Market Talk - 2020 december
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Energy And Equity Markets Limp To Finish Line
Energy and equity markets are limping to the finish line with minor losses in the early going to end this long strange year. The table below highlights the dramatic swings, and very different outcomes for some of the most watched commodity, equity and currency contracts.
Today is expiration day for the January (21) ULSD and RBOB contracts so watch the February contracts for price direction today, and note that most rack prices published tonight should carry through the long weekend since markets are closed tomorrow.
It’s been a brutal year for many, and the energy industry has certainly taken its lumps. Record setting amounts of debt were subject to bankruptcy filings in the oil patch, but things have arguably been worse for refiners as crack spreads have only made minor improvements compared to the recovery in oil prices, and the industry saw the most permanent closures announced in more than 30 years as a result.
The pace and scale of demand recovery will be the big underlying story for 2021, as the world races to distribute vaccines and get people back to a more normal existence, while a new and more potent strain of COVID threatens to derail that progress. There will be plenty of theories about how the new administration in Washington will change the landscape for several industries – ours being one of the most noteworthy – but unless the Senate is flipped in the January runoff, it seems like major legal changes are unlikely in the near term.
The Crescendo of emission reduction plans is likely to continue to build in 2021 as more big oil and refining companies lay out plans to reduce their pollution levels during the long slow transition away from fossil fuels. The Dallas Fed issued a special report this week taking a look at what the industry is doing to battle climate change, and highlighting pipeline capacity as one of the keys to reducing emissions near term. Renewable diesel is becoming the poster child for a way forward for motor fuels to have a legitimate renewable option near term as ethanol and biodiesel have already pushed the limits of their usefulness. The EIA is ending the year by highlighting the progress made on the renewable front as US consumption of those products surpassed coal in 2019 for the first time in 130 years.
3 more drilling rigs were put to work last week, marking the 12th increase in 14 weeks. According to the Baker Hughes report, we started the year with 877 rigs drilling for oil on land in the US, which ended up being the highest count of the year. That number hit a record low in August at 172, before starting a slow and steady recovery over the past 3 months as prices got back to more survivable levels and operators faced hard decisions on whether to drill or risk giving up leases in some cases.
Traders Running Out The Clock On 2020
Traders are running out the clock on 2020 with energy prices hovering near their highest levels since March, but so far unwilling to make a meaningful attempt at another rally. U.S. equity markets are pointing higher again today after pulling back from record highs in Tuesday’s session, and the U.S. dollar is weaker once again, reaching its lowest level in 2.5 years as stimulus checks start rolling out and the lawmakers in Washington appear to be doing their best Oprah impression with recent updates to monetary and fiscal policy.
The API reported inventory drawdowns across the barrel last week with oil stocks down 4.8 million, diesel down 1.8 million and gasoline down 718 thousand barrels for the week. The DOE’s weekly status report is due out at its normal time. Large draws in crude inventory are common this time of year as shippers try to minimize their tax exposure based on year end holdings in Texas.
Ahead of the weekly status report, the EIA took a look back at the record setting demand drop due to COVID mitigation efforts earlier this year.
The asset shedding continues: Marathon’s midstream spinoff is selling a fractionation plant in Corpus Christi to Howard Energy as the country’s largest refiner continues to get creative in ways to bolster its cash position to survive the COVID demand crisis.
Some better news for refiners is shown in the crack spread chart below as margins have recovered over the past couple of weeks for several grades of crude, most notably Western Canadian Select. One headwind to that recovery in margins is the steady rally in RIN prices, that acts as a tax to refiners without an integrated system to blend renewables into their refined product streams.
The weaker dollar also seems to be indirectly contributing to that run-up in RIN prices as Corn and Soybean prices both reached five year highs this week, in part due to the weaker dollar/stronger commodity phenomenon adding to the cost of producing ethanol and biodiesel.
U.S. Equity Markets Rally To Record Highs
U.S. equity markets are rallying to new record highs this week, and energy markets are trying to follow them as trading winds down for this most unusual year.
The house of representatives approved an increase in stimulus checks, sending that bill to the Senate today for approval. The House also voted to override the president’s veto of the latest defense spending bill, encouraging markets that the dollar printing presses won’t be slowing down anytime soon. Extra liquidity/aka stimulus pushes down the value of the dollar, which is correlating to stronger commodity prices, a phenomenon that had gone largely dormant, but was a major force in markets for years following the 2008 financial crisis.
While the news from Washington has Wall Street in Risk On mode, the reaction so far in energy markets is relatively muted with the complex seeming to have entered a period of sideways trading after seven weeks of gains. Most technical indicators have moved into neutral territory, which should keep the action choppy but aimless until we see the range set over the past week broken. For WTI that’s a move above $49 or below $46. For RBOB gasoline that will mean a break above $1.40 or below $1.30, and for ULSD the range seems to be set from $1.42 to $1.52.
Numerous mobility tracking data sets have become popular since the start of COVID-related shutdowns and the driving-specific data points have become a decent proxy for gasoline demand. The 2 charts below show both the seasonal slowdown, and the near-halt in movement over Christmas. The second chart also shows how two major metro areas (LA and Dallas Counties) see similar trajectories, but different demand outlooks based on their stay-at-home orders, or lack thereof.
Money managers continued to increase their bets on higher gasoline and crude oil prices last week according to the CFTC’s weekly report, but cut their length in diesel contracts. The net length held by the large speculative category of traders reached their highest levels since COVID hit the U.S. In other words, hedge funds like betting on higher gasoline prices when RBOB is trading around $1.40 than they did in April when prices were trading below $.50, or at the start of November when they were sub $1.
There’s a similar bullish enthusiasm being noted in U.S. equity markets as borrowing to invest reaches new records even after many stocks are already trading at all-time highs. This type of sentiment extreme can be seen as a contrary indicator since at some point the market runs out of new money to keep pushing prices higher, and leveraged liquidation can be particularly volatile.
Energy Prices Left In Technical Limbo
After a bit of modest selling to start the overnight session, energy futures rallied following news late Sunday night that the president had signed the stimulus package he’d previously threatened to veto. Refined products were up nearly two cents for a brief time, but have since given back almost all of those gains and are trading near break-even levels.
You can see the markets fixation on stimulus in the WTI/USD correlation chart below that shows the inverse relationship between the dollar and oil prices has reached its strongest level of the past three years.
This is typically one of the quietest trading weeks of the year, with many workers around the world taking extended vacations between Christmas and New year’s. Energy prices are left in technical limbo this week, just one strong day away from breaking out to new 10-month highs, but having had their upward trend broken during last week’s sell-off. That combination of low volume and lack of direction seems to set us up for some choppy back and forth trading.
The CFTC’s Commitments of Traders report is normally released Friday afternoon, but was delayed due to Christmas and will be out later today. The ICE version of that report shows that money managers ended their streak of weekly increases to net length held in Brent crude oil contracts, mimicking the action in prices that finally saw a weekly decline after seven straight weeks of gains. Those large speculators did continue adding to their long bets in Gasoil contracts for a seventh week.
Also note the steady decline in swap dealer positions in gasoil contracts in the chart below, that suggests interest in forward hedging of diesel prices has waned since prices have normalized after the chaos witnessed in the spring.
Baker Hughes reported their weekly rig count ahead of the holiday break, showing 1 more rig was put to work in the short week, bringing the US total for active oil rigs to 264. That’s the highest level of drilling activity since the first week of May, up from a low count of 172 oil rigs in August, but still 50 rigs less than the lowest level counted during the previous 10 years.
A study from the Dallas FED details the negative impact surging COVID cases is having on job growth in the region, a phenomenon that’s no doubt playing out in other parts of the country as well, contributing to the ongoing slump in fuel demand.
Activities Wind Down Ahead Of Long Weekend
Energy futures are trying to bounce after two days of selling, but volumes are shrinking rapidly as traders wind down their activities ahead of the long weekend.
Both equity and energy markets saw a brief selloff overnight after the U.S. President refused to sign the Stimulus & Spending package passed by congress, but quickly recovered as it became clear that the votes to override a veto were probably available, and the changes requested may actually be approved.
Unless the buyers step in soon, the energy complex is going to snap the seven week-long string of gains, and break the bullish trend-lines in the process. That leaves the complex open to more technical selling, but we’ll need to see prices drop below Monday’s lows (roughly four cents below current values for RBOB and ULSD) before this move will look more like a trend reversal than just a correction.
Although many businesses are closing tomorrow for Christmas Eve, futures will still trade and have an early settlement. Argus and Platts will both be publishing spot prices Thursday, but OPIS will not. (OPIS Rack pricing will be published as normal) Most rack prices will be updated Thursday and run through the weekend. Since Christmas falls on a Friday this year, futures trading will not reopen as it normally does, giving traders a rare holiday without any electronic trading to keep an eye on.
Refining margins have recovered during the recent run-up, and the forward curve is showing better times ahead for those plants that can survive the COVID demand crisis. The billion dollar question is how long that demand recovery will take, and if margins can hold on once run rates start increasing once again. There is some good news coming from Asia, as Indian refiners cranked up run rates to their highest levels since COVID began, following similar increases from China and Japan as demand comes back online.
The API reported a build in crude oil and diesel stocks of 2.7 million and 1 million barrels respectively, while gasoline inventories had a small decrease of 224,000 barrels. The build in crude stocks surprised those that expected a draw down in inventories as we approach year end. We’ll see later this morning if the DOE report confirms that estimate.
Door Open To Extend Santa Claus Rally
Energy and equity markets survived a round of panic selling Monday, keeping the bullish trend-lines intact, and leaving the door open to an extension of the Santa Claus rally and higher prices to end the year.
The DJIA ended higher after selling off more than 400 points in the early going, and the S&P 500 bounced more than 80 points from its morning lows. Energy contracts saw similar moves with RBOB and ULSD both down almost 9 cents overnight, but climbing back to lose less than 4 cents by settlement.
There’s some modest selling in energy futures to start Tuesday’s session, which is largely being blamed on fears of new lockdowns (which is the easy target for all sell-offs lately) and liquidity is quickly drying up as we head towards Christmas. The complex was due for a correction after 7 weeks of gains, and yesterday’s lows set a good short term support level on the charts where buyers seem comfortable to step back in.
CVR energy (fka Coffeyville resources) announced board approval to proceed with a renewable diesel project at its Wynnewood, OK refinery (fka Gary Williams), which is expected to come online mid-2021. Unlike several other renewable diesel conversion projects announced earlier this year by Holly, Marathon and P66, this project does not appear to be a complete refinery conversion, just the hydrocracker. It’s unclear at this point how or if the remaining units at the plant will operate, but if they do manage to continue a hybrid renewable/traditional refining model that seems like it could be a template others would love to follow as plants deal with the worst operating conditions in nearly 40 years.
The spending bill making its way through Washington is reported to include a 5 year extension of the 9 cents/barrel Oil Spill tax, along with extensions of several cleaner energy credits for solar, wind, carbon capture and waste-to-heat projects.
Massachusetts, Connecticut and Rhode Island, along with the District of Columbia signed a Memorandum of Understanding to participate in the Transportation and Climate Initiative program Monday. The program will tax fuel suppliers via a cap and trade program and use the proceeds of that tax for investing in clean energy projects. 10 other states in the region all rejected the plan. At this point, signing the memo doesn’t change anything as each state will still have to formulate a plan, which is not laid out in the memo, and then get it signed into law before being implemented in 2023.