News & Views
Last Trading Day Of The Month, Year And Decade
The Santa Claus rally ran out of steam this week as U.S. equities pulled back from record highs Monday, and refined products have lost 6 cents from their December high prints. So far it appears the new violence in Iraq – which appears to be yet another proxy war with Iran – has had little if any effect on prices.
It’s the last trading day of the month, year and decade. It was a strong year for both energy and equity prices, but the two asset classes had a very different decade as stocks nearly tripled in value, while petroleum prices fell under the weight of record U.S. supplies.
As foreshadowed by the market action and ICE report Friday, money managers increased their net long holdings in WTI, ULSD and RBOB contracts last week according to the delayed CFTC COT report.
RBOB gasoline positions are the most notable, even though they’re relatively small compared to oil positions, as speculators seem to be getting out over their skis with bets on higher prices well above anything we’ve witnessed at this time of year. Extreme positions held by speculative funds is seen as a contrary indicator, and could mean more selling to come once those funds start heading for the exits, which we could be witnessing currently. Refiners meanwhile seem content to sell into the rally, with the net short position held by the producer/merchant category of trader reaching its largest level since the spring.
Watch the February contracts (RBG and HOG) for price direction today as the January contracts expire. Trading will close at its regular time this afternoon, and will be closed all day tomorrow. Rack prices set tonight should carry through Thursday.
Week 51 - US DOE Inventory Recap
Optimism Abounds With New Record Highs
Optimism abounds as US stock indices continue to reach new record highs, while energy futures continue to swim in their wake and touch fresh 3-month highs on nearly a daily basis. The September price spike remains the big target near term on the energy charts, that could determine if this rally can continue into the new year.
While prices continue to trek higher, volatility continues to decline, hovering near the lowest levels of the year for both stocks and oil, another data point to show that the fear of a trade war that hung over the markets for so long appears to be gone.
In addition to the rally in futures, Gulf Coast gasoline basis continued its stronger trend Thursday, reaching 2 month highs at a time when we often see some of the cheapest values of the year. Meanwhile CARB diesel basis reached a 1-month high, some 12 cents above their December lows, during Thursday’s session, following reports of a fire at the P66 refinery in LA.
The EIA is continuing its year-end tradition of republishing favorite articles from the year. Today’s update takes another look at the importance of the Strait of Hormuz, which has roughly 20% of the world’s total oil trade pass through on a daily basis. It’s a good reminder of what a strange year it’s been that oil prices are now trading higher than they were this summer when Iran was actively trying to blow up and/or seize tankers traveling through the area.
The DOE’s weekly inventory report will be released at 11 a.m. central.
The Santa Claus Rally Has Started
The Santa Claus rally has started for energy and equity markets with modest gains to start post-Christmas trading. The API was said to show a large draw in oil inventories last week, which seems to be helping the early bid in energy futures, even as refined product inventories continued to increase. Trade optimism continues to lead the headlines as the U.S. & China continue to make gestures of cooperation.
The late December run-up has energy futures within striking distance of their September highs, set in the wake of the attacks on Saudi Oil facilities that took more than 5% of global production capacity offline. Those September highs should provide an important test to determine if the recent upward trend can last into the new year.
Gasoline basis values along the Gulf Coast have rallied by more than a nickel in the past week, which has wiped out the value for space on Colonial’s main gasoline line, just after it reached a 3 year high on 12/16. We’ll find out if this trend has staying power as traders return to their desks, or if this was a short-staffed anomaly and we’ll see the typical winter trends continue next week.
What A Difference A Year Makes
Energy futures are ticking modestly higher to start the quiet & abbreviated Christmas Eve trading session. Physical trading in refined products is non-existent so far and is expected to remain that way with several pipeline operators taking both Tuesday and Wednesday off.
What a difference a year makes: Christmas Eve 2018 saw a crescendo of selling that ultimately marked the bottom of the energy and equity markets after a brutal 4th quarter selloff. This year U.S. equities are sitting at all-time highs and WTI is holding steady above $60. In addition, volatility readings reached multi-year highs on Christmas eve in 2018, while this year both asset classes are at the bottom end of their range for volatility.
Speaking of different: RBOB gasoline continues its counter-seasonal strength today, trying to drag the rest of the complex higher even as we enter the weakest fundamental period of the year when demand crumbles for a few weeks, while supplies surge due to increased refinery production and butane blending. With both January and February RBOB holding above $1.70 this week, there is room on the chart to see another 10 cents of upside in gasoline before year end, despite the fundamentals suggesting we should see a pullback in prices soon.
The API’s inventory report will be released at its normal time this afternoon, but trading will already be shut down for the day due to the early holiday closing. That report might drive the early action when trading resumes after Christmas. The DOE’s weekly report is delayed until Friday.
Today’s interesting read: The Permian’s nat gas problem as oil drilling slows.
Oil Prices See Largest Daily Selloff
A large increase in drilling activity, and perhaps a bit of profit taking, led to the largest daily selloff for oil prices since the Black Friday melt-down to end last week. That said, losses barely surpassed 1% on the day, and didn’t threaten the upward trend lines that have taken hold in December, and refined products still managed gains, leaving the chance of another breakout to the upside for prices near term.
It’s Christmas week so companies that are open are operating with skeleton crews and trading volumes are very light. This can mean more price volatility as trading algorithms were built to react in more liquid environments, but so far, there is very little action in futures to speak of and cash trade has been non-existent.
Baker Hughes reported 18 more oil rigs put to work in the U.S. last week, the largest weekly increase of the year. All of the gains came in the Eagle Ford and Permian basins of TX, while the other basins reported more declines. The suddenly large increase this close to year end – following steady declines all year – suggest there may be some operators choosing to activate projects to avoid lease expirations, or perhaps someone in charge of the weekly data just learned a new way of counting.
Money managers continued to add to their speculative bets on higher petroleum prices, adding net length across the board for a 2nd straight week. As we’ve seen with prices recently, RBOB is showing counter-seasonal strength, with more speculative bets on higher gasoline prices than we’ve ever seen this time of year. Brent and WTI are seeing managed length approach the highest levels of 2019, but remain well below the seasonal peaks set in previous years.
The congressional bill was signed by the President Friday night, so we’ll see a return of both the biodiesel blender’s credit, and the federal oil spill fee in the coming weeks. The oil spill fee will not be retroactive and will take effect on January 1, which is good news for the industry that’s proceeded without it for all of 2019.
Christmas Holiday Trading schedule: Tuesday, 12/24 will see early settlements and closing for NYMEX futures contracts and spot market assessments will follow suit. Christmas day will have no futures or spot market activity until futures resume in the normal overnight session for Thursday. Thursday and Friday will be regular days for futures and spots, except that fewer people will be around to participate. Rack prices published Tuesday afternoon will carry through Thursday.
Oil And Diesel Prices Continue To March Higher
The December rally continues as oil and diesel prices continue to march higher, setting fresh 3-month highs on a daily basis in decidedly undramatic fashion. The small daily moves on light volume certainly give a counter argument to anyone suggesting this represents a true technical breakout, and while the activity has been lackluster so far, it feels like another big swing (similar to what we saw on Black Friday) could be coming any day.
US GDP grew 2.1% in the 3rd quarter, a “good enough” number that was in line with previous estimates, and should keep the FED from changing its plans for the early part of 2020. Equity and energy markets did not seem to react much to that news. For a more interesting take on this topic, take a look at how just 31 US counties make up 1/3 of Total US GDP, with Los Angeles leading the way.
Gasoline basis values on the Gulf Coast broke out of their winter doldrums Thursday, rallying nearly 3 cents/gallon in addition to the gains in futures on rumors of refinery issues. The reports were not substantiated in the state emission filings, so it’s hard to say if it was truly a refinery issue that caused the run-up, or if it had to do with lower liquidity and a scheduling deadline. If it’s the latter we would normally see those values drop back in the next few sessions, but with Christmas fast approaching, we may not see much activity at all.
Speaking of which, here’s Christmas Holiday Trading schedule: Tuesday 12/24 will see early settlements and closing for NYMEX futures contracts and spot market assessments will follow suit. Christmas day will have no futures or spot market activity until futures resume in the normal overnight session for Thursday. Thursday and Friday will be regular days for futures and spots, except that fewer people will be around to participate. Rack prices published Tuesday afternoon will carry through Thursday.
The giant 2,300 page spending bill (that apparently needs to be passed in order to know what’s in it) made it through the Senate on Thursday, and is expected to be signed by the President today. Here’s why that bill looks to be good news for numerous Renewable Diesel projects scheduled to come online in the next few years, but bad news for some electric vehicle projects.
Petroleum Futures Wipe Out Early Losses
Wednesday’s DOE inventory report was less bearish than Tuesday’s API data, which helped petroleum futures wipe out early losses, and keep the 2019 year-end mini rally alive. That short-lived sell-off relieved some of the technical overbought pressure that had built up after 4 days of gains, and leaves the door open for a test of the September highs.
RBOB gasoline continues to show surprising counter-seasonal strength despite inventories sitting at record highs for this time of year, heading into the weakest 2 months for consumption. At this pace, it looks like there’s a strong chance gasoline inventories will break all-time highs at some point in January.
China announced new tariff exemptions on 6 US petroleum-based products in the latest sign of easing trade tensions. While the announcement is good news for several US refiners, none of the products listed are consumed in engines. Another reminder of both the ongoing transition of the US from the world’s largest importer to its largest exporter of petroleum products, and the fact that petroleum is becoming more and more about plastic production and less about motor fuels.
Today’s interesting read: A recap of the anticipated impacts of the IMO diesel spec change, which could impact 90% of global trade in some form or fashion. As the article concludes, “…For the whole world to change specification of a product on the same day is almost unheard of.”
While the Ag community got a big shot in the arm this week with the expected inclusion of the $1/gallon biodiesel blenders credit in the congressional spending package, there was a bit of bad news Wednesday when the White House indicated the Renewable Volume Obligation for 2020 would not change from the preliminary proposal. While this does mean an increase in the amount of biofuels mandated to be blended in the US, the Ag lobby seems to have lost this round of the small-refinery exemption debate. Ethanol RINs continued to languish following the news while Biodiesel RINs managed to bounce off of Tuesday’s lows.
Right on Cue, the EIA this morning published a look at Biodiesel production in the US. While it’s no surprise that the Midwest leads the nation in biodiesel production capacity it’s worth noting that Texas is the 2nd largest producing state, which provides a bit of conflict in the ongoing lobbying battles between Big Ag and Big Oil.
Week 50 - US DOE Inventory Recap
Steam Knocked Out Of Rally In Energy Futures Overnight
Another bearish inventory report knocked the steam out of the rally in energy futures overnight, pulling oil and diesel prices back from the 3 month highs reached in Tuesday’s session.
The API was reported to show large inventory builds across the board last week, with US crude oil stocks up 4.7 million barrels on the week, gasoline up 5.6 million barrels and distillates up by 3.7 million barrels. The DOE’s weekly report is due out at its normal time this morning, then will be released on Friday at 11 a.m. Central time the next two weeks due to the Christmas and New Year’s holidays.
Today’s inventory report could be the last chance to see a big move in prices before trading activity winds down for the holidays. If the energy complex can manage to erase the early losses today, there is still a chance for a technical breakout to the upside this week, but if they can’t, it looks like we might see values limp into the end of the decade.
The government spending bill passed the House early Tuesday and is expected to be voted on by the senate early Tuesday. The most notable impact to energy markets is the biodiesel tax credit that’s proposed to be approved from Jan 1 2018 – Dec 31 2022. The reaction in Bio RIN values was dramatic, will values dropping to 38 cents/RIN down from 65 cents just a few weeks ago.
Another Green Day For Energy Futures
It’s another green day for energy futures as prices continue to ride the bullish wave of OPEC cuts and the Phase-1 US/China trade deal. The move higher has been fairly small however (it took 2 full weeks to make up for just the Black Friday losses) which could mean traders are skeptical of the staying power of this rally, or simply that they’re focusing elsewhere as the holidays approach.
ULSD futures are starting to look particularly bullish with a trifecta of technical, fundamental and regulatory factors all favoring higher prices near term. If there’s any sort of major winter cold snap along the East Coast in the next few months, conditions are ripe for a 30+ cent price increase in short order. The first test on the charts looks to be the highs around $2.10 that were set in the wake of Iran’s attacks on Saudi oil infrastructure in September.
Gasoline prices are struggling to keep pace with the rest of the complex as we enter the seasonal demand slowdown, with US inventories at elevated levels, compared to distillate stocks that are at the bottom end of their seasonal range.
Values to ship gasoline on the main line of Colonial pipeline’s system rose to their highest levels in more than 3 years Monday as Gulf Coast basis values dropped to double digit discounts to RBOB futures amidst several refineries ramping up gasoline production. The loss of the PES refinery earlier this year along with the Tier 3 gasoline & IMO diesel spec changes for 2020 could make values along Colonial more consistently valuable vs recent years when they’ve spent the majority of their time in negative territory. As the chart below shows however, values for space along the line seem to be following a seasonal pattern, and won’t be a game changer unless they last into the spring.
The giant spending package working its way through congress is reported to include the $1/gallon biodiesel blenders credit retroactively from Jan 1 2018, through the end of 2022. If passed, that may well save numerous US biodiesel producers that were on the verge of insolvency without the credit, and give the industry a rare period of extended certainty after many years of having to wait for the credit to be reinstated retroactively.
The Dallas FED’s energy indicators report for December suggests that the slowdown in oil drilling has cost more than 8,000 job losses in TX this year, more than double the official federal estimate, as bankruptcies in the oil patch rose throughout the year. The report also notes that OPEC may have handed producers an early Christmas present with their output cuts that have propped up prices.
Oil And ULSD Prices Hold 3-Month Highs
Oil & ULSD prices are holding near 3-month highs as global markets digest Friday’s “phase 1” trade deal between the US and China. While there are still plenty of questions to be answered, the stage is set for a meaningful rally in prices as two major fundamental roadblocks have been removed in the past week, and charts are set up for a breakout, IF prices can manage to break their near-term technical resistance.
On one hand, the trade deal removes the largest headwind to markets this year, the threat of a global recession if the two largest economies continue to fight. On the other, many are expressing disappointment with the deal, as some details remain scarce and the scope is less than what many had been hoping for.
While prices are now near the top end of the trading range, if they don’t break resistance soon, doubt about their ability to rally may creep in since the OPEC cuts and trade deal weren’t enough to break them out of their sideways pattern.
Money managers seemed to celebrate the OPEC announcement by raising their bets on higher oil prices to their highest levels since May. Money managers increased their net-length in all of the major petroleum contracts, although refined products continue to lag behind oil in terms of speculative betting.
Baker Hughes reported an increase of 4 oil rigs drilling in the US last week, snapping a 7-week streak of declines. It’s worth noting that the increase came from the Utica shale play (which went from 0 oil rigs to 2) and from the “other” basin category. The Permian basin, which accounts for the majority of the country’s active rigs, and has accounted for most of the decline in activity this year, held steady for the week.
Tentative Agreements Give Reason To Cheer
Deal making is the theme of the week as tentative agreements in 2 different wars (US vs China, and congress vs itself) have given equity and energy markets reason to cheer. Unfortunately, the details on both deals are scarce, which threatens a Grinch moment next week that could knock US stock indices back from their all-time highs, and send energy prices back into the winter doldrums.
Another presidential twitter bomb sent both asset classes sharply higher Thursday morning, but has often been the case with these social media market moments, the enthusiasm began to fade when details of the deal were hard to come by. There is still optimism in the market’s overnight trading, but China has been conspicuously quiet on the “deal” which could end the buying spree in a hurry.
The details of the congressional spending deal have also not yet been released, and probably aren’t set yet. Based on the drop in D4 RIN values Thursday, the market seems to be expecting a return of the $1/gallon biodiesel blenders tax credit, which could save the industry that has been crumbling without it.. There’s a good chance that spending bill, if passed, will also reinstate the federal oil spill fee.
Charts are not looking favorable for refiners these days as both WTI and Brent are breaking out to fresh 3 month highs, while refined products continue to languish in their trading ranges. Weakness in refinery margins is nothing new this time of year (see the crack spread chart below) but the recent drop in spreads is no doubt a disappointment for operators banking on Tier 3 and IMO spec changes to boost profits in the coming year.
Bearish Inventory Reports Knock Back Energy Prices
It looks like we’re in for more sideways trading after some bearish inventory reports knocked energy prices back into the middle of their 4th quarter trading range. As liquidity begins to dry up ahead of the holidays, it’s looking like energy futures will end the decade on a quiet note, unless something dramatic happens in the US/China trade discussions in the next week.
The OPEC monthly oil market report painted an optimistic picture for the global economy in 2020, after suggesting that the trade-war induced demand constraints appear to have bottomed out. The report also noted that non-OPEC supply growth appears to be slowing, which (on top of the cartel’s planned cut backs) should help balance the global oil market next year.
The DOE’s weekly report had several bearish data points, particularly for refined products, that quickly erased any chance of prices breaking through the top end of their trading range this week. Demand estimates were notably weak, and perhaps troubling to refiners heading into the winter doldrums, although it’s likely that the late Thanksgiving and subsequent winter storms both contributed to make those numbers worse than normal for this time of year.
As predicted by the price of FED fund futures, the FOMC held interest rates steady yesterday, and the following press conference suggests the committee is in no hurry to make any additional monetary policy changes in 2020. That neutral stance created minimal reaction in equity or energy markets.
Week 49 - US DOE Inventory Recap
Energy Prices Slipped Modestly Lower Overnight
Energy prices slipped modestly lower overnight following a pair of bearish fundamental reports in what will be an extremely busy day for data.
We’ll see both the DOE’s weekly status report & OPEC’s monthly oil report later this morning, followed by the FOMC announcement and press conference this afternoon…all on top of the swirling rumors over the U.S./China tariff deadline looming this weekend.
The API was said to show inventory builds across the board last week of 1.4 million barrels of crude, 4.9 million barrels for gasoline and 3.2 million barrels of diesel, which helps explain the weakness in prices overnight. WTI is showing some relative strength to the other contracts however as the Cushing, OK hub was reported to have a decline of more than 3 million barrels of crude.
The EIA’s monthly energy outlook released Tuesday forecasts lower oil prices in 2020, despite the recent OPEC & Friends’ decision to extend output cuts.
A few highlights from the STEO:
EIA expects crude oil prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of next year.
EIA assumes that OPEC will limit production through all of 2020, amid a forecast of rising oil inventories. EIA forecasts OPEC crude oil production will average 29.3 million b/d in 2020, down by 0.5 million b/d from 2019.
RE IMO 2020: EIA expects that starting in the fourth quarter of 2019, this regulation will encourage global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oil into low-sulfur distillate fuel to create compliant bunker fuels. EIA forecasts that U.S. refinery runs will rise by 3% from 2019 to a record level of 17.5 million b/d in 2020.
How Are Tariff Delays Affecting Overnight Selling?
After some modest overnight selling in both equity and energy futures, we’re seeing prices recover following reports that the US & China are planning to delay new tariffs ahead of the December 15 deadline.
The FED’s FOMC meeting kicks off today, and their policy decision will be announced tomorrow. While no interest rate changes are expected, based on where FED fund futures are trading, the FED Chair’s press conference following the announcement will be closely watched for signals of plans in 2020.
What might this mean for energy prices? Perhaps not much as the charts below show correlations between energy futures and their equity and currency counterparts have broken down for much of the past several months, although at times (like this morning) we still see stocks and commodities moving in lockstep.
We’re approaching the winter doldrums for energy demand, with just 2 weeks left of the pre-Christmas rush, that’s typically followed by the weakest few weeks of demand for the year. So far refinery margins are holding up much better than a year ago (see the crack charts below) and the forward curve suggests margins will hold in better-than-average territory. Those improvements in crack spreads may continue to put downward pressure on basis values – particularly in markets not directly impacted by the IMO spec changes – as plants look to be incentivized to run full rates even during the upcoming soft-demand season.
The EIA published a note on the carbon allowance cooperative of 10 North East US states this morning. So far this effort at containing carbon emissions isn’t having a direct impact on refined products, but is likely to become a bigger issue in the coming years as more states seek ways to appear as though they’re doing something about climate change.
Trade Fears Trump Output Cuts
Trade fears are trumping output cuts to start the week, as oil prices retreat following a strong Friday rally. Customs data showing Chinese exports declined for a 4th straight month is getting credit for the early sell-off, erasing much of the post-OPEC gains that pushed prices near 2 month highs.
After OPEC uncertainty had oil prices selling off to start Friday’s session, a much more precise proclamation on output cuts in the official press release spurred on a buying spree mid-morning. By noting that the Saudi’s would continue their own voluntary output reductions, in addition to the group’s agreed-upon output cuts, should mean that around ½ million barrels/day (roughly ½ of 1% of total global supply) will be taken offline to start 2020. One thing the official announcement did not mention was if condensate would get different treatment than traditional crude grades, which could potentially leave a loop hole for Russia to export more barrels.
It’s a big week for markets globally as both the FOMC and ECB will hold their last meetings of the year, and another tariff deadline with China comes on Sunday. After Friday’s strong jobs report helped propel US stocks back near all-time highs, equities seem to be taking a wait-and-see approach to start this week with these major issues looming.
The CME’s Fedwatch tool shows a 99% probability of no interest rate action by the FED at this meeting and low odds of any action in the front half of 2020.
5 more oil rigs were taken off-line last week, according to Baker Hughes’ latest report. That’s the 7th consecutive weekly decline, and marks a 25% reduction in the total US count so far in 2019.
Money managers do not appear to have enjoyed the Black Friday selloff in energy contracts, and reduced their net-long holdings (bets on higher prices) across the board last week. Since that report’s data is compiled as of Tuesday, those that bailed out look like they missed the recovery rally in the back half of the week. RBOB contracts saw the largest reductions, perhaps an acknowledgement of the upcoming winter doldrums for gasoline demand.
From the OPEC Press Release Friday:
“The 7th OPEC and non-OPEC Ministerial Meeting, hereby decided for an additional adjustment of 500 tb/d to the adjustment levels as agreed at the 175th Meeting of the OPEC Conference and 5th OPEC and non-OPEC Ministerial Meeting. These would lead to total adjustments of 1.7 mb/d. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 mb. This additional adjustment would be effective as of 1 January 2020 and is subject to full conformity by every country participating in the DoC.”
Energy Futures Were Slumping To Start Friday’s Session
Energy futures were slumping to start Friday’s session in spite of an expected production cut from OPEC and a strong jobs report.
The OPEC meetings this week continue to create more questions than answers. Yesterday, the cartel-only meeting was held, but there was no formal press release or press conference to announce their plans. There are reports that the group agreed to additional output cuts of around 500,000 barrels/day, but are keeping the news quiet until the cuts are confirmed with the larger OPEC & friends (which mainly means Russia) today.
Not what they were hoping for: The weakness is crude prices in spite of the suggestion of additional cuts seems to be due to Saudi Arabia already pumping below their quota, meaning this additional cut may not actually take new oil out of the market. In addition, there are suggestions that Russia will be granted exemptions on condensate, which will also effectively increase supplies without technically violating a quota.
Strong Jobs report: November non-farm payrolls rose by 266,000, and both September and October reports were revised higher, making this the strongest report since January. The market reaction to the news was notable as stock futures jumped but energy futures sold off immediately after it came out. That divergence may have more to do with OPEC uncertainty than anything else, but is will need to be watched in case the asset classes are going their own way.
Unintended consequence of record oil production: The EIA this morning noted the increase in flared (burned off) natural gas in the past year as US Oil production continued to grow to new all-time highs this year. With environmental issues continuing to become a larger issue globally, expect this side-effect to put pressure on producers in the coming years.
Oil Futures Lead The Way Higher Yesterday
Oil futures lead the way higher yesterday posting a $2/bbl gain on the day after the Department of Energy’s weekly inventory report confirmed a ~5 million barrel draw in national crude oil stockpiles. Gasoline and diesel, showing to have built inventory levels last week, pulled back slightly from earlier highs and ended the day with gains of about 3.5 cents, or $1.5/bbl.
Eyes now turn to Vienna where OPEC and friends are expected to announce a continuation of current supply cuts, scheduled to expire this March, if not dial back production even more. It seems the deal hinges on Russia’s agreement, who has yet to indicate one way or another ahead of the meeting. It seems futures are in wait-and-see mode, coming off slightly after overnight buying looked to continue yesterday’s rally.
The EIA published an interesting note yesterday showing as of September, the US is a net exporter for total petroleum products for the first time in the Agency’s history. The article highlights increased domestic crude oil production (leading to decreased imports) and crude oil exports (which have set a new seasonal high almost every week this year) as the main drivers for the paradigm shift.
Week 48 - US DOE Inventory Recap
Energy Futures Up Almost 2% Overnight
Energy futures were up almost 2% overnight as prices seem to have found a temporary floor after the post-Thanksgiving collapse. A drawdown in US crude oil stocks reported by the API late Tuesday is getting credit for the early rally, but refined product inventories built in that report and our outpacing WTI in the early move higher, suggesting this may be more of a technical move after the heavy selling of the past 3 sessions than anything fundamental. The DOE’s weekly status report is due out at its normal time this morning.
Nobody knows what OPEC and their friends will announce later this week, but plenty of people keep guessing, in the energy market’s equivalent to how equities over-analyze every speech given by FED governors ahead of an FOMC meeting. As always, the conflicting agendas of the cartel’s membership will keep things from being predictable. With US drilling activity slowing, it will be interesting to see if the cartel chooses to wait a while longer before trying to prop up prices more in an effort to flush out more of the competition, or if the Saudi’s will focus more on supporting the Aramco IPO.
In the same vein of diverse speculation, phase one of a trade deal between US and China is now reported to be scheduled for completion before the tariff deadline set for December 15th. This comes just hours after the White House warns a trade deal might not get done before next November.
While the trading range that energy prices have been stuck in for most of the year makes for dull commentary, a WSJ note argues this lack of excitement has numerous benefits for the global economy. To summarize, these range-bound prices are good enough to keep producers in business without being high enough to damage demand.
Energy Prices Sinking Mildly
Energy prices are sinking mildly this morning on news that the White House feels no pressure to get a deal done with China before the 2020 elections. While this could just be further posturing or a slightly less subtle bid for reelection next year, the headline nevertheless has energy futures, and likewise equity indices, down about 1% so far this morning.
Oil futures looking to open today in the negative represents a reversal of overnight trading action which had both American and European benchmarks gaining around .8%. Speculation that OPEC+ (Russia) was looking announce deeper supply cuts during its conference later this week had some buyers showing up overnight, only to wane as the morning progressed. It seems increasingly obvious that the latest round of supply talks has less to do with the health of the global oil market and more to do with the cartel’s most powerful member’s upcoming IPO, which isn’t looking too bright for the Kingdom.
The CFTC published their Commitment of Traders report yesterday on positions held by different classes of traders as of last Tuesday. Managed money added length to their net positions across the big three energy benchmarks, notably setting a new seasonal high for net length in RBOB futures. We will likely see this move reverse as of next week’s report as a knee-jerk reaction to Black Friday’s heavy sell-off.
Black Friday Price Plunge in Energy Futures
A Black Friday price plunge in energy futures is being pared back in early Monday trading as most physical players return to their desks after the long holiday weekend. Refined product futures are up 3-4 cents on the day so far, meaning cash markets will only drop 3-4 cents from Wednesday should current values hold. The Friday selling was blamed on jitters ahead of the OPEC & Friends meeting this week, although the early recovery rally suggests it may have had more to do with a lack of liquidity than anything else.
The CFTC’s weekly Commitments of Traders report was delayed due to the holiday, so we won’t get a look at NYMEX holdings until this afternoon. Speculators did increase their bets on higher prices for Brent last week, indicating a growing appetite for risk as prices reached 2 month highs. No doubt those new longs were not enjoying Friday’s meltdown in prices, but may be breathing a sigh of relief if they held on until this morning.
Baker Hughes reported 3 more oil rigs were taken off-line in the US last week, a 6th consecutive weekly decline in the rig count. The slowdown in drilling activity has been well documented over the past several months, but it’s important to note that in-spite of the slowdown in new wells being drilled, US production just reached a new all-time high last week of 12.9 million barrels/day. Keep in mind that’s 1.2 million barrels/day more than the all-time record set this time a year ago, and it’s easy to see why the US remains on track to become a net exporter of petroleum after decades of being the world’s largest importer.
Speaking of changing petroleum trade dynamics, a new natural gas pipeline running from Russia to China has commenced operations, in the latest major shift to the East for Russian firms trying to avoid US sanctions.
We are now less than a month away from the official start of the IMO diesel spec change for ships. While the market reaction has been muted thus far, it’s worth noting that US diesel stocks are holding near the low end of their 5 year seasonal range, putting much of the country at risk of price spikes if there’s a surge in demand.