Market Talk - 2019 july
Sign up to receive market talk updates in your inbox each day.
DOE Week 31 - 2019 Report
WTI Punched Through 200 Day Moving Average
WTI managed to punch through its 200 day moving average Tuesday, sparking the first notable price rally in crude and refined products in the past couple of weeks. While this may be the most interesting move in a while, the gains are small on the weekly and monthly charts, and don’t change the long-term price outlook that’s torn between supply concerns in the Middle East, and demand concerns just about everywhere else.
Today will be the busy day for news with the DOE’s weekly status report due out this morning and the FED decision this afternoon. Pretty much everyone is expecting at least a 25 basis point cut from the FED, so we may not see much market movement unless something else happens, or the FOMC changes their forward outlook in the statement.
Today is also the last trading day for August 19 RBOB and ULSD futures, so look to the September (“U”) contracts to see where the real action will be that should drive physical prices at the racks tomorrow.
The API was said to show inventory draws across the board last week with crude stocks down 6 million barrels, gasoline down 3.3 million and diesel down 890k. The DOE’s weekly report is due out at its normal time.
The tropics are starting to heat up. Disturbance 1 that’s headed towards Florida is still only given a 10% chance of development while a second disturbance is given a 50/50 shot at reaching storm status over the next 5 days. The first system looks like it will stay off of the SE coast and be a non-issue, while it’s too soon to say if the 2nd has a chance to thread the needle in the Caribbean and become a threat to the US.
A common theme among the earnings reports from refiners in the past couple of weeks has been the anticipated impact of the IMO bunker fuel changes coming at the end of the year. Meanwhile, Indonesia has already announced its plans to not enforce the new rules, which some worry may be the first of many that may nullify the efforts to clean up the fuels used at sea.
Oil Prices Attempting To Rally Ahead Of Weekly Inventory Reports
Oil prices are attempting to rally ahead of the weekly inventory reports and the FOMC’s highly anticipated announcement due tomorrow. WTI rallied right back into the 200 day moving average that helped reject last week’s rally attempt, which makes a good pivot point to watch as the market continues its search for direction. If WTI can sustain a push above that level, it seems likely that we’ll see a run at $60, which should help products add another 8-10 cents. If it fails again, it seems more likely we’ll see another test of the lower end of our summer trading range.
Traders have priced in a 100% probability that the FOMC will cut its interest rate target tomorrow by at least 25 points, and a 25% chance of a 50 point cut. That certainty of a rate cut is getting some of the credit for the early rally in energy prices, although stock markets are pointed to a lower open, which contradicts that theory. Odds are that without any news from the Strait of Hormuz, interest rates are the easiest thing to explain a brief bit of buying.
A US federal appeals court rejected PDVSA’s appeal, and set the stage for Citgo’s assets to be seized and sold to pay off a previous $1.4 billion judgement against the Venezuelan oil company. Don’t expect changes any time soon however as it looks like this could get appealed again to the US Supreme court, and it’s hotly debated just who is in fact legally in charge of PDVSA these days.
The stream of oil company earnings reports continue this week, with mixed results so far and more signals that smaller drillers are continuing to struggle, which may mean less drilling activity in the US in the back half of the year. The multi-billion dollar question is when that slowdown in drilling will actually translate to less oil production, as the log of drilled but uncompleted wells (DUCs) may keep output rising for some time.
The storm system heading towards Florida was “downgraded” by the NHC in its latest advisory, with a 0% chance of development over the next 48 hours, and only a 10% chance of development over the next 5 days. No doubt the weather channel will continue showing it multiple times an hour this week, but it appears this will be a non-issue for fuel supplies in the area.
Quiet Start For The Most Important Weeks Of The Year
It’s a quiet start for what could be one of the most important weeks of the year for financial markets. Energy prices are treading water as we await news on US-China trade talks, and the FOMC’s first interest rate cut in years. There were no new developments in the Strait of Hormuz over the weekend, letting energy traders sit back and watch how the other big stories will play out before making a move.
Baker Hughes reported a decline of 3 oil rigs drilling in the US last week, marking a 4th consecutive week of reduced drilling activity. The rig count has dropped in each month so far this year as producers continue to struggle with profitability, even as prices have rebounded. One interesting note in this week’s count: The Permian basin has more than half of the active drilling rigs in the country, and has been leading the declines for most of the year but actually increased by 3 rigs last week.
Money managers that jumped into long bets on energy prices ahead of Hurricane Barry two weeks ago look to have bailed out in the last commitment of traders reports. The large speculative category of trader saw large declines in almost all contracts last week, with European distillates the only one to see a net increase in net length held by money managers.
A Reuters article this morning highlights the challenging environment for ethanol producers in the US. The chart below shows that margins for producing ethanol from Corn have held in negative territory for most of the year. No surprise here, renewable fuel producers are blaming small refinery exemptions from the RFS for their woes, while refining groups suggest they’re not to blame.
It’s not just ethanol producers that are struggling. 2 more biodiesel plants have announced they will be shutting their doors this month, with the lack of a $1/gallon blenders credit making them unprofitable. The latest spending bill moving through congress does not include the tax extenders package that would reinstate that credit, along with the federal oil spill fee.
We are still more than a month away from the peak of hurricane season, but another system will need to be watched this week. Currently the NHC is only giving a 20% chance of development for a storm system that could heads towards Florida. Given that most terminals in Florida seem to be oversupplied with fuel currently, it seems less likely there will be much disruption even if this system does turn into a storm.
Sideways Action For Energy Markets Continues
The sideways action for energy markets continues, with oil prices trying to lead a modest rally this morning that would finish a choppy week of trading with gains that pale in comparison to last week’s heavy selling. The small trading range and back and forth action suggest a wait and see attitude as the Iranian tensions continue to simmer and as traders continue to debate how much the FED will cut interest rates next week.
It’s been a few days since we’ve had any market moving headlines from the Strait of Hormuz, as both Britain and Iran continue to hold a tanker hostage, while naval escorts seem to be preventing any further disruption for the time being. The economic sanctions on Iran continue to take a toll however, as two Iranian ships sit stranded off the coast of Brazil as that country refuses to refuel them.
While the action in futures has been lackluster, it’s been a busy week for companies reporting quarterly earnings. Oil refiners have been a bit of a mixed bag, although common themes include lower crack spreads than a year ago as discounts for North American crude – particularly Western Canadian crude – have shrunk. Oil producers meanwhile continue to struggle to create positive cash flows even as US production reaches all-time highs. Reuters notes that oilfield service companies are painting a grim picture for the back half of 2019, with most predicting more cut backs in operations and more rigs taken offline.
The slowdown in drilling activity is visible in in West Texas diesel prices as rack offers have dipped below Gulf Coast spot replacement costs this week – a phenomenon that’s happened only twice in the past two years.
Energy Markets Having Hard Time Making Up Mind
Energy markets are having a hard time making up their mind this week. A bullish DOE report had prices rallying Wednesday morning, only to see those gains wiped out in the afternoon, and then attempt another move higher overnight.
It’s hard to say what caused the sudden sell-off late in Wednesday’s session after the earlier DOE-induced strength. Perhaps the most notable item that could have contributed was that WTI rallied right into its 200 day moving average, only to stall out, making it look like a technical resistance layer the bulls weren’t able to overcome. Today’s rebound leaves the outlook even less clear, as technical indicators move into neutral territory and may leave us in an extended sideways pattern.
It is also possible that some traders sold into Wednesday’s rally as the large draw in crude oil stocks was driven primarily by a short-term storm-related issues rather than a long term fundamental change. Then again, demand figures rebounded nicely on the week, setting the stage for US Gasoline demand to make a run at all-time highs before the end of driving season.
The crude output chart below may have the most noteworthy impact from Hurricane Barry, causing the largest weekly drop in US crude production since the rash of hurricanes in 2017. With no reports of major damage from Barry however, we should see production bounce back to previous levels in next week’s report. It’s also worth noting that despite the largest weekly drop in nearly 2 years, total output was still 300mb/day above year-ago levels…which were a record high at the time.
PADD 3 refinery runs dropped by more than 400mb/day last week, which seems to be primarily due to the precautionary shut downs ahead of Barry. PADD 1 saw a 100mb/day increase last week, which helps to explain the relatively muted reaction to the PES shutdown over the past month.