News & Views
A Little Something For Everyone On The Thanksgiving Table
There’s a little something for everyone this morning with RBOB gasoline futures trading lower, ULSD futures moving higher, while WTI is unchanged so far on the day. Prices continue to hover near 2-month highs, but so far seem to lack the conviction needed to push through that resistance.
The API was said to report large builds of 3.6 million barrels of crude oil inventories and 4.3 million barrels of gasoline last week, while distillate stocks declined by 665k barrels. Those data points contributed to a late afternoon pull back for RBOB and WTI, and help explain the relative strength of ULSD this morning. The DOE’s weekly report is due out at its normal time.
This is known as the busiest travel day of the year in the US, and based on the large proportion of people not logged into instant messaging systems this morning, it seems like the trading activity will be sparse this morning, and possibly non-existent this afternoon.
Even though there are 4 calendar days left in the month, and the NYMEX contracts will be open for trading in abbreviated sessions Thursday and Friday, due to spot markets not being assessed either day, this will become the effective last day of November trading for most physical players.
Speaking of winding down, take a look at the LA basis charts below that show the CA spot markets seem to be calming after a bout of extreme volatility this fall.
The EIA got into the holiday spirit this morning, publishing a look at gasoline prices nationwide during Thanksgiving week, and noting the similarities currently to the past 2 years.
Is It "Trade Optimism," Or Is It "Turkey" Driving Energy Futures
Energy futures are moving higher to start Tuesday’s session, with trade optimism once again taking credit for the early buying, with most contracts hovering near the top of their fall trading range heading into the busiest travel day of the year for the US.
Based on the back and forth action of the past 2 months, we need to see ULSD futures break above $2, and RBOB get above $1.70 before getting too excited over this latest round of buying. That said, with many traders already thinking more about travel and turkey, there could be an outsized move if that technical break happens with light volume this week.
The forward curve charts below show that through the ups and downs over the past 2 months, the forward curves for the big 4 petroleum contracts have not made much of a change, another data point that we’re in a wait and see market for the time being.
A Reuters report Monday provided the most damning evidence yet of Iranian involvement in the September attacks on Saudi oil assets. While this article is stoking fears of further violence in the region, it’s worth noting with the overnight headlines below as examples, Reuters articles are a dime a dozen these days and seem to carry less weight than they once did.
Misleading headlines: Which one is it? See Top Stories Image Below
Small Contract Losses and Gains Start Thanksgiving Week 2019
It’s a mixed start to the week for energy contracts, with WTI and RBOB showing small losses, while Brent and ULSD cling to small gains. Prices remain within striking distance of the high-end of the November trading range, but so far seem unwilling to make the next move with uncertainty over trade talks and the upcoming OPEC meeting both looming.
Money managers made very small additions to their net long holdings of Brent, ULSD and RBOB contracts as of last Tuesday (when the COT data is compiled) and made a slight reduction in their long bets on WTI.
Baker Hughes reported a 5th straight weekly decline in the US oil rig count, to a total of 671 active rigs. Drilling activity according to this measure is approaching a 3 year low, with 206 rigs taken out of service so far in 2019.
Here’s a decent (if biased) read on the state of the renewable fuel standard, that also helps to partially explain why biodiesel RINs are holding near multi-year highs while ethanol RINs are holding near multi-year lows (chart below).
Thanksgiving Holiday Trading Schedule: The CME’s NYMEX contracts will trade in abbreviated sessions both Thursday and Friday this week, with settlements published only for Friday. The major spot market publications will be closed both days so expect the NYMEX volumes to be low most rack prices to carry through the long weekend, although most suppliers will reserve the right to change prices should something exciting happen.
WTI and Brent Reach 2 Month Highs
Just 2 days after prices were reaching their lows for November and threatening a technical breakdown, WTI and Brent both reached 2 month highs and are on the cusp of a technical breakout to the upside. As has been the case, whether the market is up or down, US/China trade talks and the November OPEC meeting are getting credit for the move, even though nothing has actually changed in either case.
Refined products have had similar moves to oil, rallying around 10 cents in two days, but unlike crude they’ve not yet broken through the top end of their November trading range.
This is often the start of the winter doldrums for refiners, and with crack spreads already falling sharply over the past months for many US plants, it seems that hope for the new IMO rules would prop up spreads have not yet materialized. As has been the case for most of the past year, there still seem to be more questions than answers on the new marine diesel specs, so don’t be surprised to see more volatility in crack spreads over the next few months.
One noteworthy difference from last year is the relative lack of volatility in both energy and equity markets compared to 2018. It may not seem like it’s low volatility after a back and forth week like we’ve just experienced, but looking at the volatility chart below, the daily movements in both asset classes are a fraction of what they were this time last year at the mid-point of the great Q4 sell-off that didn’t end until reaching a crescendo on Christmas eve. For comparison purposes, WTI dropped from $65 to $49 last November, making this week’s move seem a bit insignificant.
Modest Bounce Turns Into Serious Rally
A modest bounce in the early hours of Wednesday’s trading turned into a serious rally late morning as a combination of technical and fundamental factors combined to give energy prices their biggest daily rally of the month so far. The healthy bounce off of support for oil contracts keeps prices in their sideways trend, which suggests we’re likely to see more back and forth action at least until the OPEC meeting at the end of the month.
While the timing of the rally had many wondering where the bullish data points were in a DOE report that wasn’t so bullish, it also coincided with reports that Vladimir Putin was signaling further cooperation with OPEC to keep the global market in balance.
US oil production held at 12.8 million barrels/day for a 2nd straight week, marking a 1 million barrel/day increase from a year ago (which was an all-time record at the time) and a 3 million barrel/day increase from 2 years ago. For perspective, 3 million barrels/day is more than what Venezuela was producing prior to its economic collapse, so this steady growth in US output helps explain why global supply threats just aren’t as threatening as they used to be.
Want to see why west coast gasoline prices have collapsed in the past week? Take a look at the PADD 5 gasoline chart below that shows regional stocks have gone from below their 5 year seasonal range to above it in just 1 week.
Week 46 - US DOE Inventory Recap
Buyers Stepped In
Just as oil prices found themselves on the cusp of a technical breakdown after 2 days of heavy selling, buyers stepped in to keep prices within their trading range. Middle east tensions are getting credit in the headlines for the modest Wednesday bounce, while some bearish inventory data seems to be keeping the recovery rally from picking up too much steam.
Iran is dealing with widespread and violent protests after the government raised domestic fuel prices and announced a fuel rationing program. In addition, the US sent a carrier group through the strait of Hormuz Tuesday, adding to the regional tension that some feel will hit a boiling point in the not-too-distant future.
The API was said to show a build of just under 6 million barrels in US crude oil inventories last week, along with a 3.3 million barrel increase in gasoline stocks. Distillate inventories declined by 2.2 million barrels, which helps explain the early relative strength in ULSD futures. The DOE’s weekly status report is due out at its regular time this morning.
The return to earth for California’s wholesale gasoline prices is nearly complete after a wild fall season. LA spot CARBOB basis diffs are still around 8-10 cents over RBOB futures, but are a far cry from the 60+ cent premiums just 2 weeks ago, or the dollar plus premiums from September. While the basis collapse should bring welcome news for consumers, there have been more reports of refinery issues this week that could keep the regional volatility elevated into the winter.
The early selling to start the week put both WTI and Brent futures on the cusp of breaking their 7-week upward trend, which suggests we could see another 5-7% more downside near term if that support breaks in the next few days. If that support holds however, it looks like we’re due for another test of the top end of the range next week.
A technical breakdown would be more bad news for US shale oil producers, already struggling through an extended slump. This downturn is having ripple effects across other sectors from sand production to machine manufacturing.
Energy Futures Selling Off For 2nd Straight Day
Energy futures are selling off for a 2nd straight day, pulling oil prices back from 2-month highs reached Friday and now setting up a test of the low end of November’s trading range. The choppy, range-bound action suggests traders are taking a wait and see approach with the US China trade discussions ongoing and the OPEC meeting less than 2 weeks away.
It’s easy to forget that the Atlantic hurricane season runs through November following a quiet couple of weeks, but the NHC is now giving an 80% chance of development to a system over the next 2 days. Early forecasts keep this system out over open water, but we’ll need to watch this week to make sure there isn’t a shift to the west.
The EIA published its annual report on US carbon emissions last week. The report showed that after 3 straight years of declines, and a 10 year average rate of -1.7%, emissions from the energy industry increased in 2018, largely due to a colder winter and warmer summer increasing demands on home heating and cooling. That report will keep the pressure up on agencies like the IEA, which has come under fire for not doing enough to stem the tide of climate change.
Speaking of pressure, 23 US states have joined a lawsuit against the EPA to try and maintain the right to set emission standards for vehicles separately from Federal requirements. While this lawsuit may have little impact on supply or demand near term, it does make it clear that climate-related issues will stay in the forefront of conversation in the coming year.
Early Wave of Selling
There’s an early wave of selling to start the week, as energy markets got over the optimism of record high US stock prices set Friday, and seem to be focusing in on a perceived overhang of supply looming in the coming year.
The upcoming OPEC meeting is getting plenty of attention – as it often does this time of year – and the Saudi Aramco IPO is another big story getting plenty of press, but with the early selling being led by refined products and not oil, it seems like the early weakness is not an OPEC-driven event.
Money managers increased their net-long positions (betting on higher prices) in both WTI and Brent crude oil contracts for a 3rd consecutive week. Those same large speculative traders reduced their net length in refined products however, showing that the big fund money is still apprehensive about fuel prices heading into 2020.
Speaking of apprehension: Baker Hughes reported 10 more oil rigs were taken off line last week, bringing the total US oil rig count to its lowest level since March 2017. As has been the case for the past year, the Permian basin led the move lower. The drop in mining activity & jobs was noted last week in the Dallas Fed’s employment forecast for Texas, with the states leading index declining for several months so far this year. The good news is that the Dallas Fed still predicts job growth holding around 2% overall this year.
The IEA published its monthly oil market report Friday, and noted expectations for a ramp up in refinery runs in 2020, along with further increases in oil output, while holding demand estimates steady, all of which should help keep downward pressure on energy prices, and help with the IMO diesel spec change that’s now just 6 weeks away.
Energy Prices Are Sinking Lower
Energy prices are sinking lower this morning after the International Energy Agency released its monthly market report estimating a rise in non-OPEC production growth. The US, Brazil, and Norway look to be the culprits of the impending 2020 supply surge, boosting growth from 1.8 to 2.2 million barrels per day. Gasoline and diesel futures are down around .3% while crude attempts to hang on unchanged.
A lackluster inventory report reversed Thursday’s early morning gains with only HO prices remaining in the black. Gasoline and crude oil stock builds of around 2 million barrels and a draw of 2.5 million barrels in diesel inventories were outshined by the drop in crude imports. An oil spill causing extended downtime on the Keystone pipeline, which resulted in claims of force majeure from its owner TC Energy last week, sent US crude imports to a two-decade low.
The recent plunge in crude imports along with strong exports will likely lead to a confirmation of the EIA’s prediction that the US will be a net exporter of petroleum for the first time since the Administration has started keeping records in 1949.
Week 45 - US DOE Inventory Recap
Energy Complex Up Modestly
The energy complex is up modestly this morning on news that OPEC is estimating a drop in the surplus of oil supplies in 2020, which may render further production cuts unnecessary. While claims originating from the cartel are usually best seen before believed, a wandering market is easier to guide higher rather than lower. Official word on the subject is expected at their next meeting on December 5th and 6th.
That was also the case yesterday as we saw a reversal of early morning selling after Chair of the Federal Reserve Jerome Powell delivered his rosy outlook on the economic state of the nation to Congress. Equity markets edged out all-time highs yesterday leaving some to wonder ‘what ever happened to the recession?’
The American Petroleum Institute posted a surprise draw in crude oil inventories for the week ending 11/8, showing the nation’s stockpiles over half a million barrels lower. If the DOE confirms a drawdown at 10am CST, that could combine with further bullish soundbites from Powell’s second day of testifying to give today more buying pressure than we’ve seen all week.
Prices Are Drifting Lower
Prices are drifting lower again this morning, with HO futures leading the way for a second day in a row, trading down over 2 cents representing just over 1% loss so far in pre-session trading. American gasoline and crude oil benchmarks are trailing behind trading lower by a muted .2%-.4% so far this morning.
A smorgasbord of data reports are due out today with the Consumer Price Index being the one to watch for broad market movement potential. Energy markets will have to wait until tomorrow for its weekly trendsetter, delayed a day by Veterans Day.
For some that may have skipped class that day and have been too afraid to ask since, the EIA has published a concise explanation of how the Renewable Fuel Standard works. If nothing else, the note is a good reminder of what its sundry acronyms stand.
New concerns over a potential US-China trade agreement along with uncertainty surrounding further OPEC production cuts seem to be taking the blame for the slight selling pressure felt this morning. Although doubtful, it will be interesting to see if the White House’s latest heavy handed negotiation tactic will be effective despite data supporting a shift in positions of strength.
Another Quiet Start
It’s another quiet start as energy and equity markets around the globe seem to be waiting on a speech from the US President to see what might come next in the ongoing trade saga. Several US equity indices are hovering near their all-time highs, while oil prices are holding near 6 week highs, waiting for their next catalyst.
While the correlation between equities and oil prices have strengthened in recent weeks, diesel prices are trading lower for a 5th straight session, breaking away from the herd, despite tight supplies and expectations for strong early-season heating demand.
Volatility for both equity and energy contracts remains near the low end of their historic ranges, suggesting there’s still a bit of apathy in these markets, that is viewed by some as a calm before the storm.
Speaking of storms, so far there don’t appear to be any reports of new refinery problems caused by the winter storm sweeping the nation, but with record-setting cold sweeping through refinery country Monday afternoon, it seems likely there will be some complications.
While ethanol RINs continue to languish under the weight of excess inventory and ample production, Biodiesel RINs reached an 18 month high in Monday’s trading. Biodiesel producers face a challenging environment with Congress appearing more focused on little things like impeachment, and less on big issues like a retroactive blender’s tax credit for a product that already has a federal mandate, with many expecting more plants to shutter as a result.
Futures Contracts Trading Around 1%
It’s a quietly soft start to the week for energy futures with most futures contracts trading down around 1%, with a couple of bearish headlines from OPEC members getting credit for the early wave of selling.
Iran reported a new oil discovery of more than 50 billion barrels over the weekend, which would increase the country’s proven reserves by 1/3. Then again, this is the same country that said they weren’t trying to build a nuclear weapon, and didn’t attack Saudi Oil infrastructure, or numerous oil tankers in the Gulf of Oman, so any claims seem to be met with a healthy dose of skepticism.
Mid-continent basis values for diesel have spiked 8 cents or more in the past week as the Keystone pipeline shutdown threatens to force refinery cuts if it’s not solved soon, and as the drawn out harvest season saw inventories in the Group 3 market nearly cut in half over the past 2 months. As the chart below shows, that spike in values is likely to bring a new surge of barrels up from the gulf coast, just in time for demand to dry up once again.
Money managers are getting more optimistic, increasing net length in the big 4 petroleum contracts last week. A large increase in RBOB length – just in time for the seasonal demand slowdown – seems to be the most notable move, as speculative bets on higher gasoline prices are now above their 5 year range.
Baker Hughes reported another weekly decline in oil rigs. The total rig count is now approaching a 3 year low – even as US production holds steady at an all-time high as the network appears to be refocusing and consolidating to deal with a challenging cash flow environment.
This is data deluge week as the EIA, IEA and OPEC will all release their monthly reports. Most of the agencies have been taking a bearish stance lately, thanks to supply resilience and demand pessimism, so it will be worth watching to see if the new optimism in the speculative crowd shows up in the data.
Energy Complex Trading Higher Today
The energy complex is trading higher today after news that Saudi Arabia is deadest on forcing compliance on target production levels among its fellow OPEC members. With 500k barrels per day of production to trim, the Kingdom’s request coincides with the upcoming IPO of its state-owned oil giant Saudi Aramco.
The EIA report published yesterday morning showed an 8 million barrel build in crude national crude oil supplies for the week ending 11/1. Drawdowns were seen in both gasoline and diesel stockpiles of 2.8 million and 600k barrels respectively. RBOB futures took the largest hit yesterday, despite having the most bullish headline value on the inventory report, and suffered a 3% haircut on the day. Crude and Heating Oil futures both traded 1.6% lower.
Crude futures are back to testing a significant resistance level this morning after backing off yesterday with the bearish report: ~$57.25 looks to be the level to best after which the door looks open to $60. For now it seems news on further trade agreement progress or confirmation of overseas supply cuts will be the main driver of buying pressure in the short-term.
Week 44 - US DOE Inventory Recap
Prices Floating Downward
Prices are floating downward for the energy complex this morning after the American Petroleum Institute published a 4.26 million barrel build in crude oil stocks last week. According to the Institute, nationwide gasoline and diesel inventories both drew ~4 million barrels and ~1.5 million barrels, respectively, but both products’ futures contracts seem content selling off so far today.
Special attention will likely be paid to the update on the status of the nation’s oil and products inventory given the amount uncertainty surrounding US-China relations, OPEC’s supply situation going into 2020, and a sudden reemergence of Venezuelan oil headlines.
The Department of Energy’s weekly inventory report is due out today at 9:30 CST which will likely set the tone for the rest of the week’s trading activity. With futures taking a breather this morning, it will be interesting to see if a bearish number from the DOE will throw a wrench in energy’s 1+ month rally.
Equities Hit Record Highs
Equities hit record highs yesterday on the back on international trade optimism and are poised to open in the green again today. The buying pressure is spilling over into energy prices amid warnings from OPEC, published in its World Oil Outlook (WOO), that non-OPEC supply will outpace global demand for the next five years. Echoing rig count and production data, the cartel cites US drilling efficiency as the main driver for the supply-demand disparity.
Just in time for the EIA to publish a note about the recent decline in West Coast gasoline prices, the LA spot market has returned to levels last seen in mid-October, about 70 cents higher than other US markets. The latest installment of the West Coast energy infrastructure saga has PBF’s Torrance refinery unexpectedly flaring after a power outage yesterday morning.
The prompt month WTI crude oil futures contract is challenging its technically significant 200-day moving average this morning: $57.19 is the level it will be trying to settle above today. A breakout on the charts could lead the benchmark up to the $60 range in short order. The December RBOB on the other hand has sundry resistance levels it will need to best before making a significant run: $1.71 looks to be the price to beat before the path forward opens up.
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Strong Gains in Energy Prices
Optimism surrounding a possible resolution to the US-China trade war is taking credit for the strong gains in energy prices this morning. There is still some doubt as to whether or not anything gets done by the December 15th deadline but traders seem to be walking on the sunny side of the street this morning, citing increased pressure on OPEC from Iran to make additional supply cuts as a reason to keep October’s rally still going.
Baker Hughes reported another decrease in active oil production platforms in the US last week. The number of total rigs still open is down by over 180 from a year ago. While the trend in the shuttering of rigs seems like a poor indicator of the future health of US energy supply, one should note we are seeing an inverse trend on the oil output chart as it stays around all-time highs.
Managed money added to their net long positions in all 4 major energy product futures contracts last week, pushing net length in RBOB to a fresh seasonal high. WTI futures look to be setting their sights on one of the last technical resistance levels left on its daily chart this morning. $57 looks to be the level to top after which the path would be open for the American benchmark to test the $60 level.
Starting November On A Strong Note
After ending October with a thud, energy markets are starting November on a strong note with gasoline and diesel futures both pushing 2.5 cent gains in the early morning, after trading close to flat overnight.
The October Jobs report seems to have contributed to the early buying spree as a “good enough” increase of 128,000 non-farm payrolls seems to have staved off fears of a recession for another month. While both the headline and “U-6” unemployment rates ticked up from their 50 year lows reached last month, the payroll counts for August and September were revised higher by a combined 95,000 jobs, which are just more data points to fend off the pessimism that’s been an undercurrent in markets for much of the year.
Speaking of “good enough” economic signs, the Dallas FED’s Houston business cycle report shows that the oil-capital’s economy is still growing, albeit at a slowing pace. One potential bright spot for the region was highlighted in a Bloomberg report noting that several Canadian oil companies are moving more operations to the US oil hub.
After taking its annual 9-month break, prices for space to ship diesel along the Colonial pipeline have soared in recent days as the East Coast deals with tighter than normal supplies, while Gulf Coast basis values have plummeted. While both of these moves are consistent with seasonal patterns, it seems likely we could see more volatility this year than normal as numerous questions surrounding the IMO diesel spec change still need to be answered.