Market Talk - 2020 april
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Are The Worst Demand Days Behind Us?
Energy prices are seeing a strong rally for a second day following some positive data points from the weekly inventory reports that suggest that the worst demand days are behind us.
The DOE’s weekly report showed a second weekly increase in domestic gasoline demand, and a tick higher in refinery runs as inventory builds appear manageable.
While refiners seem to be up to the storage challenge, and are now increasing run rates as demand ticks higher, crude oil stocks are now within striking distance of all-time highs, suggesting we’ll have to see a larger drop in domestic production in the coming weeks. Based on industry data, it seems as though the actual drop in crude oil production may be much larger than the DOE’s estimates have shown thus far.
Today is the last trading day for May RBOB and ULSD. The May RBOB contract hit its highest level of the month this morning, setting up an important technical test. If RBOB can hold above the $0.77 range, the charts show an open path back north of $1 in May, but if they fail, this recent optimism will look fickle.
It’s a busy week for Q1 earnings releases, offering a glimpse into the pain felt by oil producers and refiners. The major themes are large losses driven by inventory write downs, based on end-of-March valuations, while operating incomes are expected to get worse in the coming quarter as the Corona shock-wave didn’t hit until the back half of the first quarter.
Week 17 - US DOE Inventory Recap
Energy And Equity Prices See Strong Gains In Early Trading
It’s a Risk On Wednesday as energy and equity prices are both seeing strong gains in early trading with optimism for life after Coronavirus taking some hold.
The API estimated that U.S. gasoline stocks dropped by 1.1 million barrels last week, while crude oil built by just under 10 million barrels and diesel stocks increased by 4.5 million barrels. The DOE’s weekly report is due out at its regular time.
The drop in gasoline stocks is the latest in a series of signs over the past week that domestic gasoline consumption is picking up. While demand remains far from where it usually is this time of year, it's a positive change that helps alleviate storage concerns for now. Gasoline cash markets are also reflecting this optimism with continued buying across several regions this week, pushing differentials up by 40 cents or more in some markets since bottoming out earlier in April.
May futures for RBOB and HO expire tomorrow, and are already seeing much lighter volumes than normal, so don’t be surprised to see some wild swings as those contracts go off the board. The super-contango across energy contracts means that June RBOB should open up near the $0.77 range that held resistance for several days earlier this month. This should provide a good near-term test of the staying power of this recent rally.
The FOMC is wrapping up a two day policy meeting today, and will be making an announcement this afternoon. With the FED already pulling out all the stops, including buying up more than $2.5 trillion worth of various assets and slashing interest rates to essentially zero, no one seems to be betting on an interest rate change from this meeting. In fact, according to the CME’s Fedwatch tool, traders aren’t expecting any change in interest rates for at least a year.
Economic Shutdown Aims At New Part Of Oil Barrel
It’s a mixed bag for energy prices to start Tuesday’s trading as the economic shutdown takes aim at a new part of the oil barrel this week. What was a crude oil demand story in February, became a gasoline story in March, only to become a crude and diesel story in the back half of April.
Exports (or rather a lack of) seem to be the new cloud hanging over diesel prices, as U.S. refiners that became diesel suppliers to the world now struggle to find a home for those barrels. The Pemex force majeure debate continues to weigh heavily on futures and cash prices, with some U.S. spot markets dropping to 50 cents/gallon for ULSD, while futures reached a new 18-year low overnight.
Gasoline futures and cash markets are faring much better this week, as it appears driving demand may have reached a bottom, and refinery cut backs are starting to balance the supply/demand equation.
Another consequence of the May WTI shockwave: Liquidity in May refined products contracts, which expire Thursday, is already drying up with June seeing nearly 10x the May contract volume already this morning. Usually that disparity in volume is reserved for the last day or of the month, but may become the norm as traders are apparently afraid of becoming the next one stuck to sell a negative number.
Speaking of expiring contracts, more index funds are announcing that they’ll be moving positions further out along the forward curve, just as the U.S. oil fund was faced to do in order to avoid extinction. The announcement by S&P Global is getting early credit for the big drop in June WTI this morning.
The Dallas FED’s Manufacturing Survey gave another data point on how quickly things went from bad to worse, with several readings far exceeding the previous record low readings set in 2008. The survey did include supplemental questions to businesses that had applied for new SBA programs, with over half of those respondents suggesting their business would return to normal levels in six months or less once restrictions are lifted.
Not a good time for a reminder: The EIA this morning published a note highlighting U.S. energy production for 2019 exceeds domestic consumption for the first time in over 60 years. Unfortunately, this fact has become painfully clear for any producers in 2020, and isn’t a point to celebrate as it was just a few months ago. Petroleum continues to be the largest source of energy, while natural gas is the fastest growing, rapidly replacing coal in the energy stream.
Energy Futures Struggle To Find Price Floor
Energy futures are struggling to find a price floor as concerns over where to store supply in the short term outweighs global equity markets, cheering signs of gradual reopening.
June WTI is trading below $13, down more than 24 percent on the day, but that seems somewhat pedestrian compared to what we saw a week ago when the June contract traded as low as $6.50 in the wake of May’s epic meltdown. In the latest sign of the demand for tankage, Energy Transfer is now reportedly looking to idle two Texas pipelines to use the lines for temporary storage space.
Reports that Pemex was declaring force majeure on fuel import contracts seems to have driven much of the heavy selling in both time and basis spreads for distillates Friday. Those reports were later refuted later in the day, and since then we’re seeing ULSD try to lead the rest of the complex higher. As we saw in last week’s DOE report where a heavy drop in exports drove a large inventory build in distillates, this story could have major implications for U.S. refiners on both the Gulf and West coasts.
Baker Hughes reported that 60 more oil rigs were taken offline in the U.S. last week, 37 of which were in the Permian basin. At this pace, the total U.S. rig count, which has dropped by 305 rigs in just six weeks, is only one to two weeks away from breaking the low set in 2016.
Money managers increased their net long holdings in both Brent and WTI last week, although it’s worth noting that Brent did not see new longs joining in, just shorts liquidating what were likely to be very profitable positions. WTI did see new length added by both the money manager and other reportable category after “can I store crude in my swimming pool?” became a trending topic.
Growing long positions in ULSD and Gasoil Contracts among the “swap dealer” trader category shows the rapidly increasing interest by distillate consumers to lock in at these historically low prices.
A Week That Set Records
The recovery rally in energy futures ran out of steam Thursday as RBOB saw an early 10 cent rally wiped out in afternoon trading, while crude and ULSD futures saw similar but less substantial pullbacks.
The lifespan of the market influence behind a presidential tweet continues to shrink after the latest bit of saber rattling between the U.S. and Iran failed to hold prices up for even a day. It’s hard to believe just over three months ago, military strikes between the two countries had many fearful of a supply shortage that would drive oil prices north of $100.
This week will go on record as the most volatile ever in 37 years of the WTI futures contract, while also marking the only time that contract traded in negative territory. The repercussions of those price swings are still being sorted out, with new reports suggesting that international retail investors playing in complex structured products may have been left holding the bag. After all the drama this week, the June WTI contract is now down just one dollar/barrel from where it settled a week ago.
While refined products are starting Friday’s action with a whimper, and are on pace to end the week with substantial losses, there are some signs of optimism in strengthening cash markets, and various indications that domestic demand may have found a floor. In other words, for many producers of petroleum products, things may not yet be getting better, but at least they’ve stopped getting worse - for now.