News & Views
Equity Markets Point Higher
WTI and Brent are trading at new highs for the year to start the last trading day in March, as equity markets point higher on the day on renewed US-China trade optimism and the half-life of a President’s oil-related tweet impact on the market continues to shrink.
Unless there’s a dramatic mid-day reversal today (not expected) this is shaping up to be the strongest quarter for oil futures (along with several equity indices) since 2009. The heavy selling to end 2018 certainly set the stage for a recovery bounce, while OPEC cuts – both intentional and not – and a rash of refinery downtime – both planned and not – were also big contributors to the price rally.
Looking forward to the 2nd quarter, it seems the supply disruptions should be priced into the market, so additional upside may need to come from the demand side of the equation, and may hinge on whether or not the global economy continues to show signs of slowing down. This week’s dramatic reversal in gasoline prices seems to have burst the spring-breakout bubble, but there are still a few more weeks left in the RVP transition and there are 2 months until driving season officially kicks off so it’s still a little too soon to break out the calls for a seasonal top.
The latest in the Venezuela saga: Citgo has secured financing to continue its operations (which have to this point continued seemingly without issue since US sanctions on its parent company) while Russia is working on new ways to get the sanctioned crude to market, which I’m sure will be at a fair price if they succeed.
As part of its 2019 annual energy outlook, the EIA is highlighting its forecast that tight-oil, aka Shale plays will continue driving US oil production for the next few decades. The report is also suggesting that US oil production will continue climbing from its current record high of 12.1 million barrels/day to 14 million barrels/day in the next couple of years. At the same time, US tight-oil exports are facing new scrutiny as foreign buyers find issues with contamination caused by the comingled nature of US pipeline networks.
Wheels Came Off Gasoline’s Spring Rally
The wheels came off gasoline’s spring rally yesterday, RBOB clocked a 6 cent loss in the nearly-expired April contract and a 3 cent loss in the May contract, which come prompt next week. This year’s run was good for about a 65 cent increase in gasoline prices since late January.
Uncertainty continues to surround the global marine diesel spec change looming in 2020 and now the Council of Economic Advisers is chiming in, refuting the Energy Information Agency’s previously published positive outlook. The CEA is anticipating a large impact on global prices with the coming changes that will impact not only diesel but gas and jet retail prices as well. They also mention a secondary consideration for the coming year: potential policy changes, especially those that would look good for the current administration in an election year.
Speaking of governmental alphabet soup, the DOE released its weekly inventory status update yesterday, reporting some nationwide inventory draws in gas and diesel stocks for the week ending on the 22nd. The refined product draw and crude oil build makes sense coming on the heels of a decrease in refinery runs, likely caused by this month’s swathe of refinery issues.
It looks like the Houston Ship Channel is now open to all traffic following the ongoing cleanup of a chemical spill last week. While shipments are restricted to the daylight hours, and it seems only outbound vessels are currently using the channel, normal operations are set to resume by this weekend or early next week.
RBOB slashed through some technical support yesterday and is set to take on some more this morning. Gas prices are down about 4.5 cents so far to start the day, knocking on the door at its 20-day average. If some buying pressure doesn’t show up in the coming weeks, the American gasoline benchmark could retrace large portions of ground gained over the past couple months. Peg $1.85 as the next pivotal point, settling below which will leave the contract open to falling another 8-10 cents in the short term.
Gasoline Prices Finally Passed Out
Gasoline prices look like they’ve finally passed out after a 3 week Spring Breakout rally, pulling back more than a nickel since reaching a 5-month high at $1.98 in Tuesday’s session. So far the pullback hasn’t had much impact on diesel and crude oil prices which are all hovering around break-even levels.
For real this time? If RBOB settles lower today it would snap a streak of 8 consecutive gains for gasoline futures in the midst of their annual spring rally. In 7 of those sessions RBOB was trading lower in the morning only to end the day with gains. So what’s different this time around? The spreads have finally cried uncle with both calendar and basis spreads pulling back sharply from their stronger-than-normal levels. If this is in fact the end of the spring rally, it would stand as a 27 cent increase in the first 26 days of March, and a 60 cent increase from the January lows.
The sudden reversal comes despite reports that the backlog of vessels in the Houston ship channel continues to grow even though sections of the waterway have reopened, and a handful of refineries may be forced to reduce runs until it can be cleared. The EPA meanwhile is urging residents to avoid eating fish caught in the Houston ship channel due to the issues of the past week. Which begs the question, who thinks it is ever a good idea to eat fish from the Houston Ship Channel?
The API was said to report declines of refined products of 3.5 million barrels for gasoline and 4.3 million barrels of diesel, while US crude stocks increased by 1.9 million barrels. The DOE’s version of the weekly stats is due out at its normal time. Gasoline’s selling-off even while inventories decline is another sign that the momentum may be waning, although it’s worth noting that gasoline stocks almost always decline this time of year as the industry works through the spring RVP transition.
News from China continues to appear to be driving price action this week, as the engine that drove much of the world’s economic and oil consumption growth in the past decade continues to slow. This week it’s more weak economic data that seems to be creating a bit of a drag on both equity and energy futures. Meanwhile, China’s own crude oil contract appears to be catching on 1-year after it’s start, which could further threaten the volumes traded in WTI and Brent.
Spring Breakout Rally Recovering From Hangover
The Spring Breakout rally is on again after recovering from a bit of a 2-day hangover. RBOB gasoline futures are leading the way higher once again, reaching fresh highs for the year, after turning early losses into afternoon gains for a 7th straight trading session Monday. A rally in US equities seems to be helping the early buying spree in energy contracts as we await the weekly inventory reports.
The rash of refinery issues continues to help RBOB spreads push much higher than they typically are this time of year, pushing spot prices in several US markets up by more than 70 cents in the past two months. The Houston ship channel is partially reopened, suggesting that any refinery impacts from the disastrous tank fire and subsequent spill last week will be short lived. USGC basis values dipped Monday on the news.
Note how the Equity/Energy correlation chart below shows the S&P 500 and WTI have been moving in lockstep for several months, but during the past couple of weeks, ULSD has decoupled from both and seems content to move sideways.
Bad news is good news: Once again, US Stocks seem to be reacting positively to bad economic data – in today’s case a low housing starts figure – as it makes it more likely that the FED will lower interest rates again. Already, FED funds futures are showing that traders expect a rate cut later this year.
Plenty of concerns of an economic slowdown continue despite today’s optimism, as bond markets continue to flash warning signs. If you’re wondering what all the hype is about with the treasury yield curve, take a look at the chart below. The last two times we’ve seen an inverted curve preceded little things known as the dot-com bubble, and the great recession.
Energy Prices Slipping Into Red
Energy prices are slipping into the red to start the week as economic concerns sparked by an inverted treasury yield curve seem to be outweighing supply concerns sparked by the fire that ultimately cut off parts of the US energy industry’s most important waterway.
Friday morning when the fire at a Deer Park TX terminal had been extinguished, it seemed that 4-day fire would quickly become an afterthought. Unfortunately the exact opposite has happened after chemicals at the facility breached a retaining wall, ultimately forcing a closure of parts of the Houston Ship Channel.
It’s still unclear whether this situation has or will force refineries in the area to cut runs, but given the great transition from US as importer to exporter, this situation has as much potential to push some prices lower since they’re temporarily trapped in the US, as it does to send prices higher since crude imports can’t make their way in. That new reality could help explain why prices are dropping today, when for decades any disruption to this major energy artery was a sure way to see prices surge.
Baker Hughes reported 9 more oil rigs were taken offline last week, bringing the total US count to an 11 month low at 824. Texas saw its total rig count drop for an 11th straight week.
Speculators seem to have decided that 4-month highs are a good place to jump on the energy bandwagon, with net long positions held by money managers in WTI seeing their largest weekly increase in 9 months last week, while RBOB net length surged above its 5 year seasonal range. Just as we’ve seen with futures lately, ULSD lagged the move of the other petroleum contracts, with managed funds hovering near a balanced position for distillates. While the speculators may be happy to bet on higher prices, it looks like producers are happy to sell into the rally as the WTI net-shorts held by swap dealers reached a new 4 month high.
Early Morning Sell-Off Proved To Be Head Fake
WTI broke above the $60 mark Wednesday for the first time since early November, as another early morning sell-off proved to be another head fake in the ongoing Spring breakout rally. Brent and RBOB gasoline also reached new 4+ month highs during the rally sparked by bullish demand estimates and inventory draws in yesterday’s DOE report, although that upward momentum has waned overnight as stocks markets point to a lower open in what appears to be a small post-FED temper tantrum.
Crude oil stocks dropped by almost 10 million barrels last week, falling below their 5 year seasonal average, despite output holding at a record high of 12.1 million barrels/day, as exports surged north of 3 million barrels/day, marking the 2nd highest weekly total on record.
The total US Petroleum demand estimates continue to hold above their seasonal 5-year range, although many in the industry are doubtful of those figures given lackluster motor fuel demand in many parts of the country. The Midwest in particular has seen a brutal weather combination of a winter storm parade followed by flooding that has sapped consumption.
Speaking of which, those floods are the culprit behind the ethanol shortages stretching across much of the southern half of the country, wreaking havoc on fuel supplies even in markets where gasoline stocks are ample. This is despite the fact that the DOE reported that total ethanol inventories in the US reached an all-time high last week. To put it another way, what’s happening to the distribution network in the Midwest is ethanol’s equivalent of what happens to gasoline supplies when there’s a hurricane in the Gulf of Mexico.
Don't Fall For The Head-Fake
Once again energy futures are starting the day on a softer note, after reaching new highs for the year in the past 24 hours. A stronger dollar and a weak start for US stock markets are both getting credit for the early move lower. Even with the early sell-off, it’s shaping up a third consecutive strong week for the energy prices, as the spring break rally continues with gasoline embracing its traditional role leading the rest of the complex higher early in the year.
Don’t fall for the head-fake: RBOB gasoline futures are trading lower again this morning, after reaching a fresh high for the year overnight. In each of the past 5 trading days gasoline futures have dropped, only to recover and settle higher by the end of the day. The rash of refinery issues from the East Coast to the West continue to push basis values well above year-ago levels, adding to the strength in futures, with several cash markets now trading 60 cents higher than they were less than 2 months ago.
Speaking of refinery issues: A Bloomberg article proves once again how the old networks that traders have relied on for years for refinery information are obsolete as now you can just track workers phones to know when there’s an issue.
The impact of Midwestern flooding continues to grow as more than 10% of US ethanol production is offline, and rail traffic has been hamstrung as roads and lines were washed out across the region. Estimates are the disruptions will last at least another few weeks, with most issues reported in the SW US due to limitations on alternate supplies or transportation routes.
Here’s the head scratcher of the week. While oil and gasoline prices are reaching multi-month highs, diesel prices are dropping. This is despite ULSD having the strongest fundamental argument of all the petroleum contracts with inventories below average levels, demand running strong and a game-changing spec change looming at year end.
Oil And Gasoline Contracts Reached Fresh Highs
Spring Break has been put on hold for energy futures as the upward momentum seems to have stalled out after oil and gasoline contracts reached fresh highs for the year. Don’t get too excited about the sell-off just yet, we’ve seen a few of these head-fakes already during the most recent run-up, and March Madness is just about to tip off.
Concerns over US/China trade talks – the easy mark for any headline writer in 2019 – are getting credit for the pullback even though US equity markets are holding steady. Others suggest that the postponed OPEC meeting is a sign that Russia is pressuring the cartel to end its output agreement earlier than the Saudi’s would like, and that strain could be bearish for prices.
The API was reported to show inventory declines across the board last week, with crude stocks down 2.1 million barrels, gasoline down 2.8 and diesel down 1.6. The EIA’s weekly report is due out at its normal release time of 9:30 central this morning. Look for product draws in the Midwest (PADD 2) in today’s report as signs in local pipeline markets suggest supplies have drawn down rapidly in the past week.
RIN values continue to drop this week after the EPA’s proposal to limit trading in the renewable fuel credits, and to approve a handful of small-refinery waivers. Ethanol values meanwhile have surged as logistical constraints have created gasoline supply disruptions in a handful of markets across the country, forcing buyers to pay up to find replacement barrels. Overall US ethanol inventories remain near all-time highs so it seems this price spike will be short lived once the trains get back on schedule.
The fire at the Deer Park TX terminal has been extinguished after burning for nearly 4 days. While that situation looks like it may have only minor impacts on operations and prices in the world’s busiest petroleum hub, it could have longer term consequences for the state’s environmental watchdog as the extended duration created plenty of doubts about their assurances about air quality.
Speaking of which, Carbon emissions continue to move into the forefront of our industry’s and society’s consciousness, with numerous plans for reduced emissions mentioned during recent earnings calls and during the CERAWeek conference. The EIA this morning showed its predictions that US energy-related carbon emissions will hold steady through 2050 as natural gas replaces coal to support America’s growth. Petroleum-based emissions are expected to fall over the next decade owing to increased vehicle fuel efficiency and more stringent product specs.
Spring Breakout Rally Continues For Energy Futures
The spring breakout rally continues for energy futures as fundamental and financial factors all appear to be aligning short term to send oil & gasoline prices to fresh 4 month highs. OPEC+ production cuts, and a rash of unplanned refinery & terminal issues along with stronger equities and a weaker dollar are getting some of the credit for the rally. From a chart perspective, the window appears open for further upside over the next few weeks.
The fire at the Deer Park terminal facility along the Houston ship channel has spread from 2 tanks to 8, and is expected to continue burning for at least another day. While the pictures are dramatic, the impact to the market will be minimal as long as the operations of nearby refineries and shipping lanes remain unaffected.
The 30 day correlation between WTI & the S&P 500 is holding around 90%, and both are moving higher again this morning. Volatility indices for WTI and the S&P 500 (aka the VIX, aka the “fear index”) have reached 6 month lows this week as the climb higher seems to have soothed some of the concerns over a pending recession.
The US Dollar has been softening of late as well, which tends to get credit for stronger commodity prices, even though energy and currencies have had a weak correlation for more than a year. More calls for the FED to lower interest rates to stave off a recession seem to be driving the dollar weakness – and likely some of the equity strength - as the FOMC starts a 2 day meeting today. The CME’s Fedwatch tool shows traders are giving just a 1.3% chance of an interest rate cut at this meeting, and a zero percent chance of an increase, meaning tomorrow’s announcement will be mainly important for signals on what might come later in the year. Traders so far are pricing in a 24% probability that interest rates get cut by at least 25 points before year end.
Energy Futures Treading Water To Start Week
Energy futures are treading water to start the week with prices hovering within striking distance of a technical breakout that could send prices up another 10% or more this spring, but so far unwilling to commit to that move.
OPEC announced they’re cancelling their April meeting, deciding to wait until June to decide if it needs to continue with its production cuts, giving more time to assess the impact of sanctions on Iran and Venezuela on global supplies and prices.
A trio of fires over the weekend have so far failed to spark a rally in product prices, although it’s still unclear whether they’ll impact regional supplies. Friday saw a fire at the P66 plant in Carson, CA, Saturday there was a fire at Exxon’s Baytown facility, and Sunday saw a fire in 2 tanks containing gasoline components at a Deer park terminal facility. The lack of reaction so far in prices may reflect a wait and see attitude by traders skeptical that this will impact supplies, but is also likely a reflection that these facilities aren’t tied directly to the NYMEX contract delivery points in the New York Harbor.
Refined products continue to find strength from planned and unplanned refinery downtime, with numerous reports that plants have been taking advantage of weak margins to start 2019 to front load maintenance for the expected demand surge in the back half of the year ahead of the marine diesel spec changes.
Baker Hughes reported a decline of 1 oil rig last week, marking a 4th straight week drop in the total US count. Texas saw its 10th consecutive decrease as production in the Permian basin continues its gradual slowdown.
Money managers continue to be unenthused by petroleum contracts in 2019. Brent and WTI did see small increases in speculative net length last week, but they remain well below year-ago levels, and towards the bottom end of their 5 year seasonal ranges. RBOB is the only contract seeing above-average speculative bets on higher prices, with managed money net length increasing for the 5th time in 6 weeks. The net short position held by swap dealers in WTI did increase for a 2nd straight week, suggesting producers may be using the recent run-up in prices to begin hedging more of their anticipated production.
The great transition continues as the EIA noted that the US Gulf Coast (PADD 3) became a net exporter of crude oil in the last 2 months of 2018. The Midwest (PADD 2) is now the largest importer owing to Canadian shipments via (mainly) pipeline and rail.
Energy Futures Sliding Into Red
Energy futures are sliding into the red this morning, in what appears to be a bit of profit taking after a strong spring breakout rally pushed prices to new 4 month highs in the past 24 hours. Some bearish elements in the IEA’s monthly oil market report could also be to blame for the overnight reversal.
RBOB gasoline futures topped out at $1.8822 in Thursday’s session and have dropped about a nickel since that time, even though NY Harbor basis values continue to strengthen, as refinery downtime is seen depleting the excess inventory seen earlier in the year. WTI meanwhile has dropped almost a dollar reaching $58.95 overnight. It will take additional drops of that size before this latest sell-off threatens the trend started when prices broke out earlier in the week, but short term technical indicators are showing signs of topping out, so a more meaningful pullback may be in order.
The IEA’s monthly report noted that world demand for oil slowed sharply in the fourth quarter of 2018, but held its estimates for 2019 steady. The agency also noted how OPEC’s production cuts have served to increase the total “spare capacity” available, which will cushion the impact of Venezuela’s collapse.
While petroleum futures have been reaching 4 month highs this week, RIN values have traded down to 4 month lows after the EPA released approved 5 more small refinery exemptions to the RFS in 2017. While the retroactive nature of those exemptions doesn’t directly impact current blending activity, it does send a clear signal that the agency is not changing its stance on granting more exemptions since a federal court ruling in 2017 that found earlier rejections of exemptions were illegal, despite subsequent lawsuits filed on behalf of agricultural groups. Needless to say, biofuel producers don’t seem thrilled with the news.
Today’s interesting read: The EIA’s note on how the industry is handling the growing demand for hydrogen at refineries to strip sulfur from crude oil to meet new cleaner fuel standards.
Prices Pushed Through Technical Resistance
The spring breakout rally is on as WTI, Brent and RBOB have all pushed through to fresh 4 month highs owing to a handful of bullish-enough fundamental reports that have pushed prices through technical resistance.
If prices can hold near current levels, the door seems open for WTI to push above $60, Brent to move back above $70, and for RBOB gasoline to test the $2 mark in the next couple of weeks. ULSD futures remain the laggard even though they may have the strongest fundamental case of all the contracts with inventory levels below average across most US markets and the IMO spec change looming at year end.
Yesterday’s DOE inventory report helped get the rally moving as it confirmed the inventory draws for crude oil and gasoline stocks that the API had reported the day prior. OPEC’s monthly report did give some cautionary notes to the fundamentalists as it noted a slowdown in global economic activity, and coinciding reduction in oil demand growth. That said, so far this morning, the market seems to care more about OPEC’s production dropping for a 4th straight month, led by decreases in Saudi Arabia and Venezuela. The bears will note that without the unintentional reductions from Venezuela, the cartel’s cuts were much lower last month than previously forecast.
In addition to the DOE report, gasoline seemed to be aided in its rally by unconfirmed reports swirling through the rumor mill that the Bayway NJ refinery would once again be shutting an FCC unit that was down for maintenance in February for unplanned repairs. That downtime contributed to PADD 1 refinery runs reaching an 8 year low 2 weeks ago, and yesterday’s “news” helped push April futures further into backwardation, while holding basis values in the 9 cent discount range, compared to an 18 cent discount for winter-grade RBOB this time last year.
That refinery is also finding its way into the headlines this week for other reasons. A recent report shows that toxic emissions from the plant have been cut by more than 2/3s in the past 15 years, but some are still unhappy as the refinery accounts for around half of the state’s total emissions of certain chemicals.
Meanwhile, a first of its kind lawsuit is being allowed in Boston, as an environmental group is suing Exxon over claims its terminal facility in MA is not adequately protecting against the effects of climate change.
Energy Futures Hover Near Multi-Month Highs
Energy futures continue to hover near multi-month highs, on the verge of another technical breakout to the upside, looking for the next catalyst to push prices on their next big move. Distillates are the exception to that rule however, as ULSD futures are ticking lower for a 6th straight session, although the sum total of the losses during that time are a fairly meaningless 3 cents/gallon.
It’s data deluge week, as in addition to the normal weekly reports, we’re also getting monthly outlooks form the DOE/EIA, OPEC and the IEA. That’s in addition to the slew of headlines that continue to come from the CERAWeek conference going on in Houston.
The API was said to report a draw in oil stocks of 2.6 million barrels last week, along with a 5.8 million barrel drop in gasoline stocks, while distillates were fairly flat, estimated to increase by less than 200,000 barrels. The DOE’s weekly report is due out at its regular time this morning. Recent swings in import/export flows have been key drivers of the weekly inventory levels, with the EIA highlighted in a new report this morning. That import/export flow highlights the latest STEO Monthly forecast from the EIA, in which the agency predicts the country’s transition from net importer to exporter in the next 2 years.
The EPA proposed new rules to allow E15 blends year-round, and to make a handful of reforms to RIN markets. The proposal will undergo a public comment period before becoming final. RIN values dropped on the news, and following a report that small refiners believe their exemptions to the RFS are legally “bulletproof”.
As for the RVP waiver that will allow E15 blends in the summer, meaning the EPA is going to allow more fuel to evaporate into the atmosphere in an effort to use more corn, that seems to be a clear victory for Ag groups, but it remains to be seen how the new ruling – if it’s finalized – will trickle down to the retail level. For example, in a state like Texas that does not allow the 1lb RVP waiver (more evaporation of fuel in the summer) with ethanol blends, E15 may still not be sold even though the federal ruling will allow it.
Speaking of state/federal EPA arguments: The newly confirmed head of the EPA is pushing ahead with new nationwide fuel economy standards after negotiations with California on their version of the plan broke down. The new “SAFE” fuel efficiency standards are intended to replace the “CAFE” standards that set lofty goals that many automakers felt were unattainable, famously highlighted by the cheating scandals at a handful in the past few years.
Oil Prices Knocking On Door Of Technical Breakout
Oil prices are knocking on the door of a technical breakout this week, with both Brent and WTI trading within a few cents of their February highs overnight, aided by reports of further intentional output cuts by Saudi Arabia and unintentional reductions in Venezuela.
The Venezuelan turmoil seems to be reaching an inflection point this week as widespread power outages have taken the situation for most citizens from bad to worse. The amount of oil the country is producing, already at 30-year lows, is estimated to have been cut in half in the past week as the lack of power shuts operations. While this news may be short term bullish for energy markets, it could also be long-term bearish as the more dire the situation, the more likely a regime change seems to be.
RBOB gasoline futures are already in technical break-out territory after settling above their 200 day moving average Monday and pushing ahead to a fresh 4.5 month high at 1.8397 overnight. The gasoline supply situation continues to show signs of being tighter than normal along the East Coast as the spring RVP transition gets into full swing, driven by refinery runs that reached 8 year lows in the past 2 weeks. NYH gasoline is trading at a 9 cent discount for winter vs summer barrels this week, compared to a 19 cent discount this time last year.
The annual CERAWeek conference is underway in Houston, with the leaders of the energy industry convening to discuss new ideas and debate the future of petroleum markets.
Among the presentations Monday, the IEA’s 5 year energy forecast provided plenty of headline-worthy notes. The charts below highlight the agency’s predictions that US Shale production will be a driver of global oil supply, and that the US might rival Russia and Saudi Arabia for export volumes in the coming years. In addition, the low Sulphur content of shale oil should further aid the US in a post IMO 2020 environment where low Sulphur refined products are increasingly in demand.
Traders Got Lesson In The Spring Gasoline Rally
Traders got a lesson in the phenomenon known as the spring gasoline rally Friday as 6 cent losses sparked by the early “risk-off” selling across stock and commodity markets was essentially wiped out by days’ end, with nothing fundamentally to point to for the reversal. That momentum carried through the overnight session, with RBOB futures once again punching through the 200 day moving average (the resistance which had been given some credit for the selloff last week) and has reached fresh 4.5 month highs.
While the rest of the complex also saw a strong recover rally late in Friday afternoon’s trading, Oil and Diesel prices merely returned to the middle of their March trading ranges, and aren’t yet showing signs of being willing to join gasoline’s spring breakout rally.
Baker Hughes reported a drop in the total US Oil rig count for a 3rd straight week Friday. Texas saw a decline for a 9th straight week, and the state’s total dropped below 500 for the first time in a year. As the chart below shows, the Permian basin has accounted for more than half of the country’s total drilling rig count since the last price collapse, so as activity in TX slows, the national total goes along for the ride.
Money managers snapped a 9-week streak of increases in the Net-Long position (bets on higher prices) in Brent crude oil last week. Although the large-speculators increased their net long holdings in WTI for a 2nd week, (the CFTC data finally caught up from the govt. shutdown) both of the major oil contracts are seeing below-average length for this time of year. That lackluster participation by large funds could be a reason why the oil price rally can’t seem to sustain itself lately, or it could become a catalyst for the next push higher if the speculative money sitting on the sidelines decides it’s time to get back in the game.
Fear Gripped Equity And Energy Markets
A bit of fear has gripped equity and energy markets this morning with a broad stock market sell-off spilling over into petroleum futures. Most petroleum contracts are down more than 2.5% at the moment, wiping the bullish technical signals that had taken over earlier in the week off the board.
The stock market tumble appears to have started after China reported that its exports plunged more than 20% in February, adding to concerns about a global economic slowdown.
Adding to the pessimism: Not only is the economic outlook in China looking worse going forward but (shocking no-one who has read numerous articles on the country’s number-fudging over the years) a new study demonstrates that the country’s GDP growth was not nearly as strong as advertised over the past decade.
Completing the bad news Trifecta: The February payroll report showed an increase of only 20,000 jobs during the month – less than 10% of the average monthly increase we saw in 2018. Will this report mark the return of “Bad news is good news?” During the years of the FED’s various monetary easing plans, equity markets often rallied on bad economic data points as they made more stimulus likely. For those hoping for an interest rate cut in 2019 instead of an increase, this slowdown in job growth could be a good thing. The flip side of that coin is the unemployment rates (both headline and U-6) continue to move lower, which is good news for the FED’s stated goal of promoting maximum employment.
Gasoline Futures Leading Energy Complex Higher
RBOB gasoline futures are leading the energy complex higher once again to start Thursday’s session, reaching a fresh 4 month high and punching through chart resistance at the 200 day moving average overnight. A large draw in gasoline inventories seems to have helped the annual spring gasoline rally with its latest push higher even though oil and distillate prices are lagging.
If RBOB futures can hold above the 200 day moving average (known historically as a level that large funds have used as an indicator of strength vs weakness) there is not much on the charts to prevent a run at the $2 mark over the coming weeks. WTI and ULSD futures may continue to act as a drag on the gasoline rally however if they can’t find enough momentum to break out of their sideways range.
According to the DOE, US refinery runs increased for a 2nd straight week, suggesting that we have made the turn for spring maintenance, and should see run rates increase over the next 6 weeks. One potential flaw with that typical-seasonal pattern: More unplanned refinery downtime. After Valero reported its McKee FCC went down again last week (for the 2nd time this year) multiple explosions were reported at HollyFrontier’s plant in El Dorado KS, and the Richmond CA refinery was also reported to have more problems.
Why are gasoline prices up a nickel since the DOE reported a 12% increase in PADD 1 refining rates last week? Gasoline stocks along the East Coast dropped by more than 3 million barrels, and even with the increase (from an 8 year low last week) refinery runs are still below the bottom end of their seasonal range.
Why are crude oil prices rallying even though oil inventories built by 7 million barrels last week? Net imports were up more than 1 million barrels/day on the week, accounting for an 11 million barrels increase based on trade flows, meaning the headline value is not likely reflective of lower demand.
The EPA reported that model year 2017 vehicles reached a record high fuel economy, and a record low for GHG emissions in their latest automotive trends update. As the chart below shows, manufacturers are using a wide range of technologies from turbo-charged engines (which has been driving up demand for premium gasoline) to more advanced transmissions and hybrid engines to achieve these targets.
Today’s head scratcher: With the world racing to produce more diesel ahead of expected shortages when the IMO 2020 rules take effect, why would Russia’s Rosneft delay upgrading projects at 5 of its refineries that would allow for increased diesel production? Are they tight on funds or betting on non-compliance to manage through the new rules?
Energy Complex In Game Of Tug-Of-War
A large inventory build stopped WTI in its tracks Tuesday afternoon, and has left the energy complex in a lackluster game of tug-of-war overnight as RBOB gasoline futures attempt to push to new highs for the year while crude oil and distillates are trying to slide into the red.
The API was reported to show a 7 million barrel build in crude oil inventories – in spite of increased refinery runs last week. For those watching the large changes in import/export flows over the past few weeks, that build in oil stocks is easy to understand, but still seems to have caught the market a bit off-guard. The industry group was said to show draws in refined products of around 3 million barrels of gasoline, and 300,000 barrels of distillates, which helps explain their relative strength vs crude overnight. The DOE’s weekly report is due out at its normal time today.
Tuesday marked the scheduling day for the last 11.5 pound gasoline grades on Colonial pipeline for the season, meaning 9lb and lower summer-grades will take over the trading & pricing markers until fall. With several markets east of the Rockies still working off a record-setting level of gasoline inventory, this year’s RVP transition could end up with more regional price volatility than most years.
For those that doubt the future of the Permian basin due to Wall-Street funding concerns: Exxon and Chevron both announced plans to dramatically increase their production in the region Tuesday, and neither one is in need of a capital infusion. The plans coincide with previous announcements by the two largest oil companies to acquire or build more refinery capacity along the US Gulf Coast to take advantage of the Permian’s wealth of oil, natural gas and other liquids.
Those announcements conveniently coincided with news that the Department of Energy was authorizing a new LNG export facility along the Gulf Coast, as the country continues to race to build the infrastructure to support its transition from petroleum importer to exporter.
The Dallas FED also highlighted those changes in its monthly energy indicators report, demonstrating how the changing crude slate has impacted gasoline and diesel inventories (and refinery margins) while petrochemical plants are taking advantage of the rapid production of ethane.
This week marks 10 years since US stock indices found a bottom in the midst of the financial crisis. While energy and equity markets have had periods of strong correlation during that span, and seem to influence one another regularly, the S&P 500 is up 319% while WTI is only up 75% during that stretch.
Early Rally Turned Into Biggest One-Day Sell-Off
The early rally in US stock markets Monday turned into the biggest one-day sell-off in a month, and that reversal knocked the wind out of energy prices as well. Most NYMEX futures did manage to recover later in the day to end with gains and have resumed a modest climb overnight as we await the weekly inventory reports.
There’s an argument that Monday’s reversal was a sign of “deal fatigue” as the US/China trade story has worn out its welcome in the bull market camp. There’s also an argument that weak economic data coming out of China was to blame, as the tariffs put in place last year seem to have done plenty of damage.
A stronger US Dollar was also getting some credit for the pullback in energy futures, although as the chart below shows, Oil prices haven’t been reacting to currency moves much in the past year.
The EIA published a note this morning explaining how record-high inventories and tighter crude spreads drove gasoline cracks for USGC refiners to their lowest levels in more than 4 years. Not mentioned explicitly in the note is that the relative complexity of those same refineries should also be a benefit later this year as the world attempts to comply with the IMO’s new Sulphur regulations.
Never let a good crisis go to waste: Those weak margins, and expectations for better days to come in 2020, explain why there have been numerous refinery maintenance projects that have seen their schedules moved up in recent weeks.
Optimism Spilling Over Into Energy Futures
Stock markets around the world are rallying on news that the US & China are close to a trade deal, and that optimism seems to be spilling over into energy futures once again.
While the correlation between US stock indices and NYMEX futures has fallen to its lowest levels in 3 months, most calculations are still north of positive 80% on a daily basis, which is a strong enough relationship to argue that the two are still likely to move in tandem more often than not. In addition to the indirect relationship between asset classes, China was also reported to buy its first US crude oil cargo since the trade spat began last year helping boost the outlook for petroleum.
Baker Hughes reported a drop of 10 oil rigs last week, with Texas accounting for half of the drop as the lone-star state racked up an 8th straight week of declines. The WSJ noted that the Permian basin is dealing with a spacing problem that may lower the number of wells completed, and could ultimately reduce forecasted production. So far, the 2-month decline in rig count hasn’t trickled down to field-level data as the latest Permian basin survey from the Dallas FED shows production, DUC wells and wages in the area all continuing to climb.
Money managers upped their bets on higher Brent crude oil prices for an 8th straight week, although the total net-long position held by large speculators is still below the 5-year average, suggesting the big money may still be on the sidelines after last year’s heavy sell-off took several funds out of the game.
The CFTC will finally be caught up with its commitments of traders reports after the government shutdown. Through mid-February data, speculators seem less enthusiastic about WTI with net length dropping for a 3rd week, and the total bet on higher prices holding near the bottom of its 5 year range, meaning those same speculators that were burned by last year’s price drop, also appear to have missed out on the recovery rally.
A couple of interesting reads:
The shortage of truck drivers in the US and its likely impact on consumer goods, including petroleum products.
In Like A Lion And Out Like A Lamb
The phrase “In like a lion and out like a lamb” that’s been used for many years to describe March weather seems a good fit for 2019 as multiple winter storms stretch across large swaths of the US. The opposite seems to be holding true for energy trading, as an often volatile month has begun with a very quiet start. WTI did manage to reach a fresh 3.5 month high overnight before giving up those gains and trading near flat this morning, so there is still a decent chance of another technical breakout that could kick off a little March madness.
News of a sale of oil from the Strategic Petroleum Reserve is making its way through the headlines, with writers stretching to find potential implications as possibly being signals to the world oil market. In reality, the sale was part of a budget bill passed in 2015 that is intended to fund upgrades to the facilities that house the US’s emergency oil stockpiles.
The spread between March and April RBOB continued its strong rally to end February, with the March contract (the last winter-grade contract of the season) expiring just 11 cents below the April (summer-grade rvp) contract. It’s been nearly a decade since the winter/summer spread has been that small to end February (no coincidence that it’s been nearly a decade since PADD 1 refinery runs were this low) and that small spread is likely to disappoint those market players along the East Coast who have become used to capitalizing on wider discounts during the RVP transition.
The forward curve charts below show that while the rally in front month futures has been dramatic over the past month, prices 2-3 years from now have not followed suit. This suggests that the market expects supply & demand to be relatively more balanced down the road, and is likely a sign that oil producers have been taking advantage of the recent run-up in prices to hedge their production in 2020 and beyond.
RIN values for both ethanol and biodiesel dipped Thursday after the Senate narrowly approved the EPA’s interim director promotion to full time chief of the agency. While the political football known as the RFS still seems unlikely to be changed with a split congress, it seems the small market reaction is acknowledgement that the bio-lobby had failed in their efforts to prevent this move.
The EIA meanwhile is predicting a stable market for biofuels over the next 2 years with steady production and consumption in a new note released this morning.