commitments of traders reports from the CFTC was delayed due to the holiday, so we’ll have to wait until this afternoon to see how the speculators have been weathering the storm.