News & Views
A Wild January Comes To A Close
A wild January is coming to a close with energy prices clinging to small gains, and trying to avoid another wave of selling that has brought diesel prices to 17 month lows.
While equity futures are pointing lower again as the outbreak continues to grow, energy futures are clinging to small gains after new reports of violence across the MENA region remind us that there still are supply fears that could send prices higher, in addition to the demand fears that have taken over the headlines.
Fighting has resumed in Libya after cease-fire talks broke down. Roughly 750,000 barrels/day of oil exports have been taken offline as a result of this most recent flare up.
Saudi Arabia: Another attack on Aramco’s facilities was reportedly stopped last week. No impact on supplies was reported due to this latest attack.
Persian Gulf: An oil tanker caught fire west of the Strait of Hormuz. Still unclear if this was another attack like we saw last summer, or just a creative effort by the crew – who have been stuck on board for a year due to an ownership dispute – to get off the boat.
Earnings releases this week from several major oil producers and refiners shows a tough operating environment, with many reporting year on year declines in earnings, and several announcing plans to divest more assets as a result. Refiners are noting narrower crude differentials this year as a reason for lower profits, as new pipelines have eliminated the transportation bottleneck in W. Texas. For those plants that have access to Western Canadian crude, the picture is a bit brighter as those spreads have been widening again, although they’re still only half as wide as they were in 2018.
With product spreads crumbling in January, and most crude spreads not offering a bail out, it’s no wonder that we’re seeing more and more reports of elective run cuts at refiners this week.
Today’s captain obvious award: The EIA’s report that risk of oil supply disruptions can have an immediate effect on oil prices. Thanks for that.
Another Fear On/Risk Off Day
It’s another Fear On/Risk Off day for energy and equity markets after the recovery rally ran out of steam Wednesday afternoon. The weekly inventory report from the DOE seemed to matter for about five minutes yesterday, as did the FOMC announcement, and then trading seems to have refocused on the unknowns of the coronavirus.
ULSD prices are leading the move lower again, and are facing an important test on the charts as they hover around one-year lows near $1.65. The last time they traded down to this level at the end of 2018, they rallied 25 cents in under two weeks. That said, there is little other support on the charts, so if prices can break and hold below this level, there could be another 20 cents of downside in short order.
A five percent drop in refinery runs was the most notable figure from the weekly DOE report, with rates dropping in four out of five PADDs. A variety of planned and unplanned maintenance events throughout the country – foreshadowed by strengthening basis values over the past week – help explain the large drop, while discretionary cutbacks due to plunging crack spreads could also be in play. Typical seasonal patterns suggest we should see refinery rates continue to drop for another two to three weeks before starting the annual spring ramp up.
Despite the cut back in refinery throughput, gasoline inventories reached a new record high last week, with the gulf coast glut growing for another week. Inventory levels on the East and West coasts are holding near or below their five year averages for this time of year, but the gulf coast now has nearly five million barrels more inventory than we’ve ever recorded prior to 2020. That excess in the gulf could lead to stronger values for shipping, whether that be over the water or on pipelines, as PADD three suppliers will be challenged to clear that excess ahead of the spring RVP transition.
Week 4 - US DOE Inventory Recap
Sigh Of Relief Rally Extends
The sigh of relief rally is extending for a second day in energy and equity markets as more signs appear that the damage done by the coronavirus may not be as widespread as once feared.
It’s still too early to say that the we’ve seen the worst of the selling, the virus is still spreading and it seems to be nearly as contagious as the fear it produces. For energy futures, the first test will be whether or not prices can hold onto these gains and end the week higher. If not, this rally looks like just a speed bump on the road to lower prices.
The API was said to show U.S. oil inventories dropped more than four million barrels last week, while gasoline stocks increased by 3.3 million barrels, and distillates drew by a rounding error of 141,000 barrels. Once again, RBOB is a bit of a head scratcher, leading the move higher in prices this morning despite its stats looking the weakest in the latest API headlines. The DOE’s weekly report is due out at its regular time this morning.
The EIA published a look back at the biodiesel blenders tax credit, predicting that the forward reinstatement of the $1/gallon subsidy should lead to substantial increases in both domestic production and imports of bio and renewable diesels over the next two years.
The FOMC is meeting today, and the CME’s FedWatch tool shows zero expectation for a rate cut at this meeting, with a 13 percent chance of a rate increase. The forward outlook for rates has changed notably this week with traders now pricing in 40 percent odds of at least one rate cut by the summer, up from 30 percent just a week ago, as more people bet the FED will need to step in to minimize the impact of the coronavirus.
Desperation setting in: Venezuela seems to be throwing a Hail Mary, floating the idea of turning its oil industry back over to the private sector to try and save its collapsing economy.
Viral Selling Takes A Break
Viral selling is taking a break this morning as cooler heads are temporarily prevailing and equity and energy markets are managing a modest bounce after another brutal selloff on Monday.
The difference in price action today vs. the meltdown of the past few sessions doesn’t appear to be happening because anything meaningful has changed in the outbreak, but simply because people are taking a step back and paying attention to other fundamental factors besides the “what if” fears from the coronavirus.
OPEC ministers (and several banks) are suggesting that the market has overestimated the impact on oil demand from the outbreak, and noted that the cartel will be ready to act in March if needed to steady prices. Several are noting that the drop in Libyan output alone may mean that OPEC will not need to make further cuts to balance global supplies.
The treasury yield curve is threatening inversion for the first time since October, which for many is a sign of a looming recession, and to many more is a sign that the FED may step in to soothe the fears in financial markets.
While most risk assets were selling off Monday, RIN values were rallying after a federal judge ruled the EPA had overstepped its bounds in granting three small refinery waivers. There’s a chance this ruling could lead to other waivers being vacated since the EPA was only allowed to grant extensions after 2010, not new waivers. It’s unclear which other plants could be affected, or if any of the plants will be forced to meet past RIN obligations, which would have the most impact on RIN values near term.
Fear Takes Hold Of Global Markets
Fear has taken hold of global markets with equity and energy prices selling off sharply as the coronavirus outbreak accelerated over the weekend. Concerns about the impact to the global economy are far outweighing new threats to oil supply in Libya, Kazakhstan and Iraq, with energy futures reaching multi-month lows.
If you look back to the SARS outbreak in the early 2000s, oil prices dropped by 1/3 during a similar wave of panic selling, and took a year to recover those losses. With oil prices already down around 20 percent in the past three weeks, it’s not hard to imagine that prices could end up being cut by 1/3 during this contagion sell-off. A counter argument would be that SARS effected Hong Kong a major travel hub, while this virus is coming from a relatively unknown inland city which may mean less impact on demand.
ULSD futures have been the hardest hit during the past few weeks, reaching their lowest levels in a year overnight, more than 45 cents below their high trade from January 8.
Money managers were not scared off by the first wave of selling, with large speculators adding to their net long holdings in WTI, Brent and RBOB contracts last week. The COT report data is compiled as of Tuesday, so we won’t know how they weathered the larger round of selling to end the week until this Friday’s report, although given the crescendo of selling we’ve been witnessing, it seems likely the speculative funds are racing for the exit.
Baker Hughes reported an increase of three oil rigs last week, a second consecutive weekly gain after declining for most of 2019.
Worst Of The Winter Doldrums May Be Behind Us
Oil futures are trading lower for a fourth straight day, gasoline prices are down for a fifth, and ULSD for a seventh as concerns over growing supplies and shrinking demand continue to plague the market. Despite this morning’s round of selling, prices are still one to two percent above Thursday’s lows, as the DOE report helped the market find a short term bottom with a few signs that the worst of the winter doldrums may be behind us.
It’s worth noting that while fear is clearly driving the trading bus this week, the sell-off has left several short term technical indicators in oversold territory we haven’t experienced in two+ years, meaning when a recovery rally starts, it could be significant.
Refiners may be breathing a sigh of relief after yesterday’s report as the diesel demand patient that appeared have its heart stop beating for three weeks came back to life with a 33 percent increase in consumption estimated last week. While that is consistent with seasonal demand patterns, there’s always a sense that the industry has to hold its breath for a few weeks until we see the demand come back online after the holiday season.
Gasoline inventories reached a new all-time high last week, passing 260 million barrels for the first time ever. This was the same week in which gasoline stocks set a record high a year ago, and seasonally we’d expect inventories to top out in January before beginning their four month decline as we move through the various phases of the spring RVP transition.
As the inventory charts by PADD show, the glut in gasoline is primarily contained to the Gulf Coast, while PADDs, 1, 2 and 5 are holding near their five year average levels. With PADD 3 stocks far above anything we’ve ever seen before, it’s a bit surprising that USGC basis values remain stronger than a year ago, and in their normal range for January.
Speaking of basis strength, the West Coast is at it again with LA CARBOB values surging north of 30 cents/gallon over futures Thursday. Anywhere else in the country you might think a hurricane had taken out several refineries if you saw that type of price action, but it’s somewhat pedestrian for the West Coast in recent years.
Crude oil output held at its all-time high 13 million barrels for a second week, and the EIA’s projections suggest this number should continue to grow this year even though drilling activity has slowed as the huge backlog of drilled but uncompleted wells will bring more barrels to market.
Week 3 - US DOE Inventory Recap
Energy Futures Hit Multi-Month Lows
The meltdown goes on as swelling inventory levels, demand fears and perhaps more long liquidation combine to push energy futures to multi-month lows. ULSD futures are once again leading the slide, trading to their lowest levels in five months overnight.
The API was said to report more inventory builds across the board last week, with refined product inventories increasing 4.5 million barrels for gasoline and 3.5 million barrels for distillates, while U.S. oil stocks were up 1.5 million barrels. Those builds seem to be contributing to the early round of selling, and don’t seem conducive to helping crack spreads find a bottom, although RBOB futures are down the least on the day, even though gasoline inventories built the most. The DOE’s report is due out at 11 a.m. Eastern.
Speaking of which, the EIA this morning highlighted its forecasts for rapidly increasing exports of natural gas in the coming years, thanks in large part to new cross-border pipelines into Mexico.
Three Chinese cities were placed on travel lock-down leaving many to wonder just how much further this outbreak might spread, and others to wonder how they’re going to find their beach now.
While futures are getting crushed this week, basis levels in the Gulf and west coasts are showing signs of life as numerous refinery maintenance issues (both planned and unplanned) are taking place. As the chart below shows, the rally in USGC basis levels has crushed values for space on the Colonial pipeline, consistent with a typical seasonal pattern for this time of year.
Slow-Motion Meltdown Continues
The slow-motion meltdown continues for energy futures this morning as concerns about excess supply and slumping demand continue to pressure prices lower.
After selling off in nine out of the last 10 trading sessions, ULSD prices are now 30 cents lower than they were just two weeks ago, in the wake of Iran’s missile attack on U.S. troops in Iraq. Diesel futures are now approaching the $1.80 mark - a level that could prove to be pivotal for the next few months, as we’ve only seen ULSD settle below that mark a handful of times in the past two years.
That slump in diesel prices from seven month highs to four months lows in January has been bad news for refiners who were counting on strong diesel spreads – mainly due to the IMO 2020 spec change – to make their year, and instead are seeing cracks reach 18 month lows. See the chart below on a U.S. refiner ETF for a hint on how those companies’ stock prices have performed.
The IEA’s executive director was interviewed at the World Economic Forum Tuesday, and said the agency expects a one million barrel/day surplus in the front half of 2020 will keep a lid on oil prices, as it has recently in spite of unrest in Iraq, Iran and Libya.
A report from Goldman Sachs suggested the outbreak of Coronavirus could drive a 260mb/day decrease in global oil demand (roughly ¼ of 1% of the world’s total) which might drive crude prices down about $3/barrel. It’s worth noting that Jet fuel consumption is expected to be hit hardest as travel restrictions will be put in place to prevent the disease from spreading. The report did not include an estimated impact on demand for limes.
The weekly inventory reports are delayed a day due to the MLK holiday, so we’ll get a look at the API estimates later this afternoon, and the DOE’s data tomorrow morning.
Economic Fears Trump Supply Threats
Economic fears are trumping supply threats this morning as global stock markets trade lower, pulling energy prices along for the ride. Concerns that the mysterious coronavirus spreading in China could have widespread effects on the world economy are taking the blame for the selling in both asset classes. (Cue the “I thought corona virus was what I caught on spring break” jokes).
Energy contracts had lost their correlation with stocks in recent weeks as U.S. equity indices have surged to record highs, while petroleum prices are breaking down without a supply threat to prop them up. Now that economic fear seems to be taking a turn at driving the action, it seems likely we’ll see the a stronger tie in the daily price movements between asset classes.
Yet another failure to sustain a rally sparked by Middle East unrest, and the subsequent selling this morning are pushing energy futures back below their five-month-old bullish trend lines, and threatening another wave of selling if buyers don’t step up this week.
The IMF published its quarterly economic outlook Monday, making modest reductions to its global forecasts for 2020 and 2021, but noting that things are looking better than they were a few months ago, thanks to accommodative monetary policy from major central banks and a cooling in the trade wars. While the global economy is expected to grow by 3.3 percent this year, and 3.4 percent next year, the U.S. is expected to slide from 2.3 percent in 2019, to 2 percent in 2020 then to 1.7 percent in 2021.
Results of Friday’s auction for the shuttered PES refining complex are supposed to be revealed Wednesday in bankruptcy court.
Violent Protests Have Energy Futures On Edge
Violent protests in Iraq and more violence in Libya have energy futures on edge to start the week, although most U.S. cash markets will not active due to the MLK day holiday. Oil prices were up more than $1/barrel early in the overnight session, and refined products were up more than three cents, but those gains have since been cut in half, as middle eastern violence has become the boy who cried wolf for global energy supplies.
As the IEA mentioned in its January Oil Market report last week, Iraq’s oil output is looking suddenly vulnerable, and at the very least investors until tensions cool, meaning new capacity projects will be delayed.
Libya is making its way back into the headlines as the country’s oil output has been slashed due to rebels shutting down pipelines and ports, while the international community attempts to negotiate another cease-fire in the nine-year-old conflict.
Since there will not be spot market assessments published today, most rack prices are expected to hold through Tuesday as long as the (currently minor) flare up in futures doesn’t catch fire.
Money managers were split last week with WTI and ULSD contracts seeing large reductions in net length, while Brent and RBOB saw small increases.
The big reduction in WTI positions seems especially pessimistic given the lack of reaction in Brent and RBOB contracts, not to mention the phase-one trade deal is expected to mean more U.S. oil will be exported to China.
Baker Hughes reported an addition of 14 oil rigs active in the U.S. last week, a strong start compared to the steady reductions witnessed in 2019. The Permian basis accounted for six new rigs, while the other gains were spread between the Eagleford, Bakken, and the “other” group of smaller basins.
Diesel Prices Continue To Slide
Diesel prices continue their slide this morning with heating oil futures posting the only loss among the ‘big 4’ energy benchmarks. The prompt month diesel futures contract is down about 1.5 cents while gasoline, WTI and Brent futures are all up around 0.5 percent so far this morning.
This is now the seventh day of the last eight that HO has traded lower, threatening the multi-month low set back in October around $1.82. The bearish trend, started over a week ago with the lack of severity in Iran’s retaliatory attack on the U.S., has been bolstered by strong inventory levels and a muted impact from the maritime diesel spec change.
While WTI futures are up this morning, the contract is set for its second weekly decline, save some late buying later today. Although the U.S.-China trade deal has been a driving positive force for the equity and energy sectors, there are concerns that the lack of a trade war won’t necessarily mean an increase in oil demand.
Sizable Builds Send Prices Lower
Sizable builds in refined product stockpiles reported by the Department of Energy sent futures prices lower yesterday morning. The eight million barrel build in U.S. diesel inventories lead the headlining values yesterday (even with gas stocks trailing closely behind with a 6.7 million barrel build), and likewise lead prices lower with the prompt month HO contract losing 3.25 cents on the day. Gasoline and crude lagged behind the distillate contract, shaving off 1.76 cents per gallon and 42 cents per barrel respectively.
Much ado about nothing(?): The first international inventory reports since the new maritime diesel spec mandates took effect are, surprisingly, showing rapid growth of compliant fuel. While this may be good news for shipping companies and ultimately consumers, refiners are expected to enjoy less of the ample diesel margin 2019 afforded them as effects of the IMO rule change are being described as “smaller-than-expected.”
Equity indexes hit all-time highs after China and the U.S. signed phase one of their trade deal yesterday, despite assertions from the U.S. that tariffs will remain in place. Although they were cut from 15% to 7.5%, the White House has promised to keep tariffs on around $370 billion of Chinese goods until a “broad sweeping” economic agreement can be reached.
Prices this morning look about how one would expect them to given the past couple days of news: gasoline and American and European futures are trading mildly higher this morning, attempting to recover from yesterday’s sell-off, while the prompt month diesel contract falls by over 1.5 cents.
Week 2 - US DOE Inventory Recap
Energy Complex Drifts Lower
The energy complex is drifting lower this morning with gas and diesel futures down less than a penny, WTI shedding about 15 cents to start the day. Despite anticipation of the U.S. and China signing Phase 1 of their trade agreement today, which took credit for the lackluster upward price action during yesterday’s session, the American crude oil benchmark is headed lower again this morning, in line with the downward trend it started last week.
Prices seem to be in "wait-and-see" mode ahead of this morning’s inventory report which is scheduled to be released at its normal time by the Department of Energy. Last Wednesday’s inventory build across the three major products certainly didn’t hamper the sizable selloff we witnessed that day, and with the API estimating another increase in stockpiles, we might be in for something similar this morning albeit less dramatic.
The EIA published it’s Short Term Energy Outlook yesterday and is predicting slightly higher WTI prices going into 2021, with a decrease in net imports (down from 2.3 million bbls/day in 2018 to .5 million bbls/day in 2019) outpacing an anticipated increase in production. In case you find an increase in price a little tough to believe given the persistent global glut of oil, rest assured the EIA is 95% confident the prices will be somewhere between $30 and $100 through the end of 2021.
Oil Prices Fall From Seven Month Highs
Oil prices fell from seven month highs to five week lows in just five trading days as the Iranian threat to global oil supplies has subsided, even as its nuclear deal is on the brink of collapse. Both Brent and WTI prices seem to have found some near-term support at their 200 day moving averages, which seems to be encouraging a bit of bottom fishing buy buyers. We’ll need to wait and see if the early rally can be sustained to know if this move higher is the end of the January sell-off, or just a dead cat bounce.
Read why Reuters Analyst John Kemp thinks prices will hold near current levels for an extended period of time. Or, if you prefer, read why the WSJ suggests an unwind of speculative betting may drive prices lower.
Another interesting read: Why Mexico declared its oil hedging program a state secret.
Today marks the last day of what historically are the sloppiest two weeks of the year for physical markets in the U.S., and already some of the spot & rack markets with the most severe discounts are showing signs of recovery. Several planned refinery turnarounds are starting along the U.S. Gulf Coast over the next two weeks, and that maintenance activity should build through February as plants tool up for the spring.
Five Week Win-Streak Snapped
A five week win-streak for petroleum prices was snapped in the aftermath of Iran’s missile debacle, leaving the futures complex on the cusp of breaking the bullish trendlines in place since September.
Money managers were looking confident in higher prices as of Tuesday, January 7, when the latest Commitments of Traders data was compiled, with the large speculative category adding to long positions in WTI, Brent and RBOB. The whipsaw action Tuesday night into Wednesday no doubt sent a shock wave through those bettors, although we won’t get to see the change in positions until this Friday’s report.
RBOB looks the most precarious with managed funds holding more than 100,000 contracts of net length, the only time they have ever had this large of a bet on higher prices in January. Whether or not those funds start rushing for the exits may well be a driving factor in the price action for the balance of the month.
Baker Hughes reported 11 more oil rigs were taken offline last week, bringing the total U.S. count to 659 active rigs, the lowest level since March 2017.
While drilling activity slowed dramatically in 2019, the EIA published a new study this morning showing that proven reserves of U.S. oil and natural gas surged to new record highs and with plenty of new pipeline capacity available now to bring that to market, those reserves look like the world’s supply safety valve for years to come.
Iran's Unspoken Influence On Energy Futures
This time a week ago, when the world was digesting news that the U.S. had killed an Iranian general with an airstrike, it would probably have been hard to find someone willing to bet that oil prices would be $5 lower, refined products would drop 15 cents/gallon, and stocks would reach new record highs in the next 7 days. Of course that’s exactly what has happened, as the inevitable showdown between the U.S. and Iran became a relatively benign event.
There’s also an argument to be made that the airliner tragedy in Iran may be having an unspoken influence on the selling in energy futures, as the Iranian regime is losing credibility and sympathy from the international community, making future attacks (whether directly or by proxy) less likely in the near term.
The December Jobs report showed another good, not great, month for the U.S. economy with 145,000 jobs added, the headline unemployment rate holding steady at 3.5% and the U-6 unemployment rate (aka the real rate) ticking lower to 6.7%. Equity and energy markets had little reaction to the report as it appears to be right in line with expectations, and wasn’t good or bad enough to suggest the FED may be forced to change their neutral stance.
Shell announced plans to offload another west coast refinery, and according to a Reuters story, that means five percent of U.S. refining capacity is currently up for sale, and having a hard time finding buyers.
“East coast assets have proven particularly tough to unload, as they lack both the scale of U.S. Gulf facilities and access to U.S. crude production. They also face competition from two shuttered Caribbean plants due to restart in coming months that have easier access to overseas crude and more flexible fuel distribution systems.”
In addition to the challenges faced on the east coast mentioned in the article, Gulf Coast plants are no longer seeing a benefit from cheaper Midland-based WTI as the shortage of pipeline capacity a year ago has quickly turned to an excess.
Prices Drop In Wake Of Violence
In the wake of Iranian missile attacks on U.S. troops in Iraq, Tuesday nights’ eight cent gains for refined products quickly turned into losses once it appeared that no return fire was coming. Some bearish stats from the DOE report added to the selling, and when the dust settled, we ended up with the largest intra-day price drop for futures since 2011.
The collapse in the wake of a new level of violence was certainly surprising to many, but might be best summarized as a 'buy the rumor, sell the news' phenomenon after months of saber rattling turned into a non-event, and those longs that had been building in anticipation of the inevitable U.S./Iran showdown may have decided to head for the exits. Unfortunately we won’t see the CFTC COT report that includes Wednesday’s activity until Friday, January 15, and there’s plenty that could happen in the meantime to know for sure who was behind the meltdown.
Of course the question after a day like Wednesday is: where do we go from here? From a chart perspective, the outside down reversal pattern caused by the big head fake is definitely a bearish signal. The move also wiped out the near term chart support around $1.70 for RBOB and $2.00 for ULSD, which sets up a test of the lower end of the winter ranges some four to five cents below current values. With little fundamentally to push prices up this time of year (with warmer than normal weather), it looks like the path of least resistance is lower for the next week or two.
The first DOE inventory report of the year painted a gloomy picture for U.S. energy producers, with inventories building even more than normal for this time of year, while demand estimates are sluggish at best.
Total U.S. petroleum consumption is holding near its previous five year average, but well below the first week of January in 2018 and 2019. The weekly consumption estimates are notoriously volatile for a number of reasons, and the timing of the holiday season no doubt plays a part, so it’s not panic time yet for refiners, but they’ll likely be holding their breath for a week or two until they see these numbers bounce back.
Speaking of refiners, yesterday’s report showed a decrease in refinery runs across all five PADDs, which helps to explain some of the strength we’ve seen in Gulf Coast and west coast basis values lately. We expect to see run rates drop over the next four to five weeks as plants do maintenance work ahead of the spring.
Week 1 - US DOE Inventory Recap
Energy Prices Swing After Missile Launch
If you went to bed early last night, you might see the early selling in energy markets as a sign that tensions in the Middle East are returning to a normal level. Of course, if you’re reading this, you already know that’s not the case, and that prices swung more than 10 cents overnight after Iran launched missiles at U.S. military outposts in Iraq.
The key elements in the reversal from 8 cent overnight gains to 2 cent morning losses appear to be the lack of casualties from the attacks, the targeting of military assets not energy assets, and signals from the U.S. that no further retaliation is imminent. That said, both countries’ leaders will be making statements later today that could either continue to lower the tensions, or set the stage for the next round of violence, so it would not be surprising to see more volatile action.
Speaking of volatility, the Oil Volatility Index (OVX chart below) has spiked in the past week due to the escalating violence, but remains well below levels we saw most of last year, in another sign of the price buffer created by the world’s surplus of petroleum supply.
In fundamental news, the API was said to show large builds in refined products last week, with both gasoline and diesel stocks up more than six million barrels, while oil stocks were down one million barrels. Those types of product builds are consistent for this time of year when demand dies up, and would mark the largest weekly increase in gasoline stocks since this week a year ago, if confirmed by the DOE in their report due out at its regular time this morning.
While most eyes are focused on the action in futures, the west coast is heating up again as CARBOB basis values have surged nearly 20 cents this week, following unconfirmed reports of another refinery issue in the L.A. area.
Futures Pull Back From Multi-Month Highs
The half-life of an oil price rally that starts with violence in the Middle East is holding around two days as futures pull back from multi-month highs this morning. Refined products and WTI were unable to hold above the highs set in September (the last time a major attack roiled markets) leaving the complex susceptible to a sharper pull-back as the world awaits Iran’s response.
A WSJ article this morning sheds more light on why it’s been dangerous to buy geopolitical rallies in the past year.
Speculators were less enthusiastic about NYMEX contracts than they were Brent last week according to the CFTC’s delayed report, with only modest increases in net length seen in WTI and ULSD contracts, while RBOB saw a modest decline. RBOB is the only contract with managed money positions outside of the average range for this time of year, in a counter-seasonal bet on higher prices that will either prove hedge funds really do have the smartest guys in the room, or that they just don’t study their history lessons.
Peg $1.70 for RBOB and $2.00 for ULSD as the near-term pivot points this week that may determine if this latest sell-off is more than just profit taking after the recent spike. If prices hold above those levels, there’s still a strong chance of another rally in the next few weeks, but if they fail, there’s another 10 cents of downside that looks likely in short order, and in the case of gasoline, perhaps much more.
Markets Guess What Will Come Next
Stocks are trading lower and oil prices are trading higher as the markets try to guess what will come next in the U.S./Iran conflict. The most remarkable news so far is that energy prices are up less than five percent from where they were prior to last week’s attacks, compared to a few years ago when this type of tension could have easily pushed prices up 20 percent or more.
Perhaps the most significant development of the past decade for oil markets is we changed from fears of “Peak Oil,” where lack of supply led to routine spikes over $100/barrel to fears of “Peak Oil Demand,” as OPEC and other producers are now having to voluntarily reduce their production to keep prices from collapsing and even after extreme violence in the Middle East, prices are still in the $60s as that excess supply has cushioned the impact of these events.
Prices did briefly spike overnight, with products trading up more than four cents and Brent trading north of $70 for a few hours. Most of those gains have been erased in the morning hours however, with ULSD actually trading negative on the day.
ULSD’s relative weakness appears to be at least partially a sympathetic trade with Natural Gas as warmer-than-average temperatures across the eastern half of the country limit demand for home heat. In addition, the annual holiday demand slump for diesel is in full force, with consumption down 27 percent across the U.S. last week according to the DOE’s weekly estimate. Based on prior years, we expect that slump to last another week, and then we should (hopefully) see a return to normal levels in the second week of the year.
The gasoline demand slump so far is not as bad as it has been this time over the past two years, but history suggests the worst is still ahead of us, and we probably won’t see consumption bottom out for another two weeks. This annual tradition of demand falling to its lowest levels of the year also coincides with refiners reaching their winter peak for output, which tends to create some sloppiness in spot and rack markets for the next several weeks. 2020 looks to be set to follow that trend, although the loss of PES is holding total refinery runs below the all-time highs set a year ago.
The Commitment of Traders report from the CFTC was delayed again due to the holiday, but Brent crude (reported by ICE) saw speculative length reach its highest levels in more than a year last week. No doubt money managers holding those bets on higher prices are enjoying the price spike of the past few days, and it seems likely we may see an influx of additional speculative length in the coming weeks as long as the potential for more violence in the region remains elevated.
Week 52 - US DOE Inventory Recap
Military Strikes Spur Energy Futures
U.S. military strikes in Iraq have spurred energy futures to their highest levels in more than seven months overnight, with most contracts up around four percent on the day. To be clear, there has been no immediate impact on oil supply, or even a direct threat on supplies in the region, but this situation is all about what might come next.
Is this the start of a larger military conflict between the U.S. and Iran that could threaten the Strait of Hormuz and 20 percent of the world’s oil supply? Or will this end up just another blip on the radar screen for an energy market like the attacks in Saudi Arabia or the sabotage to oil tankers last year due to ample global supplies and spare production capacity?
The reaction in stock markets to the news of the attacks is a good reminder that there could be a negative impact on fuel demand as well if this situation escalates.
The first test on the charts will be the high trades set in the wake of the Saudi Attacks last September, which were breached overnight by WTI, ULSD and RBOB futures, but have since pulled back below that level. As a reminder, within two weeks of the Saudi Attacks – which actually took more than five percent of global supply off the market temporarily – prices were lower than they had been prior.
RBOB futures are running into a cluster of resistance in the $1.77 range, which marks both the 200 day moving average on the continuation chart, and the high trades from September’s brief spike. For ULSD, the $2.10 range looks like the hurdle to clear if this rally is going to spark the next big move higher. If prices continue to push through the highs set in 2019, the next big targets on the charts are the 2018 high trades - roughly 30 cents above current values.
The fallout from the airstrikes in Iraq probably mean the market may shrug off the DOE’s weekly status report, which is due out at 11 a.m. EST due to the holiday this week.
The Start To Trading In 2020
RBOB gasoline futures are trying to lead the rest of the energy complex higher to start trading in 2020, but is struggling to regain the upward momentum that was lost in the last two trading sessions of 2019.
The early strength in gasoline will be good news for U.S. refiners if it’s able to hold, as they’re moving through what’s historically been the weakest time of the year for crack spreads. As the chart below shows, Gulf Coast refiners are starting this year in a better spot than they did 2019, even before this morning’s gains.
The API was said to report another large draw in crude oil stocks last week, with U.S. inventories down by 7.8 million barrels, while gasoline stocks dropped by only 776k barrels, and distillate inventories increased by 2.8 million barrels. It’s a bit strange to see WTI trading in the red while refined products are both higher when those stats would suggest the opposite, but the inventory reports can be skewed lower by shippers trying to avoid year-end taxes, particularly in Texas, which may explain the relative weakness in WTI this morning. The EIA’s weekly inventory report is due out tomorrow.
The most recent flare-up in Iraq (which is actually more of a threat of violence with Iran) seems to have simmered down for now. While oil production facilities were the target of protests, it doesn’t appear that the events caused any disruption to supply.
Meanwhile, Saudi Arabia and Kuwait have come to terms to restart oil production in the “neutral zone” border area between the two countries, that’s been shuttered for nearly five years due to disputes over ownership rights. It’s estimated that agreement could bring another 500,000 barrels/day of production online by the end of the year.