Market Talk - 2019 may
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Bearish Trio Of Factors Hammering Energy Prices
A bearish trio of fundamental, technical and trade factors are hammering energy prices, with most futures down another 2% this morning, marking 5-6% losses on the week, and 12-14% losses for the month.
The DOE inventory report got the selling started in earnest Thursday morning, as US crude output regained its all-time high at 12.3 million barrels/day, and inventories held steady even though oil exports once again surpassed 3 million barrels/day last week. To put that in perspective, all else being equal, if the US wasn’t allowed to export crude oil as in year’s past, inventories would have climbed by more than 21 million barrels in a week.
Gasoline demand figures were also disappointing, holding below their seasonal 5 year average for a 3rd straight week just in time for refinery runs to start increasing across all 5 PADDs. Reports that the Ozark pipeline which feeds Midwestern refineries was back online after a brief storm-induced shutdown added to the negative sentiment for products. The good news for refiners was the distillate demand rebounded sharply last week after a dismal 2 month stretch of below-average estimates.
If the DOE stats weren’t enough, a report that the US would allow countries to continue buying Iranian oil until they’d reached a negotiated limit seemed to also contribute to the tidal wave of selling Thursday afternoon, and no one seemed to notice when that report was rejected later in the evening.
Unlike Thursday’s collapse, this morning’s heavy selling seems to be tumbling stock markets that were shocked by the latest tariff threat, this time levied against Mexico, the United States’ largest trading partner, just as the new version of NAFTA was ready to be ratified. IF Mexico chooses to retaliate, it could be bearish for refined products as the US has been steadily exporting more fuel south, whereas in years past this could be bullish for prices when the US relied more on Mexican oil.
In addition to the tariff surprise, there’s a strong technical argument for the selling today after support layers broke in Thursday’s session, creating a snowball effect to the downside. It seems likely given the size of the move this week and the volumes traded that we’re witnessing a liquidation event for a good portion of the speculative longs that have built up so far in 2019.
So, where to from here? We are nearing some new layers of technical support that helped hold up prices last winter, so it would not be surprising to see the selling end – or at least take a break – right around current levels. Then again, if we are witnessing another mass liquidation of speculative funds, those sell-offs tend to overshoot, which could mean we see another $5 taken out of crude and 20 cents or more taken out of products in June.
DOE Week 22 - 2019 Report
Energy Markets Survive Heavy Wave Of Selling
The back and forth continues for energy markets after surviving another heavy wave of selling Wednesday, as traders react to the weekly inventory reports and a slew of minor supply disruptions across the midcontinent due to storms.
The API reported a draw in crude oil stocks of 5.3 million barrels, and a drop in distillates of 2.1 million barrels, while gasoline stocks increased by 2.7 million barrels. The overnight price reaction seems to match that report with WTI trying to hold onto gains, while RBOB futures try to drag the complex lower. The DOE/EIA’s report is due out at 10am central today.
More pipeline, refinery and terminal issues are popping up around the US due to the rash of severe storms that continue to sweep across the country. Wednesday the Explorer pipeline reported plans to shut part of its line near St. Louis due to flooding, while numerous terminals in the Midwest were said to be either running out of products, or forced to close directly or indirectly due to the storms. In some cases, power losses are to blame, while in others there are suggestions that the disruptions on crude pipelines and takeaway capacity from barges is forcing refineries from IL to LA to cut runs.
Interesting timing: A new note from the EIA this morning details the race to build new oil pipeline capacity in the Gulf Coast and Midwestern regions.
Interest rates took credit for much of the pessimism Thursday that had both equity and energy prices selling off sharply early in the day. The 10 year treasury yield dropped to its lowest level in nearly 2 years, while the treasury yield curves continued to get steeper. Bulls will shrug off the yield curve warning – suggesting that metric has predicted 7 of the last 3 recessions – while bears see this as a clear sign that investors are taking money off the table and buying up treasuries in a flight to safety.
Meanwhile, the US economy continues to keep chugging along with the 2nd look at Q1 GDP readings holding steady north of 3% this morning, which seems to have given both equities and energy futures a small boost off their overnight lows.
Reports that the US was blaming Iranian mines for the sabotage on 4 tankers in the Gulf of Oman earlier in May may have stirred markets up briefly during Wednesday’s afternoon bounce, but it appears the market is largely shrugging off that news as both sides seem to have limited their saber rattling in recent days.
Strong Wave Of Selling Has Wiped Out Gains
So much for that bounce. A strong wave of selling has wiped out the gains of the past few trading sessions, and put most energy contracts on the cusp of fresh multi-month lows and potentially a more severe drop in the coming days.
The latest perceived escalation in the US/China trade war (rumors of rare earth metal tariffs) is getting much of the blame for the sell-off in equities and energy markets that started Tuesday afternoon and carried through the overnight session.
Both ULSD and RBOB futures are currently just a few ticks away from their May lows, and threatening another 10 cent drop in short order should this short-term chart support fail to hold.
Ethanol prices were spiking Tuesday, along with corn futures as the brutal stretch of spring weather continued across the Midwest – further delaying planting that’s already weeks behind schedule in several states. RIN values have not followed suit as the recent run-up should not impact blending operations with current ethanol inventory levels remaining ample for blending, and there’s no change in sight on the RFS.
That same rough weather continues to disrupt crude and refined product flows on a more limited scale, with a few crude pipelines around the Cushing OK hub reducing rates, which was helping WTI outpace Brent in the past few sessions, but now seems to be acting as those closures may prevent more oil from leaving that it will delay deliveries to the hub.
In addition to the problems with crude flow, Holly’s refinery in Tulsa also remains closed as a precaution as floodwaters come perilously close to the plant – and nearby terminals – while the CVR refinery in Wynnewood is reported to be restarting units that were shuttered due to storms last week.
The weekly inventory reports are delayed due to Memorial Day, the API will be out this afternoon and the EIA/DOE report will be out tomorrow at 10am central.
Gasoline And Diesel Contracts Trying To Lead Energy Complex Higher
Gasoline and diesel contracts are trying to lead the rest of the energy complex higher to start the first full day of trading of this holiday-shortened week. The follow through after Friday’s bounce has taken back about 40% of the losses we saw in the past week.
The early strength in refined products makes it seem like there may have been a refinery hiccup over the long weekend, although so far no reports of issues are coming to light. The Midwest continues to see basis values rally, with Group 3 UNL trading 20 cents higher than a week ago after storms knocked at least 2 refineries in Oklahoma offline last week. Products could be finding some more strength from reports that several European refineries have been forced to reduce their run rates due to the ongoing saga of contaminated crude coming out of Russia.
Speaking of refiners, an article over the weekend noted how the global shortage of heavy crudes is hampering margins for many refiners this year, while a WSJ report this morning shows that expectations for an earnings boost at year end due to the IMO spec change remain high.
Baker Hughes reported a net decrease of 5 oil rigs working in the US last week, with the Permian basin declining by 3 rigs, while the DJ Niobrara declined by 2.
Money managers were reducing their net-long holdings in most energy contracts before the big selling started last week, with WTI seeing a 4th straight weekly decline, while Brent had its 2nd, although none of the changes were large enough to suggest any sort of mass exodus was underway. Given the resilience in prices since Thursday’s collapse, it seems that the large funds have weathered another storm.
The EIA this morning takes a look at the importance of energy trade between the US & Canada, with our neighbors to the north accounting for nearly half of all US oil imports.
Biggest 1-Day Selloff Of The Year
Oil and refined products had their biggest 1-day selloff of the year so far Thursday as fear over demand slowing both domestically and globally seemed to put supply concerns from the Middle East on the back burner. The sell-off has daily, weekly and monthly charts all favoring lower prices, even with a modest recovery rally underway this morning. Unless there is a dramatic rally next week, it looks like oil prices will have their first monthly loss of the year, with charts favoring a test of $54 for WTI and $65 for Brent over the coming weeks, with another 10-15 cents of downside for refined products.
A WSJ article this morning points out how remarkable it is that we’ve had attacks on ships near the strait of Hormuz, the largest oil pipeline in Saudi Arabia, Iran and Venezuelan production is collapsing and Russia’s exports have dropped due to contamination issues, and yet prices are still falling to multi-month lows.
We will get to see the latest Commitment of Traders reports this afternoon, but that data is compiled as of Tuesday’s close of business, so we won’t get a chance to see if Thursday’s sell-off was driven by money managers heading for the exits until next Friday’s report.
Lost in the 8 cent futures losses, Midwest gasoline differentials spiked by about a nickel in both the Group 3 and Chicago hubs after HollyFrontier shut its Tulsa refinery due to expected flooding, and a segment of a Chicago-area pipeline was forced to shut for repairs.
An EIA note takes a look at gasoline prices leading up to Memorial day, which is the unofficial start of driving season in the US. The agency is predicting that retail prices will continue climbing over the next few months, which means this piece was probably written before this week’s heavy selling. That prediction also seems to contradict the chart below that shows retail gasoline prices often peak for the year right around this time.
NOAA’s 2019 Atlantic hurricane forecast gives a 40% chance of a “near normal” season, a 30% chance of an above normal season, and a 30% chance it will be below normal. That seems like a uniquely scientific way of saying they have no idea what’s going to happen.