Market Talk - 2019 march
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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.
DOE Week 13 - 2019 Report
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.