Market Talk - 2020 february
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"Get-Out" Trading Goes For A Clean Sweep
The “Get Out” trading is going for a clean sweep this week with equity and energy markets both trading in the red for another day. At this point, it looks like this will be the biggest weekly sell-off since the financial crisis in 2008 with just about anything besides U.S. Treasuries, gold and RINs being thrown out the window as many around the world continue to panic over the potential fallout from the coronavirus.
Of course everyone wants to know how much lower can we go from here? For perspective, during crisis of 2008, we saw WTI drop from $147 in July to $32 in December. RBOB went from $3.63 to $.78 and ULSD dropped from $4.15 to $1.19 during that same stretch, making this latest panic sell-off look minor in comparison.
It’s hard to say if we will see anything close to that again (keep in mind we started from values half as high as they were then) but there certainly could be much more selling to come as long as fear is driving the bus. The next natural stopping points I see on the charts are the $42 range for WTI and $1.24 for RBOB (lows from Dec 2018) $1.35 for ULSD (low from summer of 2017).
It’s expiration day for March RBOB and ULSD futures, and with the increased volatility we’ve seen lately, don’t be surprised to see some wild swings as those contracts go off the board this afternoon. Most cash markets around the country have already transitioned to pricing off of the April contracts, so those swings (if they happen) should not impact rack pricing tonight.
Week 8 - US DOE Inventory Recap
Melt-Down Continues With Coronavirus Concerns
The melt-down continues as concerns about the potential impacts of the coronavirus continue to spread much faster than the virus itself, and markets around the world are experiencing a huge flight to “safety” that’s forcing many risk assets like stocks and energy commodities sharply lower.
If current prices hold, this would be the third consecutive seven cent loss for RBOB futures, which has happened only a few times in the history of the contract, and now marks a 40 cent drop from January’s high trade. ULSD futures are unimpressed by the action in RBOB as they’ve now dropped more than 66 cents since January 8.
As is often the case during mass-liquidation events, fundamentals were largely ignored, with some bullish figures in the DOE’s weekly inventory report only able to sustain a brief price rally before the selling took over once again. Despite concerns that the coronavirus will be the end of diesel demand as we know it, U.S. diesel stocks declined for a seventh straight week, and remain well below their five-year average, while the weekly demand estimate surged to the top end of its seasonal range.
Gasoline stocks saw a similar decline, while demand ticked higher for a second week, but of course none of that matters when the world is more concerned that the virus will prevent people from driving cars.
About the only two things not selling off: RINs and West Coast basis values. RINs got another boost following reports that the White House was agreeing to limit further small-refinery exemptions from the RFS, which propelled D6 ethanol values to two year highs.
West Coast cash markets were bid aggressively following the fire at Marathon’s LA-area refinery, and other units being forced to shut while damage was assessed. Overnight there were reports of a different refinery blip in the region, which could continue to push those basis values higher.
Glimmer Of Hope As Panic Selling Continues
The panic selling continues for a fourth straight day in energy futures, with WTI trading down to a 13 month low overnight, and ULSD reaching its lowest level since July 2017. There is a glimmer of hope for the bulls this morning however as U.S. equity markets are pointing higher to start the day, following their worst two-day selloff in years.
No surprise, concerns about the spread of the Coronavirus, and its impact on the economy – most notably fuel demand – are getting credit for the wave of selling. Demand for jet fuel has been particularly hard hit as flight cancellations spread from China to Europe, adding further drag on distillates in general. Chinese refiners are forced to either cut back on production, or find a new home for their barrels abroad, leading to an increase in product exports. The big question over the next few weeks is if the demand curtailments induced by travel restrictions will spread faster than the virus, or if the fears of demand contraction are worse than reality.
The runaway rally in RBOB spreads finally stalled out Tuesday after reports that Exxon’s Baton Rouge refinery was restarting several units that had been shut down since a fire two weeks ago. Even though futures are sharply lower again this morning, don’t be surprised to see some West Coast cash prices move higher today after Marathon’s LA-area refinery suffered a large explosion and fire overnight.
The API report showed minimal changes in petroleum inventories last week. The industry group was reported to show a build in crude stocks of 1.3 million barrels, while gasoline stocks grew by 74,000 barrels and distillates drew by 706,000 barrels. The DOE’s weekly report is due out at its normal time this morning.
Cooler Heads Prevail In Tuesday's Trading
Cooler heads are prevailing so far in Tuesday’s trading, following a Monday panic that saw the DJIA have its third worst day on record, U.S. Treasuries come within a few ticks of all time low yields, and energy prices fall back towards their lows for the year.
RBOB futures continued to show their relative strength during the sell-off, ending the day with just a fraction of the losses witnessed in crude and diesel thanks in large part to the runaway rally in the March/April spread. Several refinery issues – Bayway and Baton Rouge most notable – seem to be underpinning the strength in prompt pricing, daring physical players to try and bring in a winter barrel before the summer RVP change-over to capitalize on the unusual strength in winter gasoline prices.
The EIA published a new look at U.S. crude oil imports this morning, noting how the complexity of U.S. refineries makes it important to continue importing heavy crude grades to maximize profitability, in spite of record domestic oil production.
The Dallas FED’s Permian Basin Economic indicators report showed that hiring in the country’s most prolific oil patch stagnated last year – consistent with the drop in rig count we’ve been seeing – but wages and total crude output continue to climb in spite of the activity slowdown. The report also suggests that the recent price collapse has the area near the tipping point of another bust.
Virus Concerns Knock Global Equity And Energy Markets Lower
Fear has taken hold of financial markets again with new virus concerns outside of China knocking global equity and energy markets sharply lower to start the week. Safe havens like U.S. treasuries and gold are reaching multi-year highs, while most other risk assets are seeing heavy losses. Refined products are off nearly 10 cents from Thursday’s high trade, snapping the upward trend lines that had formed in the past two weeks, and threatening a test of the February lows.
Money managers had mixed reactions last week, reducing net length in WTI and Brent crude oil contracts to multi-month lows, but increasing bets on higher RBOB prices for a second straight week, and reducing the net-short position in ULSD. Based on the selling we saw to end last week, and start this one, we could see another large liquidation in this week’s report.
Baker Hughes reported one new oil rig put to work in the U.S. last week, with the total rig count holding steady so far for the year.
Saudi Arabia is reportedly considering breaking the OPEC/Russia alliance and making a new output cut to limit the damage to oil prices.