Market Talk - 2019 january
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Energy Prices Moving Higher For 3rd Day
Energy prices are moving higher for a 3rd day to start Thursday’s session, with momentum from some bullish data points in the DOE report, and a market-friendly FOMC statement carrying through from Wednesday’s session. Prices are once again within striking distance of their December highs, which capped the last rally attempt, and look to be the difference between this rally lasting a few days, and it lasting a few weeks.
A little Patience from the FED went a long way in financial markets, with US equity markets surging after the central bank sent a strong signal that it would not rush further monetary tightening. Monday the CME’s FEDWATCH tool showed roughly a 20% chance of at least 1 more interest rate hike in 2019, and a 10% probability of a decrease. This morning, after the “patience statement”, there’s a 5% chance of an increase, and a 20% chance of a decrease in the next 12 months. You can argue whether or not this is good for the economy as a whole, but it’s hard to argue that more accommodative monetary policy is anything but good news for stock markets.
Reports (also known as rumors) that the White House was considering a release of the US Strategic Petroleum Reserve to counter any negative effects from the Venezuelan sanctions suggest the administration has a much better handle on how to work the media than they do an oil refinery. In reality, if the rumors manage to take the steam out of the rally in oil & products futures, that would seem to be a mission accomplished, even if there is a negative impact to Gulf Coast refiners.
Speaking of which, while much of the focus is on potential fall-out with Citgo and its 2 Gulf Coast refineries due to sanctions, it was Citgo’s Chicago-area headline that had the most market impact Wednesday, when reports of a reduction in processing rates due to extreme cold sent Chicago gasoline prices up nearly 10 cents on the day.
Speaking of refinery run cuts: The headline drop of 586,000 barrels/day of refinery throughput seemed to catch some traders off-guard based on the strong reaction in refined product prices after the report. Then again, even after the 3.4% drop during the week, refinery runs are still 450,000 barrels/day higher than they were this time last year…and last year’s figure was a record high for the 4th week in January.
Unbelievable? The weekly gasoline demand estimate from the DOE surged nearly 8% last week, and at 9.56 million barrels/day is ½ million bpd higher than this time last year, and is at a level historically only witnessed during the summer driving season. Considering the numerous anecdotes about gasoline consumption slowing last week on the heels of 2 winter storms. Read the methodology notes from the EIA if you need a reminder why the weekly estimates are not reliable as a true indicator of actual consumption. If the theory that implied demand spiked as secondary fuel inventories were stockpiled ahead of the storm, we should see a large correction in the estimate in the next 2 weeks.
Energy Futures Moving Higher For 2nd Day
Energy futures are moving higher for a 2nd day, and most contracts in the petroleum complex have now wiped out Monday’s heavy losses as the uncertainty over Venezuela and optimism in US stocks both seem to be helping encourage buyers.
While most of the oil market chatter continues to revolve around Venezuela, the correlation between energy and equity markets continues to be strong, so it seems the early boost in stocks on the backs of some positive earnings reports is aiding in the bounce in petroleum futures.
Unlike when sanctions were placed on Iran last year, Saudi Arabia is not rushing in to offset any potential lost production from Venezuela, at least according to some reports. Whether or not that holds true, and how much extra oil may be needed, is just a guess at this point, and anyone who says differently is probably trying to sell you something. Assuming there will be some drop off in heavy oil supplies for Gulf Coast refiners, that’s just more bad news as most are already struggling with an excess of gasoline while trying to maximize their diesel output.
Speaking of which, diesel prices led the move higher Tuesday, ending the day up around 6 cents after several utilities from the Great Lakes region to the East Coast notified customers of natural gas curtailments due to the winter storm, sending buyers scrambling for heating oil. The rush may prove short-lived however as above average temperatures are forecast for the weekend, which may explain why natural gas futures continue to slide even while spot supplies are tight in several markets.
The API was said to report another week of inventory builds across the board, with crude and gasoline stocks up more than 2 million barrels, while distillates were up just over 200,000 barrels on the week. The DOE’s weekly status report is due out at its normal time this morning, and based on the strength in basis values across many spot markets since bottoming out early in January, (not to mention the weak margin environment) it seems likely we’ll see refinery run rates cut back further in this report.
Traders Digest Impacts Of New Oil Sanctions
Energy futures are bouncing this morning as traders try to digest the impacts of new oil sanctions, after a heavy wave of selling Monday pushed prices below the floor of the trading range that’s held for the past 2 weeks. Diesel prices are leading the move higher this morning (up 3 cents at the moment vs ½ cent for gasoline) as yet another major winter storm sweeps the country and boosts heating demand.
While the extreme cold temperatures are likely to cause issues at terminals across the Eastern half of the country (vapor recovery units are especially vulnerable to extreme cold) the market reaction suggests there’s more concern about a negative impact on gasoline demand than there is about a disruption to supplies. Midwestern gasoline cash markets dropped below their Christmas eve lows during Monday’s sell-off, even though futures are still about a dime higher than their December floor.
The big news Monday afternoon was that the US will be imposing sanctions on Venezuela’s oil industry, in an attempt to force a transfer of power in the country. While the sanctions aren’t officially an embargo, they will act like one if the current leadership doesn’t relinquish control.
Citgo is allowed to continue operations in the US and oil on the way to the US that’s already been paid for will be left alone, but new oil purchases will be required to be done through “blocked” accounts that will be held until the regime change is complete. Product sales to Venezuela will be limited according to the Treasury secretary, but the details of those restrictions were not made clear.
Oil prices did not have a dramatic reaction to the news, although it seems to be helping limit any additional downside after Monday’s big sell-off. The feeling seems to be that there’s plenty of oil around, particularly with US refiners heading into maintenance, even though localized shortages of heavy crude are an ongoing concern.
The FED kicks off a 2 day Open Market Committee (FOMC) meeting today. According to the CME’s FEDWatch tool, traders are giving a zero percent chance of interest rates changing as a result of this meeting. It’s worth noting that based on where treasury futures are trading, there’s a 23% probability of at least one more interest rate increase in 2019 priced into current values, but also a 10% probability of a 25 point reduction in the FED’s interest rate target by next January.
Meanwhile, the Dallas FED reported accelerating growth in Texas Manufacturing in its monthly survey. Another positive sign for long term manufacturing in the state? Exxon reportedly approved plans to nearly double the size of its Beaumont TX refinery, which would make it the largest plant in the US when work is completed around 2022.
The EIA offered some more color to its Annual Energy Outlook projections made last week in a new note this morning detailing how the US will become a net exporter of energy in 2020.
Energy & Equity Markets Are Sliding
Energy & Equity markets are sliding Monday morning, after a sigh-of-relief rally Friday when the US Government reopened temporarily, proved to be short lived. For petroleum contracts, this sell-off pulls prices well away from the December highs they were threatening last week, and the failure to break out leaves us in technical limbo.
This is scheduled to be a busy week for headlines with quarterly earnings reports coming out, a FED meeting, along with more Brexit & Chinese trade talks. For the energy markets this very well may mean more back and forth trading as there appears to be a lack of conviction in either direction.
Baker Hughes reported an increase of 10 oil rigs working in the US last week, reversing a 3 week trend of rig count declines. Perhaps more interesting is that while Texas led the rig count charge in 2018, the lone star state has seen its drilling activity slow for the past 3 weeks, while North Dakota and New Mexico have been increasing over that span, and accounted for the majority of last week’s increase.
We haven’t seen a CFTC commitments of traders report since the week of December 18 due to the government shutdown, but if you make an inference based on what ICE reports on Brent, not to mention the strong price rally to begin 2019, it’s safe to say the speculators are dipping their toes back in the water, with open interest and managed money net length both increasing for a 3rd week.
Today’s interesting read has a lot to do with the activity of those speculative funds: Dr. Philip Verlager explains why projections for increased oil production from shale may be overestimated due to cash flow concerns.
Today’s not-so-interesting read: The EIA’s report on US distillate consumption in 2017. Not only is the data going on 2 years old, the report offers little insight into the drivers of consumption trends.
A Great Deal Of Uncertainty
There is a great deal of uncertainty these days, whether it be from trade talks, the government shutdown, or geopolitical unrest. Many times in years past, and even in the first few weeks of 2019, uncertainty such as we’re seeing now would lead to great bouts of volatility in oil & refined product prices. The past two days however, it feels like there’s so much confusion as to what might come next, that traders have just stopped guessing and fuel prices are going nowhere.
From a technical perspective this back and forth action that ultimately goes nowhere leaves indicators in neutral territory, so until we break out of the December trading range (either to the upside or down) don’t expect any consistency in daily price changes. From a seasonal perspective, there is a strong history of seeing prices rise as we approach spring – particularly for gasoline - so if I had to make a bet on which direction we will eventually break, my SWAG would be to the upside.
In its annual Energy Outlook the EIA is projecting (not predicting) that the US will become a net energy exporter in 2020, and that continued gains in energy efficiency will keep domestic demand relatively flat despite a growing economy. The report also provides estimates on how the upcoming IMO diesel spec changes will impact fuel usage and refinery operations. The entire 165 page report is an interesting read for anyone in the industry (and required reading for the employees of TACenergy) but it’s hard to imagine the government employees working without pay will see the value in federally funded projections of oil consumption in 2050 this week.
Yesterday’s EIA weekly status report was largely shrugged off at least in terms of market reaction. The most notable point from the report was that total US Gasoline inventories reached a new all-time high. What’s more important for those in the industry however is that record was set while the western half of the country is seeing below-average stockpiles, meaning the glut of gasoline East of the rockies is becoming a serious issue that could ultimately force some refiners to cut back on production.
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