News & Views
Another Red Day For Energy Futures
It’s another red day for energy futures as global economic concerns are winning the daily tug-of-war for price direction as they have in 8 out of the last 10 trading sessions.
A flurry of conflicting headlines Friday about Iran, Yemen and Saudi Arabia, had prices bouncing back and forth, but ultimately pessimism over demand seems to have outweighed rumors of the next supply disruption for the time being.
The exception to that rule is the West Coast where gasoline prices continue to diverge from the rest of the country, with LA spot values reaching a $1.10/gallon premium to RBOB futures, while San Francisco spots hit $1.20/gallon over. Strange as it may seem, this could be the most notable impact of the Saudi attacks, as tankers rush to replace Asian demand, making imports to resupply the US West coast more scarce.
Ethanol prices were also rallying last week as severe weather across the Midwest threatened to make a bad year for many farmers even worse. The USDA’s crop progress report is due out this morning and will give the latest indication on how the rain-delayed season is progressing.
6 more oil rigs were taken off-line last week according to Baker Hughes weekly rig count. A WSJ article Sunday suggests that the US Shale boom is coming to an end as lower rig counts coincide with a drop off in per-well production.
Money managers remain skeptical on oil prices, cutting back slightly on their net long positions in Brent and WTI last week, while making modest increases to their long bets in refined products.
Sell-Off Continues In Energy Futures
The sell-off continues in energy futures after a 1 day respite, as oil prices now trade within $1/barrel of the levels we saw before the attack on Saudi Arabia 2 weeks ago. Overnight losses for refined products were bouncing between 1-2 cents overnight, but another wave of selling began around 7:20 that took those losses to 4 cents before prices found a temporary floor.
It’s not yet clear what caused that latest sell-off, as equities are pointing to a higher open, and no new headlines seem to be taking the blame. It could just be that a bullish position holder finally threw in the towel after a brutal week of selling.
West Coast gasoline markets continue to stand out this week, as October pipeline trading kicked off in style, wiping out the 20 cents of backwardation from September trading Thursday, keeping prompt values some 80-90 cents above other regional markets. A lack of imports and low production from West Coast refiners have both been cited, along with the inability to source product from other states due to California’s boutique fuel grades.
Good news on the storm front. While Hurricane Lorenzo has strengthened into a category 4 hurricane as it heads north through the Atlantic, it poses no threat to land and Tropical Storm Karen is falling apart and is forecast to dissipate before approaching the US next week.
Oil Prices Continue To Drift Lower
Oil prices continue to drift lower this morning as the supply-risk premium has been largely erased from futures over the past week. RBOB gasoline futures had been resisting oil’s pull until the past few minutes as they’ve given up their overnight gains, and joined the rest of the complex in the red.
While futures have been trending lower, the real action this week continues to be in spot gasoline markets on the West Coast, as a large draw in PADD 5 gasoline stocks seemed to encourage the run-away train effect in California spot markets on Wednesday. LA CARBOB ended the day around 95 cents over October futures, while San Francisco was hovering around a 90 cent premium. Those differentials put spot prices on the west coast nearly $1/gallon higher than those on the Gulf and East coast. Those prices will begin their return to earth today as traders shift to October pipeline timing, with the newly prompt cycles trading some 20 cents below current values, but the region remains susceptible to new price spikes until imports start arriving with several refinery issues still lingering in the region.
Other highlights from the DOE’s weekly report include US Crude production climbing back to tie its all-time record at 12.5 million barrels/day, while refinery runs continued their seasonal decline. Gasoline stocks beyond the West Coast remain ample, while distillate inventories are getting tight – particularly in the Lower Atlantic states (PADD 1C).
Tropical Storm Karen continues to meander its way through the Atlantic, and is weakening as it moves, which is good news for the islands that have been battered so far this year. There is still a chance that the storm could head West towards the US Coast line next week, although the models are very uncertain on a path or whether it will have a chance to gain back some of its lost intensity.
US DOE Weekly Inventory Recap
Click here to download a PDF of the US DOE Weekly Inventory Recap.
Surprise Build in Crude Oil Inventories
A surprise build in crude oil inventories as reported by the American Petroleum Institute weighed on energy prices yesterday afternoon. The Institute is estimating a 1.4 million barrel build in crude stocks last week along with a build in gasoline and draw in diesel of +1.9 million barrels and -2.2 million barrels respectively. Despite diesel’s drawdown, the complex is selling off this morning losing 1.5%-2% across the board.
A trio of tropical systems, all in different stages of hurricane progression, are churning in the Atlantic basin. Post-hurricane tropical storm Jerry is expected to stay out to sea and hit Bermuda later tonight while Hurricane Lorenzo is expected to upgrade into a major hurricane by Thursday out in no-man’s-land in the Mid-Atlantic. Tropical storm Karen seems to be the system to watch as it’s forecasted to head north and hook west towards an already battered Bahamas. Another system has popped up in the southern Gulf of Mexico but odds are low (10%) of it organizing in the next 5 days.
Markets seem to be taking a risk-off approach in light of dual headlines sparking concerns of global political and economic turmoil:
The European Manufacturing PMI, the index used to quantify general sentiment in manufacturing and service sectors of the economy, has reached an 83-month low, the lowest level in nearly seven years.
The Democrats of US Congress have formally launched a presidential impeachment inquiry. While an impeachment seems unlikely, the process itself could impede any progress on a resolution to the US-China trade war.
The EIA’s weekly inventory report is due out at 9:30am CDT. A contrary draw down in crude stocks could help stem off further selling but for now the market seems content fading lower this morning amid bearish sentiment.
Energy Futures Starting In The Red Today
Energy futures are starting the day in the red, still stuck in the unknown between the Middle East supply concerns, and global demand concerns both of which are playing out on center stage at the UN this week.
While the Saudi attacks no doubt left their mark on energy prices, which are still some 5-6% higher for prompt values than they were prior, the forward curve charts below show that over the next 3 years, the change in prices has been minor. For WTI and Brent, forward prices are still below where they were a month ago suggesting this market is still more concerned with demand growth flattening than it is with a disruption of supply.
While futures may have had a muted reaction to the Saudi Supply threat, spot prices on the West Coast have been spiking once again as a new rash of refinery issues crops up. LA Spot gasoline basis values surged to 60 cents over the NYMEX in Monday’s session, while Bay-Area diffs reached 75 cents over, compared to differentials around a penny along the Gulf Coast.
The IEA is celebrating the formation of a “3% club” at the UN assembly this week. The a group of 15 countries that are committing – with words – to accelerate progress towards energy efficiency, marked by a 3% annual improvement in energy intensity.
Meanwhile, ExxonMobil’s annual Outlook for Energy report suggests that improvements in energy technology are already creating cleaner and more efficient transportation, and predicts that trend will accelerate in the coming decade.
Jerry, Karen and Lorenzo are all churning through the Atlantic, while a 4th system is threatening to develop off the coast of the Yucatan. At this point, only Karen appears to stand a chance of threatening the US coast line, although those odds have diminished since yesterday as the latest models favor a shift to the east into open water, rather than West towards the US.
Energy Markets Start The Week Conflicted
Energy markets are having a hard time making up their mind to start the week as overnight gains of $1 for crude and 2-3 cents for refined products turned to early morning losses across the board. Middle-East supply tensions and global demand fears continue to be the leading culprits in the daily tug-of-war on prices, and the charts are offering little in the way of clarify as to what might come next. The EIA published a note this morning highlighting the impacts this event are having on global prices.
There are conflicting reports on how long it will take to bring that damaged Saudi oil infrastructure back online – Kingdom officials continue to insist the repairs will be done in weeks, while outsiders suggest it may take much longer - leaving market participants to guess what the real impact will be to global supply.
Iran has reportedly released the British oil tanker it seized back in July, which the market is taking as a sign of easing tensions ahead of UN meetings this week. The British Prime Minister meanwhile has joined several other nations placing blame on Iran for the attacks on Saudi oil assets last weekend, just in case anyone was worried that peace might break out.
TS Karen formed over the weekend and will head north over Puerto Rico this week. After that there’s plenty of uncertainty, but a chance that the storm could turn west and head towards Florida or other parts of the South Eastern US coast next week. Tropical Depression 13 also formed over the weekend and will need to be monitored as it begins its long trek across the Atlantic.
Although trading volumes hit all-time highs in several energy futures contracts during Monday’s huge price spike, money managers made little change in their overall net positions, and a slight decline in Brent’s net length suggest some speculators saw this as an opportune time to take some profits. Swap Dealers saw modest declines in their positions during the week, suggesting that industry participants used the rally as an opportunity to add to their forward hedge positions.
Baker Hughes reported a drop of 14 oil rigs operating in the US last week, bringing the total count to a fresh 2 year low. If prices can hang onto the gains set last week, it’s possible we could see the rig count bottom out in this current area, although those decisions will be made with a much longer time horizon – and take longer to implement – so don’t expect an immediate change.
Quiet Start To End A Wild Week
It’s a quiet start to end a wild week for financial markets around the globe, with oil prices starting the day with modest gains, while refined products are essentially flat on the day after trading higher overnight.
The debates over the Saudi’s ability to restore its oil production, and what they – and the US – might do in retaliation seem to have reached a temporary stalemate causing the lack of prices movement this morning with no new headlines to push the action. Saudi officials continue to claim that their oil production will be fully back online by the end of September, although plenty of doubts from outsiders on their ability to do so.
Although refined product prices look to end the week some 12-15 cents higher, from a technical perspective, the failure this week for prices to break above their May high could be seen as a bearish signal on the long term charts. We’ll need to see prices settle lower to end September to even begin confirming that theory, but at this point, the technical outlook is starting to turn negative with bearish seasonal demand patterns likely to add to the negative sentiment soon.
While most eyes have been focused on the FOMC’s monetary policy, and how the NY FED is handling a bit of panic in the overnight funding market, the Dallas FED released its report on energy indicators this week, noting how employment in the industry continues to decline despite production and exports continuing to climb.
The Beaumont area experienced rainfall on par with Hurricane Harvey from Tropical Storm Imelda this week, and news that the weather was causing refinery issues helped futures to rally in Thursday’s session, although gulf coast basis values seemed to shrug off the news. In addition to the Exxon Beaumont facility, there were numerous other reports of issues at various chemical plants in the area. The good news was none of the other major petroleum refineries seem to have been affected. The bad news is – according to the Texas Commission on Environmental Quality - the Jed Clampett production facility operated by Oxy USA reported an emissions event that will last through this afternoon. There are no updates on how Ellie May is doing.
Forecasts for Hurricane Jerry continue to shift to the North and East, which is good news for the US Coast that’s now well out of the threat cone, but bad news for Bermuda which looks like it will take its 2nd direct hit in a week. Two other tropical systems in the Atlantic are still given low odds of developing by the NHC.
Wild Week For Energy Markets
It’s been a wild week for energy markets, and a 5 cent rally to start Thursday’s action is keeping the volatility in full force as a flurry of interesting headlines are stirring markets all over the globe.
Reports that the Saudis are relying on oil imports to meet their customers’ demands were getting credit for the early buying, as those stories suggest the kingdom’s boasts about restoring production may have been more hat than cattle.
Just in the past few minutes reports are circling that Exxon may be forced to shut its Beaumont TX refinery – the 8th largest plant in the US – due to flooding caused by Tropical Storm Imelda. That news took the early morning gains from 3 cents to more than a nickel for refined products. With reports of 2 feet of rain in the Beaumont area, flooding is a serious concern for 3 other large refineries, with that immediate area accounting for 9% of the total US refining capacity. Officially there is no confirmation (yet) of any shutdowns, and no filings of emissions have been made to the TCEQ.
As we begin to move past the peak of hurricane season, there are 3 named storms and 3 more potential systems currently in the Atlantic basin. TS Jerry is expected to become a hurricane tomorrow, but most models continue to keep it out to sea along with Humberto. The other 3 systems are all given low odds of development.
The FOMC did announce a 2nd straight interest rate cut Wednesday, but equities reacted negatively to the news. Reports that the fed was forced to inject funds into the overnight repurchase market for a 2nd day (the first time since the financial crisis they’ve had to do this) has investors on edge despite the accommodative monetary policy as free flows of credit are a lynchpin to the economy.
The most notable data point from the DOE report Wednesday was a decline of 788mb/day of refinery output as fall maintenance appears to be in full swing. There were numerous reports this year that fall maintenance would be slower than normal as refiners moved work up earlier this year when margins were bad, and in anticipation of IMO changes at year end, so the big drop – while consistent seasonally – seemed to catch some off-guard.
While most eyes have been on oil markets this week, RIN values have hit multi-month highs on reports that the White House may have brokered a deal to reallocate some of the gallons waived for small refiners under the RFS.
Energy Futures Give Back Half Of Monday Gains
Energy futures gave back roughly half of their Monday gains (which were the largest daily increases in more than 10 years) during Tuesday’s session, after Saudi Arabian officials said that half of its output had already been restored, and that the remainder would be back online by the end of the month. In addition, there were reports that the Saudi’s were planning on ramping up production to 12 million barrels/day by November, compared to a self-restricted 9.8 million barrels/day prior to the attacks, which could mean the Kingdom is once again ready to use its oil weapon to teach Iran a lesson.
Whether or not the claims of increasing production to new record highs are even physically possible is a matter that will be hotly debated in the coming weeks. That said, if economic war-far is chosen over conventional methods of retaliation for the weekend attacks, that certainly could be bearish for prices, as the Saudi’s production restraint was seen as the main driver holding up crude oil prices in an oversupplied environment the past few years.
That negative sentiment continued overnight with another wave of selling across the barrel, aided by inventory increases, but perhaps tempered by uncertainty surrounding the FED.
The API was said to show builds across the board, with distillates up 2 million barrels on the weeks, while gasoline stocks increased by 1.6 million barrels and crude oil inventories grew by 592,000 barrels. The DOE’s weekly report is due out at 9:30 central.
FED coin-flip: The CME’s Fedwatch tool shows futures are pricing in close to equal odds of a 25 point rate cut vs no action today, compared to a month ago when another cut was given 100% odds of happening.
Tropical Storm Imelda formed and made landfall near the heart of refining country Tuesday. That storm is bringing flooding to the Houston area, but at this point there are no reports of refinery shutdowns or other supply disruptions. Fortunately it seems we’ve dodged another tropical bullet as that system just didn’t have enough time over open water to develop into a more severe threat. No time to rest however as Tropical Storm Jerry also has formed over the Atlantic and is expected to reach hurricane strength Friday. Most models continue to favor a north-east turn next week that will keep this system at sea, but there is still a potential threat for Florida and the SE that we’ll need to keep an eye on.
Energy Prices Taking A Breather
Energy prices are taking a breather following their largest single day rally in more than a decade as traders try and figure out the long-term implications of the weekend attacks in Saudi Arabia. While yesterday’s price action was certainly dramatic, if you take a look at the monthly chart below, that move loses some of its luster as it is does not represent any sort of long-term change in trend.
The Saudi’s new oil minister is scheduled to give a press conference later today that could be pivotal for prices action since that will give market watchers their first glimpse into the Kingdom’s plan to return output to normal levels, and may give more detail on the damage assessment.
We saw plenty of refiners pretend to have terminal maintenance or other allocation issues yesterday to limit the amount of lifting their customers could do ahead of the 20 cent price increases for refined products – a move that was common during the 2008 price run-up but had fallen out of favor (for numerous reasons) in recent years. The good news for those refiners is that they’ve been importing only around 500mb/day of Saudi oil – a 40 year low – limiting any direct impact on their US operations. It will be Asian refiners that will feel the most direct impact from this disruption, although the Saudi’s various emergency reserves throughout the Pacific basin may limit that impact.
US refiners are also fortunate to have dodged several bullets already this Hurricane season, as Barry, Dorian and Humberto have all largely spared their operations. We are at the peak of the season, and there are 2 more potential systems that need to be watched. The first is given a 90% chance of becoming a named storm this week – but most models keep it out to sea. The 2nd is only given a 30% chance of developing, but still might dump a foot of rain on the heart of US refining operations in the Houston area. Its proximity to the coast may spare those refiners from further damage.
Drone Attacks on Saudi Arabian Oil Infrastructure Increases Prices
When news broke Saturday of coordinated drone attacks on Saudi Arabian oil infrastructure that shuttered nearly half of the country’s production, the question wasn’t if prices would move higher, it was whether or not the increases would be record-breaking.
Brent crude led the initial surge when trading resumed Sunday night, trading up nearly $12/barrel in the early moments, a 19.5% increase – marking the largest single day rally in the history of that contract. RBOB and ULSD futures saw similar price spikes in the opening seconds of overnight trading as trading algorithms raced humans to buy, with both contracts briefly trading up more than 20 cents before cutting those gains in half later in the evening.
Prices have rallied again off their evening lows after the US accused Iran of launching both missiles and drones in Saturday’s attack, a new revelation that combined with strong words from the president suggests a US response may become inevitable.
There are many more questions that need to be answered before we’ll see where prices will end up. Perhaps the 2 most important this week are how quickly the Saudi’s can bring production online – this is where their previous production cuts may prove valuable as it could provide a cushion, depending on the logistics puzzle of returning those barrels to the market – and what the response will be both from the Saudi’s and the US.
From a technical perspective, the May highs around $73 for Brent and $64 for WTI look to be the natural resistance layers after the early overnight rally stalled out in that vicinity. If Saudi output can’t come back online, or if a shooting war with Iran breaks out, those resistance levels may prove to be only a speed bump. At this point however, the global overhang of supply is acting as a buffer. Just think of what an attack like this would have done 5 years ago when prices were still north of $100/barrel.
Some hedge funds are likely patting themselves on the backs this morning as the money-manager category saw healthy increases in the net-long positions held in energy contracts last week – prior to the Saudi story making most other energy news temporarily irrelevant.
Oil Prices are Set to Book a Loss for the Week
Energy futures are mixed this morning as prices search for direction going into the weekend. October RBOB is up slightly at 20 points per gallon while ULSD is down roughly the same amount. WTI and Brent benchmarks are both up between 10 and 20 cents per barrel to start the day.
Oil prices are set to book a loss for the week, driven by the IEA’s warning on excess oil supply and OPEC’s inaction on adjusting their output levels. While something as dramatic as a full collapse is unlikely, how the cartel proceeds in a market forecasted to be oversupplied with slowing demand growth will be closely watched going into 2020.
In what looks like a repeat of Hurricane Dorian, Tropical Depression Nine is currently forecasted to make landfall in Florida as a tropical storm sometime this weekend and then ride the coastline up to the Carolinas. While it is only anticipated to reach storm status, sustained rainfall and storm surges still pose a threat to the coastal cities.
Earlier this week crude oil futures looked to be on the verge of a technical breakout barring some bearish headlines rocking the boat. Over the course of the past couple weeks, the American benchmark managed to break through multiple resistance levels that left the path to $60 wide open starting with Monday’s trading. The slew of bearish headlines dropped those prices right back through the technical levels previously toppled and left the road ahead rather bumpy for buyers.
Energy Complex Trading Lower on OPEC news today
The energy complex is trading lower today on news that OPEC and its allies have no immediate plans of cutting any further production. Furthermore the cartel cut its 2019 petroleum demand growth estimates while the International Energy Agency warns of a global oil surplus going into 2020. What seems like bearish news all around has pushed WTI futures below $55, wiping out the 4-day rally that started late last week.
The Department of Energy’s weekly inventory report published yesterday showed crude oil stockpiles below their 5-year average for the first time since March. Low imports, high exports, slowing output, and climbing refinery runs all contributed to the drop but the bullish sentiment of yesterday’s publication was overshadowed by dismal demand estimates as futures sold off.
Tropical Disturbance 1 made its way further northwest yesterday and forecasts now have the system pointed at southern Florida with an 80% chance of cyclonic development over the next week. The latest estimated path comes as good news for refiners as the warm waters in the Gulf of Mexico are known to accelerate development dramatically; Florida could end up taking a bullet for the other coastal states.
Energy Futures Weaken
After starting yesterday on a strong positive note, energy futures weakened into Tuesday’s settlement on news that the Trump administration has asked for John Bolton’s resignation, a move that is expected to be beneficial for tensions in the Middle East. The former National Security Advisor had a reputation of taking a hard stance on Iran and its oil exports. WTI futures ended the day down about 50 cents per barrel while prompt month gas and diesel contracts held on in positive territory, each showing about half a cent in gains.
Buying quickly resumed later that afternoon after the American Petroleum Institute published its weekly inventory report, showing a 7.2 million barrel draw in US crude oil inventories, bringing the net change in stockpile levels for 2019 around -26 million barrels, according to the Institute. Prices are up slightly this morning, somewhat confident the drawdown in stocks is accurate, but traders will likely wait until confirmation of the draw’s magnitude by the DOE’s report, due out at 9:30AM CDT this morning.
The EIA published their monthly Short Term Energy Outlook yesterday with a somewhat neutral forecast of things to come in 2019 and 2020. While fuel consumption growth is projected to weaken for the rest of 2019, they anticipate it will bounce back in 2020 due to global economic expansion. The Administration also anticipates US oil production growth to slow between this year and next, citing relatively flat oil prices as the main driver. It will be interesting to see if renewed efforts by OPEC to avoid a further global surplus of oil will have a tangible effect on prices and likewise US production levels.
Tropical Disturbance 1 which is currently just Southeast of the Bahamas now has a 40-60% chance of cyclonic development over the next 5 days as it moves into the Gulf of Mexico. While prompt attention will likely be paid to the closest threat to the American mainland, two more areas to watch are creeping West across the Atlantic as well, making for a very busy September.
Energy Complex Moving Higher For 5th Straight Day
The energy complex is moving higher for a 5th straight day, with most futures contracts reaching their highest levels in a month. Optimism for more production cuts thanks to comments from the new Saudi energy minister are getting credit for the early rally for a 2nd straight day.
As prices push through the high-trade levels from August, there is a technical window opening that suggests we could see additional upside for crude and products that should push WTI back north of $60 and ULSD above $2, although as we learned throughout the summer, we’re only one tweet away from concerns over global economic activity raining on an energy parade.
The steady march higher over the past week has provided counter-seasonal strength to gasoline prices across much of the country, as the driving season is now in our rear-view mirror, and the transition to less-stringent winter-grade specifications at the pipeline & terminal levels is underway. A few regional markets – primarily in the Western half of the country - are seeing a squeeze on any remaining summer-grade barrels, while many East Coast markets are seeing the opposite effect as inventories remain ample.
The odds are still low (30% or less) for each of the 3 storm systems moving across the central Atlantic to develop over the next 5 days. The most likely threat is currently known as disturbance 2, and while development is not likely (according to the National Hurricane Center) this week, it could get into the Gulf of Mexico over the weekend, where it’s more likely to strengthen and become a threat to refineries along the Gulf Coast, not to mention Alabama.
The EIA highlighted a study that Drilled by Uncompleted wells don’t seem to fare any worse when they begin to produce than a well that’s drilled and fracked in short order. This study suggests that total US production may continue to climb for months, if not years, thanks to a huge backlog of those DUC wells, even though active drilling rig counts have been declining steadily this year.
Oil & Diesel Prices Attempting Modest Rally
Oil & diesel prices are attempting a modest rally to start the week, on the back of a few bullish headlines over the weekend, but plenty of headwinds remain that might challenge any attempt to sustain a move higher.
There were a variety of headlines from the Middle East over the weekend: Most notably, Saudi Arabia replaced its energy minister with a royal family member, who promptly pledged his commitment to the current output cuts to balance global supplies.
Iran meanwhile announced its long-delayed cargo of oil had finally been delivered, and suggested that they were preparing to release the British tanker they’ve been holding, although details on both stories are scarce. The British tanker release would seem bearish for prices as it temporarily relieves tensions around the world’s busiest oil shipping lanes, while the oil delivery news could be bullish if the Iranians found a new way to get their product to Syria. Bloomberg had an interesting read over the weekend on the challenges of tracking Iranian oil.
We’re in the peak of hurricane season, and after 2 weeks of destruction from Dorian, 3 more potential systems are being watched for development in the Atlantic, in addition to Tropical Storm Gabrielle which poses no threat to the US. The good news is the first 2 systems are only given 20% chances of development by the NHC. The third, which is currently a wave moving over Africa, seems more likely to become a threat sometime next week.
A Reuters article is highlighting the challenges the White House is facing balancing Big Ag and Big Oil interests, which seems to have RIN values rallying off of their lows for the year. There’s still no word on what exactly the EPA or the White House will announce, but there is an expectation that some concession will be made to appease the farm lobby that could be bullish for ethanol, biodiesel and/or their associated RINs.
Baker Hughes reported a decrease of 4 active oil rigs last week, marking a drop of 32 rigs in the past 3 weeks, putting the total US count at 738, its lowest level in nearly 2 years.
Speculators remain cautious on energy prices, with money managers net-long holdings in WTI and Brent remaining below their 5 year averages, although Brent did see a modest increase last week. Those large funds look to be even more critical of refined products as ULSD saw a drop back to a net-short position (betting on lower prices) in the managed money category last week, while RBOB saw another large drop in net-length as the 2019 driving season ended.
Strong Rally In Energy Prices Runs Out Of Steam
A strong 2-day rally in energy prices ran out of steam Thursday afternoon – despite some bullish headline numbers from the DOE – and prices have slipped back into the red overnight.
There doesn't appear to be any smoking-gun headlines to explain the sudden reversal, so it seems that there simply wasn’t enough momentum by the bulls to push prices through the top end of their recent trading range, leaving us stuck in a choppy sideways pattern for a while longer.
The DOE weekly report showed inventory declines across the board, and total petroleum demand holding at the top end of its seasonal range, although the weekly estimate for gasoline consumption dropped sharply. Crude oil production pulled back slightly from its all-time high set last week, and refinery runs ticked lower due to a handful of unplanned maintenance events, and as the fall gasoline RVP transition moves into full swing.
Reports are circulating that the EPA is working to revoke California’s ability to regulate automobile emissions beyond federal standards. Until a final ruling is made the details of this plan – and which of California’s numerous rules it may affect – are scarce, and it seems likely that any ruling may take years of court battles to enforce.
Pipelines for everyone! It’s not just crude oil and refined products that are seeing new pipeline options relieve supply bottlenecks in the Permian basin. The EIA is reporting that W. Texas natural gas prices – which had dipped below zero on occasion in recent years – are strengthening due to new takeaway capacity.
Energy Prices Up Slightly
Energy prices are up slightly this morning after a heavy wave of buying yesterday. A weaker dollar pushed energy prices some 4% higher Wednesday, making up for Tuesday’s losses and then some. RBOB prompt month futures were last seen just over $1.53 per gallon while HO looks like it may make a run at $1.90; crude oil jumped over $56 dollars per barrel, tempting monthly highs.
The Tanker Saga™ had a very interesting development yesterday: it wasn’t a Nigerian prince but a top ranking official in the US State Department that contacted the captain of the oil tanker heading to Syria, offering millions of dollars in cash to hand over the carrier. The rather unorthodox tactic is Washington’s latest bid in an effort to exert maximum pressure on Iran over its breach of the 2015 nuclear agreement which seems to have spiraled even more out of control.
Hurricane Dorian has left Florida and Georgia in its rearview as it progresses northward. Current forecasts has the storm potentially making landfall on the North Carolina coast, but hurricane warnings have nonetheless been issued comprehensively from South Carolina up through parts of Virginia.
Tropical storm Gabrielle still looks to be a non event for the American mainland: the 7th named storm of the season is projected to continue heading northwest over the weekend and fizzle out somewhere in the north Atlantic.
The API published a surprise small crude oil inventory build yesterday afternoon, tempering some of the day’s earlier gains. Eyes now turn to the DOE for confirmation of the Institute’s report, and futures seem content to hover above unchanged leading up to the publication, scheduled for release at 10am CDT.
Trade Disputes Weighed On Energy Prices
Continued trade disputes between the world’s two largest economic countries weighed on energy prices in a big way Tuesday. RBOB futures lead the way posting over 3.5% losses for the day while WTI and HO trailed behind with ~2% and ~1.5% losses respectively. The downward pressure was aided by reports that OPEC might be losing its grip on member country’s production levels as the cartel’s production reached a 4-month high in August.
The persistence of lower oil prices is starting to take its toll on Saudi Arabia’s economy. Economic growth has stalled for the Kingdom along with its intentionally slowed oil production, a supply adjustment made in a bid for higher oil prices. The global surplus in oil and ongoing economic uncertainty has kept prices low, which could end up decreasing overall investor activity both out of and into Saudi Arabia. Maintained pressure to issue the IPO for its state-run oil company could force Aramco to enter the public market during a time of unfavorable oil prices, which could make things even worse for the Saudi economy.
Hurricane Dorian has made its way halfway up Florida’s east coast without making landfall. Current forecasts have the category 2 storm following the Georgia coastline up to the Carolinas through the end of the week. While the chances of the storm coming aground on the American mainland are still uncertain, flash flooding along Dorian’s path still poses a threat as the storm progresses.
As if it knew we’d flipped our calendars, the Atlantic basin is suddenly bustling with tropical activity. It looks like September will keep its title of most tropically active month with 5 distinct areas of development to watch over the 5 days.
A couple new tropical storm have formed overnight but pose little threat to the States for the foreseeable future. As of now TS Ferdinand will likely dissipate over the next couple days south of the border and TS Gabrielle is set to end its course somewhere in the middle of the Atlantic.
Both the API’s and the EIA’s weekly energy snapshots have been delayed a day due to Labor day. The API is due out this afternoon and the EIA will publish their report tomorrow morning.
Hurricane Dorian Stalled Over The Bahamas
Hurricane Dorian has stalled over the Bahamas this morning and its sustained winds have weakened to ‘only’ 120mph. As of now it doesn’t look like the eye of the storm, around which the strongest and most destructive winds are, will make landfall on the American mainland. However, evacuation notices have been issues that will affect nearly 3 million people on the east coast, mainly in Florida, Georgia, and the Carolinas. Impact on energy prices remain localized as of now with refined product terminals shuttering in preparation for storm surges and potential flash flooding from sustained rainfall.
Energy prices are down sharply this morning on news that Beijing and Washington are back at it with the trade debacle. For the first time in the trade war, China has targeted US crude oil exports, adding a 5% tariff to the product and sending futures lower over 2.5%. The latest move comes in response to the White House fulfilling its intention to issue an additional 15% tariff on various Chinese imports.
Managed money cut their long positions in energy futures last month, bringing the net position in ULSD close to flat for the first time since last May.
Baker Hughes reported a decline in total US oil production rigs for last week. The decrease, mainly seen in rig closures in the Permian basin, has sent this year’s total operating count lower than that of 2017.