Market Talk - 2019 december
Sign up to receive market talk updates in your inbox each day.
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.