Market Talk - 2019 august
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Energy Complex Pulling Back After Week Of Heavy Buying
The energy complex is pulling back today after a week of heavy buying. Profit takers are being blamed for the downward action seen in oil prices this morning but the US crude benchmark is on track for a ~4% gain on the week. It’s a similar story for heating oil futures, up just over 3% on the week, but gasoline prices are just about flat since Monday as traders position themselves ahead of the expiration of the summer-grade September futures contract.
The cone is shrinking: Hurricane Dorian’s projected path is focusing on the southern half of Florida’s east coast. It is still projected to make landfall as a category 3 storm, classified by sustained wind speeds of 111-129 miles per hour, sometime early Tuesday morning. The governor of Florida initially declared a state of emergency for 26 counties ahead of the storm, then revised it for the entire state’s 67 counties as heavy rainfall could be widespread.
Discretionary spending is likely to receive a bit of a boost this weekend. Gas prices at the pump are about 9% lower than they were this time last year due to slightly lower consumption and strong inventory levels. 2019 is also projected to be one of the busiest driving years since 1970 with miles driven expected to be over 3 trillion nationwide.
Positive sentiment surrounding trade talks between US and China, paired with this week’s bullish inventory report from the Department of Energy, has paved the way for higher short-term oil prices. Numerous technical resistance levels were blown through this week, leaving the door open for WTI futures to make a run at $60. The charts have a speed bump around $58 but, as we saw this week, positive headlines can make short work of chart signals.
Energy Complex Saw Buying Pressure
The energy complex saw some buying pressure yesterday as the DOE reported a large draw in national crude oil inventories caused almost completely by a drop off in imports. Climbing oil production and a pullback in refinery runs barely made a dent in the ~1.3 million barrel per day drop in imports, leading the metric’s total to the lowest level on record. While there’s speculation about a potential drop in US crude exports due to trade disputes with China, analysts are oddly quiet about the cause of the drop in last week’s imports, which could mean that number might be a fluke. WTI futures seemed lean towards the same conclusion after the report released yesterday morning, settling just 85 cents per barrel higher after an earlier gain of over 2 dollars.
Hurricane Dorian swept over Puerto Rico yesterday as a category 1 storm and is now headed to the US mainland via Florida’s east coast. Directional forecasts expect the storm to make landfall somewhere between Cape Canaveral and Palm Beach early Monday morning, possibly as a major hurricane (category 3). Almost all of the state’s refined product terminals lie within the forecast’s error cone; flooding due to heavy rainfall poses the biggest threat to local energy prices. Historically speaking September is the peak month for tropical activity in the Atlantic basin and this year it is starting off with a bang.
Oil prices are up slightly again today, looking to hold on to momentum gained from yesterday’s buying activity. It looks like the chicken or the egg conundrum while trying to assess whether equities are bolstering energy or vice versa. Currently oil prices seem to be the stronger counterpart in the equation as headlines can’t decide whether to be optimistic or cautious on the US economic outlook.
DOE Week 35 - 2019 Report
Sizable Draw In Crude Oil Inventories
A sizable draw in crude oil inventories as estimated by the American Petroleum Institute inspired after-hours buying in energy futures yesterday. After an already strong day, seeing gains of over $1 per barrel during the formal session, the reported +11 million barrel drop in national crude stores sent WTI futures another 90 cents higher as of this morning.
Tropical Storm Dorian is bearing down on Puerto Rico this morning and is expected to make landfall later this afternoon. Overnight developments have upgraded the storm’s forecast to probable hurricane status as it reaches the American mainland early Monday morning. The entire east coast of Florida and Georgia fall within the storm’s forecasted cone of uncertainty, marking any point along that portion of the seaboard as possible landfall destinations. The anticipated impact to energy infrastructure remains minimal as there are no refineries in the storms projected path however, as we saw last night, things can change quickly.
Likewise, yesterday’s Tropical Depression Six was upgraded early this morning and claimed the 5th named storm so far this season. Tropical Storm Erin’s estimated trajectory is now pointed squarely at Halifax, staying off the US East coast by about 150 miles. However, the estimated path has pulled further east over the last 24 hours which suggests it could still pose a threat.
Futures seem to be shrugging off a slew of bearish headlines going into mid-week: recession fears on lower treasury yields, the possibility of the return of Iranian barrels to the international market, and posturing by China that it expects trade trifles to continue. It will be interesting to see if any of these factors will take hold in energy prices if the Department of Energy’s weekly inventory report (due out at 10:30am CDT) disproves the API’s estimate.
Energy Prices Up This Morning
Energy prices are up this morning after the flurry of headlines from the G7 meeting saw futures up then down during Monday’s trading session. Aside from concerns over the Amazon rainforest fire and gossip surrounding the First Lady and the Canadian Prime Minister, a sit-down brokered by France’s Macron between the White House and Tehran is rumored to be in the works. The bearish economic implications of Iranian supply returning to the market have given way to doubt that any agreement will be reached between the US and Iran given that an entirely new nuclear deal will need to be in place before sanctions are lifted.
Tropical storm Dorian has formed on the outskirts of the Caribbean Sea over the weekend. The system is currently projected to make landfall on the east coast of Florida this Sunday but will likely remain a storm and anticipated impact to infrastructure is expected to be minimal. Another organized disturbance, currently designated as Tropical Depression Six, has formed overnight between the American mainland and Bermuda. This formation will likely strengthen into a tropical storm and make landfall in Nova Scotia or Newfoundland this weekend. Other than causing local disturbances, the storm will likely be a non-event for energy prices.
Futures bulls have a tough road ahead of them both fundamentally and technical over the next couple weeks. Despite the positive news surrounding a possible break and resolution to the US-China trade war, concerns over whether or not anything will come of the peace talks has sent Chinese currency to an 11-year low Monday. The charts don’t offer much hope either with myriad resistance levels presenting formidable opposition to higher prices in the short term.
Trade Teeter Totter Continues To Roil Markets
The trade teeter totter continues to roil markets with a new round of tariffs announced Friday morning sending energy and equity markets sharply lower, only to see a recovery rally this morning following reports that the US and China were returning to the negotiating table.
Fake News? After the overnight tweet about China wanting to make a deal sent equity markets sharply higher, and helped refined products turn 2 cent losses into penny gains, numerous other notes have surfaced suggesting that there has been no change in the official Chinese stance, and the phone calls may not have happened at all.
Keep an eye on corn and ethanol prices today after the US announced a new trade deal with Japan had been agreed to in principal, which includes a large increase in US corn exports. Ethanol & its RINs had already staged a nice recovery rally last week, and this latest bit of good news may help that upward momentum continue.
Iran claims it has sold the roughly 2 million barrels of oil onboard its tanker that had been held for weeks in Gibraltar, a move seen as trying to circumvent US intervention. Still no word on the British tanker that was seized by Iran in retaliation, although reports last week suggest it may also be released soon. Meanwhile, Israel attacked Iranian-linked forces in 3 different countries over the weekend, a stark reminder that the tensions in the region extend well beyond shipping lanes.
Tropical Storm Dorian formed over the weekend, and is on a path that could bring it to Florida next weekend. While models do suggest this storm may become a hurricane as it nears Puerto Rico, current forecasts suggest the storm will weaken due to dry air and wind shear, and may dissipate before reaching the US Coast. The other storm system known for now as 98L is still given 80% odds of developing this week, but is tracking off the US East coast and doesn’t currently appear to be a threat to land. Speaking of fake news: The US President is denying claims he suggested the country consider using nuclear bombs to stop hurricanes.
16 oil rigs were taken off-line last week, according to Baker Hughes’ weekly rig count, which brings the US total to a new 18 month low. The Permian basin led the decrease again, with 7 fewer rigs (a 1.5% decline in active rigs for that basin), while the DJ Niobrara basin in Colorado laid down 5 rigs, which amounts to a 16% reduction in just 1 week.
Money managers continue to seem uninterested in energy contracts, making small reductions in Brent and RBOB net length last week, while WTI and ULSD both saw small increases.