Market Talk - 2019 september
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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.