News & Views
Energy Futures Taking A Breather
Energy futures are taking a breather to start Thursday’s session, after a huge drop in oil imports sparked the largest rally in WTI in a month Wednesday. Weaker equity markets due to trade concerns with China & North Korea are taking some blame in the headlines for oil’s pause, but the correlation between the asset classes has been weakening lately, making it less likely that stocks will drive the action for petroleum prices.
So how do US crude oil inventories drop 8 million barrels on the same week when domestic production reached a new record high at 12.1 million barrels/day and refinery runs were relatively flat? US Net crude oil imports (imports minus exports) reached their lowest level in the 28 years that the DOE has been publishing weekly readings.
For perspective, a decade ago, the US was a net importer of around 60 million barrels of oil each week. Last week, that total was just shy of 18 million barrels. Although it will be a few months before the EIA releases the imports by country for February, it’s presumed that the Venezuelan sanctions played a major role in this dramatic drop in imports. Other reports suggest that fog may be partly to blame limiting ship movements along the gulf coast, in which case we should see a sharp increase in imports in the coming weeks.
RBOB futures also had another strong day, reaching new 4 month highs as PADD 1 refinery runs hit their lowest level since 2011. The March/April RBOB spread continued its rapid climb, bringing an early collapse to the winter/spring gasoline price spread.
Charts from the DOE weekly status report.
Energy Futures Moving Higher
Inventory declines and output cut assurances have energy futures moving higher for a 2nd day, making Monday’s big sell-off seem like a distant memory.
Saudi Arabia’s energy minister affirmed the country’s commitment to rebalancing the market, indirectly countering the US President’s twitter post that sent prices spiraling lower Monday.
The API was reported to show a draw in crude oil stocks of 4.2 million barrels last week, and a decline in gasoline stocks of 3.8 million barrels, while distillates saw a slight increase of 400k. The EIA weekly report is due out at its normal time this morning.
RBOB gasoline futures continue to outperform as a busy refinery maintenance season coupled with numerous unplanned outages outweigh soft demand and ample inventories as the spring RVP transition begins.
As the chart below shows, the spread between March and April RBOB futures is dramatically tighter than it was in the past two years, as multiple PADD 1 refinery issues have started closing the gap between winter and summer grade prices ahead of their normal schedule.
Energy Futures Wiped Out Previous Progress
Energy futures wiped out their previous 5-days’ worth of progress Monday in a harsh round of selling that’s largely been blamed on an early morning Tweet by the US president asking OPEC to “relax and take it easy”. No telling how much priced would have sold off if he hadn’t said “please”.
As was the case a few times last year, the early knee jerk reaction seems to be melting away as reports suggest OPEC will continue on its output cut plan.
From a chart perspective the selling did knock the wind out of the bulls sails temporarily, setting most short term indicators back to neutral territory after a 2 week run, and placed a new top-end target for short term trading at the 3 month highs reached shortly before the price drop.
The EIA published a comparison of the recent Midwestern cold snap to the “Bomb cyclone” last year and the “Polar Vortex” of 2014, showing that despite more demand for heating fuel this year, prices for natural gas didn’t spike like in the previous events. Although the report doesn’t show it, the same pattern holds true for distillates as well.
While I was out last week BP released its annual energy outlook. The major themes seem to be a need to more energy with less carbon, demand being driven by emerging economies (US Demand stays fairly flat), and the US being the driver of global supply growth for petroleum and renewables for the next several years.
Energy Futures Stumbling Out Of Gate
Energy futures are stumbling out of the gate this week with most NYMEX futures contracts down around 2% to start the day in spite of stronger equity markets overnight. There does not appear to be a headline to pin the sell-off on after most contracts pushed higher to start the overnight session, suggesting this could just be a round of profit taking after 2 strong weeks of gains.
Baker Hughes reported a drop of 4 oil rigs last week, with Texas seeing a decline for a 7th straight week, while Oklahoma and New Mexico both declined for a 4th consecutive week. The Wall Street Journal is reporting that shale drillers may be having a harder time raising capital from Wall Street, which could restrict drilling activity this year. On the flip side, the Dallas Fed’s recent energy survey suggests that despite the drop in oil prices late in 2018, most US drillers still plan on increasing their capital spending this year.
Money managers continue to tip toe back into the energy space, with net long holdings in Brent crude oil contracts increasing for a 7th consecutive week to start 2019, but the total amount bet by large speculators on higher prices remains below the 5 year average for this time of year. The CFTC COT reports are still playing catch-up from the government shut-down, but through 5 weeks large funds were more conservative betting on WTI than they have been in Brent, and diesel contracts are seeing a net-short bias for the 2nd week this year.
Warren Buffett released his annual stockholder letter over the weekend. While Berkshire’s energy holdings, including Pilot Flying J were barely mentioned, as always, there was plenty to make this a worthwhile read:
"Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history."
Spring Break-Out Rally Continues
The spring break-out rally continues, as most energy futures are touching fresh 3 month highs again this morning. Strength in equity markets, healthy exports, and the ongoing issues in Venezuela all seem to be contributing to the strength, in addition to the momentum generated by the break in technical resistance last week.
US Crude oil production reached a new record high at 12 million barrels/day last week, and US oil exports also reached a record of 3.6 million barrels/day. The 25 million barrels of US crude that was sent out of the country last week alone probably explains why WTI is outperforming the rest of the petroleum complex today after being the weakest link for most of the recent rally.
A sharp drop in PADD 1 refinery runs to their lowest level in nearly 2 years, and subsequent reduction in gasoline stocks along the East Coast helps give a fundamental reason for the recent strength in futures and cash markets as the transition from winter to summer gasoline specs begins.
In addition to the weekly status report released yesterday, the EIA is highlighting its new Statistics tool in a note released this morning, showing the top energy consuming states by total and per capita. Texas, California and Florida continue to dominate in terms of total energy usage.
Energy Futures Treading Water After Strong Wednesday Session
Energy futures are treading water this morning after a strong Wednesday session pushed gasoline and oil prices to fresh 3-month highs. Charts continue to favor higher prices near term as the momentum from last week’s technical break-out appears to be intact.
The API was said to show a build in crude oil inventories of 1.3 million barrels last week, while gasoline stocks dropped by 1.6 million barrels and distillates declined by 758,000 barrels. The DOE’s holiday-delayed version of the weekly statistics is due out at 11am Eastern.
The EIA’s monthly drilling report released earlier this week shows that total oil production continues to increase in the major US Shale plays, although the Permian and Eagle Ford basins both saw slight decreases in per-rig productivity while the Bakken and Niobrara continued to show increases.
Mexico’s President is announcing an aid package of more than $5 billion to help Pemex reverse its trend of reduced oil and refined product output. Short term reports this should have little if any effect on US imports of oil, or Exports of refined products to its southern neighbor, but has the potential to be a major long-term issue to keep an eye on.
Slow Hump Day For Energy Trading
The Department of Energy isn’t releasing their national petroleum status report today on account of Washington’s birthday we celebrated Monday, and will instead publish tomorrow at 10am Central Time. That, combined with the overall sleepy tone of this week, will likely lead to slow hump day for energy trading, as the complex floats slightly lower to start this morning.
The American crude oil benchmark hit a 3 month high yesterday, the rise being most recently attributed to optimism surrounding US-China trade talks currently underway. WTI futures are taking a break this morning, trading lower by about 50 cents per barrel, likely due to profit-taking from its rally that started last Monday.
Something that could spark at least some amount of action out of futures today is the release of the Federal Open Market Committee’s minutes from their January 30 meeting. Although severe weather has cancelled the press lockup for the data release, the FOMC will still publish their minutes today as investors look for more clarification on the Fed’s monetary for the year and how Committee will address inflation.
Even though refined product prices settled lower yesterday, and seem to be opting that same direction today, technicals still look like the futures are on the cusp of a sizeable break to the upside. RBOB and HO are both knocking on the door of their respective 100 day moving averages, testing their mettle against the resistance level, so far unsuccessfully, in an attempt to continue last week’s rally.
Slow Start While Traders Come Back From Holiday
We are off to a slow start this morning while traders come back from a federal and bank holiday. Refined products are coming off by less than a penny while crude oil tacks on about 50 cents. It wouldn’t be too far-fetched to imagine some profit-taking after last week’s rally but anticipated higher spring time prices for gasoline, OPEC production reduction, and Venezuelan uncertainties are keeping the selling from picking up speed, for now.
While decreasing over the past couple weeks, the correlation between energy and equity indexes remains strong. Some early selling in global stocks this morning due to poor performance data released from Europe’s largest bank, might be contributing to the downward pressure we are seeing on futures this morning. And as if they could only settle for one headline, analysts from the same bank, HSBC, are seeing a slowing auto demand in Europe and the US which is bearish news for retail, shipping, and fuel prices.
All three RBOB, HO, and WTI prompt month futures contracts are knocking on the door of another technical breakout to the upside. A group of technical indicators known as ‘oscillators’ are calling for higher prices in the near term while another technical study, which essentially sets the lower and upper bounds of the commonly accepted daily trading range, is currently keeping prices from going too far too fast. After taking the last half of December and all of January to recover from the Q4’18 meltdown, the complex looks poised to make a run at last summer’s price levels.
Presidents’ Day Kicking Off With Slow Start
Presidents’ Day 2019 is kicking off with a relatively slow start in energy markets this morning. The ‘big three’ benchmark contracts are showing modest upside bias but will likely end today’s abbreviated session quietly as most American traders have taken the day off. Refined products are bouncing around unchanged while WTI opts to add about 50 cents. The European benchmark, ICE’s Brent Crude Oil, is lacking conviction in its upward move as well, only adding 15 cents to its prompt month contract so far this morning.
Baker Hughes reported an additional 3 oil production rig startups last week, bringing the total operating count to 857. The ~2 month long rally in crude prices can be loosely attributed to the “whatever it takes” strategy OPEC has employed to prop up weak benchmark prices: slashing production runs in member nations, including the cartel’s main player Saudi Arabia. Somewhat of a wildcard when it comes to production strategy (and most other things too), Russia claims to be accelerating current cuts to boost prices as well.
After last week it appears that the spring rally in gasoline prices, and the energy complex by association, is in full swing. Most technical indicators are flashing green for RBOB futures as they have pushed through the upper end of the trading range they have been captive to since December. Technical resistance levels are the challenge this week, specifically today and tomorrow, as the front month contract trades up to the 100 day moving average this morning. Since there won’t be a settlement today, traders have two days to decide if gas prices are going to break above resistance and take a shot at last summer’s prices. Peg $1.58 as the pivotal price level, with $1.64 as the price target if the former can’t hold the rally.
Spring Breakout Rally Sprung For Energy Prices
The Spring breakout rally has sprung for energy prices with futures moving higher for a 4th straight day, showing strong momentum after technical resistance was broken earlier in the week. Most contracts are trading at fresh 3-month highs this morning, and the charts suggest there’s plenty of more room to run to the upside.
Strength in equity markets continues to at least appear to be helping energy prices find a bid as the correlation between the two asset classes remains strong, and the US/China trade talks appear to be progressing.
Unplanned Refinery maintenance, whether based in mechanics or economics, seems to be the other major theme helping prices rise with at least a dozen different events reported in the past 2 weeks of record setting cold, and record setting weakness in gasoline margins for some parts of the country. Yesterday, PBF announced in an earnings call that it too would be accelerating its maintenance schedule in an attempt to slow down now in order to be running full strength when margins are expected to improve later this year.
For a reminder on the seasonal nature of energy prices in general, and gasoline prices in particular, look up any of Walter Zimmerman’s writings on the subject. This 5-year old interview published by the CSP daily news seems particularly relevant as we wonder how much higher prices can run this spring.
“Gasoline price trends are extremely seasonal. Averaging out the last 30 years of spot gasoline futures (from leaded, to unleaded, to MTBE, to RBOB), one finds that the average winter-to-spring price move has been a 57% increase in spot contract value. By Q4, everyone is typically bearish on gasoline because prices have been under downward pressure since Q2. Over the years we have observed that the more severely gasoline prices are pushed lower into Q4, the more vibrant the rally into Q2.”
Energy Complex Pushed Through Technical Resistance
After 5 weeks of sideways trading, most of the energy complex has pushed through technical resistance overnight, reaching new 3 months highs, and setting the stage for a spring break-out rally, with charts suggesting we could see another 15-30 cents of upside for gasoline and diesel prices over the next 2-3 months. WTI is lagging the rest of the complex as the rash of refinery issues that’s helped drive the product rally also means less demand for domestic crude.
Speaking of which: The DOE report Wednesday showed US refinery runs dropped by more than 5% last week following the numerous refinery outages that have been widely reported, many due to weather-related issues, others owing to a busy spring maintenance schedule and others believe to be economic-based run cuts with gasoline margins in the tank. The weekly decline was the 11th largest drop in the past 20 years, and is of a scale typically only seen in the wake of a Gulf Coast Hurricane. The big question now is how soon do we see run rates bottom out.
There was a potentially, but uncertainly, meaningful development in the Venezuelan saga this week as the US law firm that had been taking orders from the old Maduro regime, appears to have switched allegiances and is now taking orders from the new US backed leadership. It’s unlikely that this change will have any short-term impact on oil flows, but it may have a significant long term impact on Citgo’s operations, which continue to seem unaffected by the drama.
Energy Futures Knocked Backwards
The latest rally attempt in energy futures was knocked backwards sharply in Tuesday’s session, but the bulls dusted themselves off overnight and are giving it another shot this morning. Equity markets around the world continue to celebrate signals that the China-US trade war may be cooling, which seems to be aiding the early optimism in energy contracts.
As it often does when we approach an RVP transition, RBOB gasoline is leading the volatility, rallying by 5 cents mid-morning Tuesday, only to drop back 4.5 cents in the afternoon. Overnight, the swings have continued with 2.5 cent gains largely evaporating as of this writing. Reports of unplanned refinery maintenance around the country continue to create volatility in refined products.
It’s alphabet soup time: In just two days we’re getting monthly reports from the EIA, IEA & OPEC, along with the normal weekly reports from the API and DOE.
The API reportedly showed crude oil stocks declining by just under 1 million barrels last week, distillates dropped by around 2.5 million barrels, while gasoline stocks rose 750,000. The DOE/EIA’s weekly estimate will be out at its normal time this morning.
The IEA released its monthly oil market report this morning, holding its demand estimates for 2019 steady, while increasing its global supply forecast) as US oil production continues to swell to record highs. The theme of US oil production growth in 2019 being enough to offset OPEC’s intentional and unintentional production cuts was consistent in all 3 of the OPEC, IEA and EIA monthly reports. Of course, since everyone agrees, that sets the stage for a big move in the market if it doesn’t pan out.
The EIA and IEA reports also focused on the growing issue of quality vs quantity of oil driven by decreasing heavy oil supplies and their potential impact on US Gulf Coast Refiners.
From the IEA
Crude oil quality is another issue, and, in the wider context of supply in the early part of 2019, it is even more important. Sanctions against Iran, a fall in OPEC supply of 930 kb/d in January, sanctions against PDVSA and Alberta supply cuts all impact directly on the supply of heavy, sour oil. In the case of PDVSA, its oil is typically of the heaviest quality and requires the addition of significant quantities of imported diluents or domestic blending. With the import of diluents now sanctioned by the US, and problems in producing its own lighter crudes, PDVSA will have a tough job to make enough on spec barrels available for export. This is before it gets to the issue of who will buy them.
Long before the US shale revolution took off, Gulf Coast refiners had invested in equipment to process barrels expected to get heavier and sourer.
The EIA’s Short Term Energy Outlook also noted the record-setting weakness in gasoline margins over the past 3 months:
From November through January, the RBOB–Brent crack spread was negative for 43 of the 62 trading days, a record amount of time the crack spread was negative for any three-month period since RBOB began trading in 2005. The low cracks spreads reflect relatively flat gasoline demand growth relative to strong supply globally, resulting in elevated inventory levels.
Gasoline inventories are high in every major storage hub globally and are likely contributing to low crack spreads. As of the first week of February, inventories were 15% and 24% higher than their five-year (2014–18) averages in Singapore and the Amsterdam, Rotterdam, and Antwerp (ARA) hubs, respectively. In the United States, gasoline inventories reached an all-time high of nearly 260 million barrels for the week ending January 18.
Energy Prices Back On The Climb
Energy prices are back on the climb this morning along with equity markets following a deal made “in principle” in congress to avoid the next government shutdown, and after OPEC announced a large cut in its production last month. The early gains have wiped out Monday’s losses, and set up a test of the top-end of the recent trading range, which should determine if this is another short term bounce or the start of the spring break-out rally.
OPEC’s monthly oil market report showed the cartel cut production by nearly 800mb/day in January, driving a sharp reduction in overall global oil inventories. Saudi Arabia accounted for nearly half of the total cut, making good on its word to “rebalance” the market following the latest sell-off.
The OPEC report was not all bullish news however, as demand estimates for last year and this year continued to deteriorate based on softer economic growth worldwide, while global production estimates ticked higher, and a glut of gasoline on several continents was expected to be an ongoing headwind for refiners.
While all of the petroleum contracts are moving higher this morning, WTI is lagging the rest of the complex as the rash of refinery outages continues (another unplanned outage at a plant in E. Texas was reported Monday) and the ongoing shutdown of a section of the Keystone pipeline both back barrels up in Cushing OK, the delivery hub for the NYMEX WTI futures contract.
Venezuela is turning to Asia to try and help solve the logistics puzzle created by US sanctions, with reports of an attempt to woo India as a buyer, and others that China is taking advantage of this opportunity by increasing its resale price of the Ven’s heavy oil.
Beyond the oil exports, Venezuela needs imports of unfinished refined products to act as a diluting agent (known as diluent) to help its heavy oil flow and thus maximize production, which used to come from the US, and now must come from somewhere else. It appears that Saudi Arabia may be able and willing to help with both issues, as a partially laden super-tanker is making a rare voyage from the Kingdom to Venezuela, with speculation that it may drop off naphtha before loading heavy crude.
Energy Futures Continue Slow March
Energy futures continue their slow march through the winter doldrums without much sense of direction, starting the week chopping back and forth between gains and losses.
Rumors of a refinery issue in New Jersey Friday helped RBOB gasoline futures end last week on a strong note, but a lack of reaction in New York cash markets suggests that won’t be enough of a catalyst to push prices through the top end of their month-old trading range. We are approaching the seasonal window where we expect gasoline prices to rally as the transition to summer-grades begins, so there’s a good chance we could see that break-out before February comes to an end.
Another winter-storm-related refinery fire over the weekend, this time at the plant outside of St. Louis operated by P66. As is often the case, there are conflicting reports on the operational status of the plant following the fire, with some claiming a crude distillation unit has been shut as a result, while others suggest normal operations continue. Given the location of the facility, if there is an extended downtime, expect the Chicago spot market to react first as barrels coming north on the Explorer pipeline may be diverted to meet demand in area. The silver lining of PADD 2 gasoline inventories reaching all-time highs in the past few weeks are that – so far – the rash of refinery issues is having a relatively minor impact on prices.
Money managers added to their net long holdings in Brent crude oil contracts for a 5th straight week, but the rate of increase dropped sharply with only about 12 hundred net contracts added to the long side of the ledger vs 12 thousand the week prior.
The CFTC is still playing catch-up with its Commitments of Traders reports, releasing data from the first week of January on Friday. That report showed sharp reductions in NYMEX holdings by money managers, with WTI net-length dropping to the bottom of its 5 year range, while ULSD contracts fell to a net-short position for the first time since July 2017.
Based on where the large funds started the year, it appears that they largely missed out on the early 2019 rally in energy futures, adding insult to injury after they were caught on the wrong side of the 2018 sell-off.
Baker Hughes reported a net increase of 7 drilling rigs across the US last week, with the 2019 pattern continuing to look much different than a the past few years as the count in Texas dropped for a 5th straight week to a total of 511 rigs, while California and Alaska, with a combined 13 rigs between them a week ago, added 4 rigs each last week.
Global Markets Dealt Dose Of Fear
Global markets were dealt a dose of fear Thursday, after a couple of optimistic weeks had pushed trade war and recession concerns to the back burner of the geopolitical range. The ensuing sell-off pushed energy futures to the lower end of their recent trading range, after threatening the top end of that range earlier in the week. An overnight bounce leaves prices stuck in the middle once again, with few signs that the complex is ready to make its spring break.
A step backward in US-China trade talks seemed to spook stock markets around the globe Thursday, and with the equity/energy asset classes still showing a strong correlation, it wasn’t long until that selling spilled over into oil and refined products. As stocks reached their lows for the day, WTI was down more than $2/barrel and gasoline prices were down more than 6 cents. Both asset classes were able to bounce in the afternoon, and roughly halve their losses on the day.
Never let a good crisis go to waste: PDVSA is trying to use the new sanctions levied by the US as justification to overturn the ruling that would allow Crystallex to seize control (and likely create an auction for) Citgo’s shares. Citgo meanwhile continues to quietly weather the storm, operating its refineries and other downstream assets in a business-as-usual manner.
Energy took center stage in Congress this week as Senators proposed a bill to sue OPEC for colluding with Russia, while a proposal known as the “Green New Deal” was proposed in the House. While the broad proposal to overhaul energy in the US (among many other things) isn’t being taken too seriously just yet, it is an early warning shot that we’re in for 2 years of politicians debating the future of our industry as the 2020 elections approach.
Indecision Continues To Reign In Energy Markets
Indecision continues to reign in energy markets as a strong Wednesday bounce has faded in the early hours of Thursday’s trading.
The latest change in control of Libya’s largest oil field is getting some of the credit for the move lower in oil prices this morning, as it could mean another 300,000 barrels/day of production can return to the market in short order.
Wednesday’s DOE report headline values were more bullish than most forecasts, with oil and gasoline inventories increasing less than expected, while distillates dropped more than 2 million barrels on the week.
Total US refinery runs were up on the week, surprising many considering the numerous outage reports in the past 2 weeks, and expectations for a busy pre-spring maintenance period. It’s possible the impacts of the rash of refinery issues were overestimated, but it’s also possible that the timing of the data collection means the drop in run rates won’t show up until next week. Based on the strength in regional cash markets over the past 2 weeks, it seems like we’re due to see the reported refinery runs continue to fall.
Last week’s demand estimate for gasoline seemed too good to be true, and yesterday’s report confirmed those suspicions as the estimated domestic consumption dropped by more than 5%. The DOE’s estimate through 5 weeks of 2019 of 8.96 million barrels/day of gasoline demand is about 1% higher than the first 5 weeks of 2018.
US Oil output continues to hold steady at its all-time high of 11.9 million barrels/day, and oil exports continue to hold near 3 million barrels/day, keeping a lid on domestic inventories for now.
Charts from the DOE weekly status report:
Complex Continues To Move Sideways
Energy futures are slipping for a 3rd straight day, but are not threatening Friday’s low trades, as the complex continues to move sideways, languishing through the winter doldrums stuck in technical-trading purgatory.
The API was said to show inventory builds across the board last week, albeit relatively minor in size. Crude oil stocks were reported to increase about 2.5 million barrels, gasoline inventories were up 1.7 million, while diesel stocks increased by around 140,000 barrels.
The EIA’s version of weekly stats is due out at its regular time. Last week’s big number was the large drop in refinery run rates. With numerous unplanned outages reported since that time, there could be another large decline today. In addition to the weather-related events of the past week, there are reports the multiple refineries in the midcontinent may be moving up their maintenance schedules previously planned for later in 2019, betting that it’s better to shut units now when margins are soft, than later in the year when many expect a prices could surge as the 2020 IMO deadline approaches.
There are still more questions than answers on how the chaos in Venezuela will play out. The story of the past 24 hours has been the count of oil tankers idling off the coast, stranded by the uncertainty.
Several reports are claiming that OPEC is attempting to formalize its cooperation with Russia and the other oil producing countries that have come to terms on production cuts to prop up prices over the past 2 years. At this point, it appears that the Russians aren’t cooperating. Shocking.
The CFTC issued the 2nd “catch up” commitments of traders report Tuesday, showing that money managers (aka hedge funds, aka large speculators) were still cautious about betting on oil and refined products in the last week of 2018. Considering the meltdown they’d just lived through on Christmas eve, it’s hard to blame them. Then again, based on the price rally, and 4 straight weeks of new speculative length additions in Brent that we’ve seen, it seems like a foregone conclusion that the adrenaline junkies who are “managing” money have increased their bets in 2019.
One other item to watch in the COT reports: Swap positions (a proxy for producer hedging in WTI) reached a 15 month low at year-end. There have been concerns that hedge funds leaving the oil market may make forward hedging more challenging for producers, and that’s one place we should be able to figure out whether or not that’s true.
Quiet Ending Overshadowed Volatile Session
If you only looked at the settlement prices Monday, you may have thought it was a quiet day for energy futures with gasoline and diesel prices moving by less than half a cent. That quiet ending overshadowed another volatile session however that saw March RBOB futures have an 8 cent swing, while ULSD had “only” a 5.5 cent high to low range before ending the day nearly unchanged.
The sell-off ever since futures touched 2019 highs Sunday night suggests that traders still lack the conviction to break out of the sideways pattern that’s held prices for nearly 4 weeks. The longer this back and forth action continues, the more it seems that the spring is coiling, setting us up for a bigger move once the inevitable breakout takes place.
Refinery issues continue to be a key driver of the price action in futures and cash markets around the country, even while headline writes try to figure out a way to pin every move on the latest guess about the fallout from Venezuelan sanctions. While the two Sunday fires at PBF plants in Toledo and Delaware city sparked an early buying spree in futures, Monday’s most notable event came from weekend issues at the Chevron plant in Richmond CA that sent some west coast spot gasoline prices up more than 20 cents on the day.
The EIA published a new note on a fringe impact of the shale boom this morning: the US becoming the world’s key exporter of ethane. Remember that the next time you drink from a plastic bottle.
Petroleum Complex Selling Off
Most of the petroleum complex is selling off Monday morning, reversing course after a strong Friday finish and overnight gains had pushed prices to their highs of the year so far and set the stage for a big move higher. It’s not clear what’s driving the reversal sell-off this morning, but it could simply be that fears over sanctions and a rash of refinery problems had pushed prices too high too fast.
After a week filled with numerous refinery issues – most due to the extreme cold temperatures – a pair of refinery fires Sunday (one in Toledo OH and the other in Delaware City DE, both happen to be PBF plants) gave gasoline prices more reason to continue their run.
March RBOB futures spiked nearly a nickel when trading started Sunday night, marking an 11 cent increase since Friday morning, but have since given back all of their overnight gains. It’s always a challenge determining what type of a market impact unplanned refinery issues will have, but based on the price reaction so far, it doesn’t seem like either of the weekend fires will create long-term disruptions.
There is still a great deal of consternation about Citgo’s outlook in the short & long term. The Treasury issued notes on Friday clarifying the sanction rules for US-based bondholders of Citgo’s debt, and for purchasers of PDVSA crude (of which Citgo is one of the largest). Long story short, US companies can continue buying Venezuelan crude for 3 more months, as long as the funds go into blocked accounts.
Citgo meanwhile is denying claims that it’s considering bankruptcy in order to continue operating in the US, and by some accounts may soon find itself flush with cash since the funds it generates in the US are not able to be repatriated to Venezuela.
The CFTC announced last week that it would publish 2 Commitments of Traders reports each week to catch up from the time missed during the government shutdown. So, last Friday’s COT report showed data from the week of Christmas and we won’t get current reports for another few weeks. The ICE COT reports continue to be published however, and speculators continue to return to the oil market with net length held by money managers increasing for a 4th straight week.
Baker Hughes reported a decline of 15 oil rigs last week, bringing the US total rig count to its lowest level since last May. Texas and Oklahoma accounted for about half of the decline nationwide.
Gasoline Futures Attempted To Pull Energy Complex Higher
Gasoline futures are attempted to pull the rest of the energy complex higher to start Friday’s trading as a rash of refinery issues have encouraged buyers to push up near-term prices. Diesel futures are still trading in the red however as a quick 50-70 degree warm-up after this week’s record-setting cold snap will end the spike in heating demand. Thursday’s session will be remembered for another large reversal in oil and refined products, after WTI and ULSD briefly hit new highs for the year, showing that the bulls may be lacking conviction to break out of sideways trading range, but most contracts did finish January with healthy gains, snapping a 3 month losing streak.
The list of Midwestern refineries having issues due to extreme cold continued to grow Thursday, with outages reported and/or rumored at Citgo, BP, Marathon, Husky and P66 plants in the region, and strong cash market buying (note the Chicago RBOB basis values in the chart below) suggesting they weren’t the only facilities having problems. The two big questions become 1) was any long term damage done and 2) will consumers even notice given the large numbers of businesses & schools shuttered due to the weather.
Those refinery outages, coupled with the large drop in total US refinery runs the DOE reported for last week, seems to be helping gasoline time & crack spreads find a bid in the past couple of days. With March futures taking the prompt position today, there is now a 20 cent spread between the first and second RBOB contracts as we approach the always-volatile spring RVP transition.
It’s been a busy week of earnings reports for all segments of the energy industry. A few common themes seem to be a continued race to build infrastructure that will support the latest US Oil boom, good – not great – domestic consumption, and plenty of concern about the global economy in 2019.
The January jobs report was released this morning, in which the Bureau of Labor Statistics seems to have given credence to one of Mark Twain’s borrowed phrase about the 3 types of lies. The agency made a huge cut back in December’s estimated job growth from 312k to 222k jobs for the month. The January figure was estimated at 304k jobs, while the official unemployment rate ticked up .01% to 4.0%. If you’re wondering, the bureau didn’t count the hundreds of thousands of Federal employees who were not being paid as unemployed in the official numbers. The U-6 rate, which doesn’t exclude unemployed people the BLS doesn’t classify as unemployed, was up to 8.1% from 7.6% the week prior. Stocks and energy futures seemed to tick up slightly after the report as this bit of good news for January, bad news for December, seems to add to the “Patient Fed” plan that’s encouraged investors since Wednesday’s FOMC announcement.