Market Talk - 2019 april
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Refined Products Leading Rally
So much for the sell-off. Refined products are leading a rally this morning, trading up nearly 4 cents/gallon, after technical support managed to hold up through last week’s heavy selling, and a pair of bullish oil headlines made their way through the markets overnight.
Venezuela’s opposition leader called for a military uprising, which is certainly a notable turn of events in the ongoing saga, but probably won’t do much short term to change the flow of oil from the region. You could argue that the move – if successful – will be bearish for oil prices as a regime change should help allow the oil (and dollars) to begin flowing again.
Meanwhile, last week’s call from the US President for OPEC to increase production was refuted by the Saudi oil minister, which seems to also be taking credit for the early buying spree. The full text of the Saudi oil minister’s comments aren’t quite as bullish as headlines might make it seem, as he reiterated the Kingdom’s plan to replace any lost Iranian exports, they just don’t think they’ll need to break the current agreement in order to do so.
While the oil headlines are getting credit for the early rally, refined products are actually leading the charge higher, with both RBOB and ULSD up more than 2%, compared to around 1.5% for Brent and WTI. There do not appear to be any refinery issues to explain the rally, so it seems this may be more technical-based buying now that the trend-lines have held.
Speaking of refiners: Most major refiners have been reporting much weaker earnings in Q1 2019 vs. a year ago as the wide crude spreads that drove profits in 2018 have compressed dramatically.
Today’s interesting read: Philip Verleger compares the current oil supply issues in Iran and Venezuela to 19 previous oil shocks.
Energy Markets Treading Water To Start Week
The energy markets are treading water to start the week after the biggest daily sell-off in more than 2 months broke a streak of weekly gains and threatens to break the bullish trend-lines that have pushed prices higher since bottoming in December.
Friday’s heavy selling was largely blamed on a statement from the US President that he’d reached out to OPEC about keeping oil prices low. Even when that statement was refuted by OPEC, the market did not reverse course suggesting there was a wave of liquidation at hand after a 7-week-long rally in WTI and similar moves in the rest of the complex.
Wondering why Trump Tweets seem to roil the oil markets? Read this piece by Michael Lynch.
Baker Hughes reported a decline of 20 oil rigs last week, the largest weekly drop since January, and the 2nd largest of the past 3 years. The market seemed to shrug off that news Friday as the report did little to stem the tide of heavy selling, another indicator that this market had been over-cooked.
Money managers continued their steady increase of net-long holdings in WTI and Brent last week, while refined products both saw a slight decrease. This week’s COT reports will be closely watched to see how those funds weathered Friday’s sell-off. Whether or not those funds head for the exits now may determine if prices bounce on the trend support and continue higher, or if they’ll break, and spark another May sell-off.
The EIA this morning noted how exports of various petroleum products from the US Gulf Coast have been aided by an expansion of the Panama Canal.
Bull Market In Energy Prices May Have Ended
The bull market in energy prices may have officially ended this week if the early wave of selling can hold up through the afternoon. The week started with the US removing Iranian-sanction waivers, and Thursday saw new highs for the years after reports that Russian oil was being rejected in Europe. The Iranian news was countered by the IEA’s report that other countries besides Saudi Arabia now had spare capacity to increase oil shipments if needed, and Russia has already committed to fixing its quality issue via an alternate pipeline route, and suddenly in about 24 hours the week’s gains have been erased.
If WTI (currently trading at $63.91) settles below $64, it would snap a streak of 7 consecutive weekly gains, and creates a bearish-looking bar on the charts, just in time for the “Sell by May and go away” chants to begin. The correlation between equity and energy markets remains strong, and with stocks ticking lower after multiple US indices reached new record highs this week, the stage is set for a large potential correction in both asset classes.
Adding to the negative sentiment this morning: ExxonMobil (a DJIA component) reported a sharp drop in quarterly earnings and its stock is down more than 2 % in early trading. The news channels appear to be struggling to figure out why the earnings were weak in Q1 even though the company made a report to the SEC estimating Downstream earnings would drop by nearly $2 billion due to tighter crude spreads and hedge losses more than 2 weeks ago.
The bulls may counter that the strong backwardation in Brent crude proves that buyers are still having a difficult time finding crude oil near-term, suggesting there may be a fundamental reason why today’s selling may be nothing more than a good buying opportunity. In addition, we have not yet broken the bullish trend lines that started when prices bottomed out on Christmas eve, so it’s still a little too soon to call an end to the 2019 run. How the money managers that have been steadily increasing their bets on higher prices react to this pull-back may well determine if this is just a bump in the road for energy bulls, or the end of it.
Crude Oil Stocks Remain Above Seasonal Average
The 5.5 million barrel build in crude oil stocks reported by the EIA applied some selling pressure to refined products yesterday, keeping them in the red. Crude oil stocks remains above the seasonal 5-year average while output hit the same all-time-high level it did a couple weeks ago.
Prices have been sent higher this morning, however, on news that several Baltic countries have halted Russian crude imports over “quality concerns”. The European crude benchmark doesn’t seem to care if this move might be some sort of political posturing as it breaks through the psychologically important $75 per barrel price level and sets new highs for the year.
More news that surely isn’t hurting today’s rally is the discovery that sabotage caused the fire on one of Nigeria’s pipelines, resulting in an oil production decrease of 8%. While this is the second disruption to oil infrastructure the country has seen in a couple months, oil production from the OPEC member has remained relatively stable over the past year.
Refined product futures continue to tick higher, helped by a new seasonal high set for US petroleum demand reported yesterday. Stockpiles of both products remain below their respective 5-year averages but as refineries continue to return from the rash of planned and unplanned maintenance we saw earlier this year, we could see bullish pressure wane going into the summer.
DOE Week 17 - 2019 Report
Futures Pulling Back From Fresh Highs
Futures are pulling back from the fresh 2019 highs set during yesterday’s trading session on some bearish inventory data from the American Petroleum Institute. While crude oil stocks are estimated to have the largest draw down of the three main benchmarks (-6.8 million barrels), it is actually the RBOB futures contract that is leading the complex lower this morning, despite its relatively muted 2 million barrel draw in national gasoline stores.
The May RBOB contract is showing a 3 cent loss so far this morning, leaving May HO and June WTI lagging behind with losses of about a penny and 14 cents per barrel respectively. A confirmation of the API’s report by the EIA could spur prices lower; the report is scheduled to be released at 9:30 AM CDT today.
The disparity between energy and equities continued to widen yesterday as equities hit an all-time high. Dovish sentiment emanating from central banks and a positive outlook on US-China trade talks seems to be bullish enough to push past fears that this historic rally might be reaching the end of its cycle.
A 7-month-long pattern completed on the RBOB futures chart earlier this week, leaving general technical price direction open for the near term. Coming off of a very exuberant spring rally in gasoline prices, the market adage “sell in May and go away” might prove to be prudent advice rather than finance blather as a stronger case for lower prices seems to be emerging.