Market Talk - 2019 february
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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.
DOE Week 9 - 2019 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.