Market Talk - 2020 july
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Taking A Trip To The Edge Of A Technical Cliff
Energy futures took a trip to the edge of a technical cliff Thursday morning, but managed to pull back and return to safer territory, keeping the sideways trading pattern intact. All of that excitement happened in just over an hour of trading as product prices started plunging just before 9 a.m. Central Time, and were trading some eight cents lower by 9:20 – setting new lows for the month in the process - only to take back most of those losses by 10 a.m.
The move coincided with a similar short-lived wave of selling in equity markets that suggests fear control for a while following some shocking headline drops in GDP & Q2 earnings releases. As those numbers were digested, and it became more clear that the numbers weren’t as bad as many were predicting, prices quickly recovered. If prices can hold on near current levels today, July should be seen as a modest victory for energy bulls as crude & products all managed gains despite the setbacks in reopening plans as COVID cases surged.
Today is expiration day for August ULSD and RBOB contracts, so watch the September (HOU/RBU) contracts to see where rack prices are heading tonight. September is the last month of summer-spec RBOB, which typically means increased volatility in spreads as inventory holders try to minimize their annual write-down of more expensive grades. Given the depressed demand environment and near-record inventory levels, this annual transition could be even more interesting than normal this year.
While refined product prices have been stagnant for most of July, ethanol values have been on a roller-coaster ride, which is pointing lower this week. After reaching multi-year highs early in the month, values are now hitting two month lows as tight inventories in regional hubs appear to be healing.
No surprise here, Isaias was upgraded to hurricane status even though early models suggested it would not reach that strength. The good news is the storm’s path continues shifting east, which should limit the impact to Florida and the SE coast as long as it doesn’t shift back in the next couple of days. There are two new systems being monitored right behind this storm, as the record-setting pace of Atlantic activity shows no signs of slowing.
This morning, ExxonMobil reported a $1.1 billion loss for the quarter, even after adding $1.9 billion in inventory gains due to rising prices during the quarter. It’s worth noting that Exxon released the report on its website this morning as the SEC’s filing system appears to be having technical difficulties on one of the busiest days for quarterly earnings reports.
Valero had a similar report yesterday, with a large inventory write-up offsetting operational losses. Valero’s refineries ran only 2.3 million barrels/day in Q2 this year, vs. 2.9 million last year, and only its mid-con plants had positive earnings of its four refinery regions.
Market Players Grapple With Numbers Never Seen Before
We’re seeing a modest round of “risk off” selling in energy and equity markets to start Thursday’s session, as recovery doubts appear to be growing and market players grapple with numbers they’ve never seen before.
This latest round of selling is pushing petroleum futures towards the lower end of their July trading range, which could mean sharp losses if support breaks down, but until it does these relatively small moves aren’t changing the neutral outlook. Peg $1.20 for products and $40 for WTI as must-hold levels this week to keep the sideways pattern intact.
The DOE’s weekly status report was highlighted by a 10 million barrel draw in U.S. crude oil inventories, and a tick higher in domestic fuel consumption. Seven million barrels of the crude draw was accounted for by a plunge in imports and stronger exports, with the balance made up for by a strong increase in refinery runs. The muted market reaction to that large draw suggests there is plenty of doubt that any of those three factors are sustainable as long as reopening plans continue to be delayed.
The rest of this week will be heavy on Q2 earnings reports, which are expected to be the worst in more than a decade for most oil producers and refiners. Shell reported an $18 billion loss for the quarter, as the demand slump wiped out its operational earnings and the company took at $16.8 write down of its assets, and cut its dividend for the first time in over 70 years.
Tropical Storm Isaias’ path shifted East over the past 24 hours, now threatening the eastern half of Florida, and the SE Atlantic coast. The NHC predictions continue to suggest that this system will not reach hurricane strength, but don’t be surprised if that changes quickly in the next several days as it reaches warmer water. Although Isaias currently looks like it will not threaten energy supply infrastructure in the gulf of Mexico, given that we’re still five weeks away from the peak of hurricane season, and there’s yet another system moving off the African coast this week, it’s feeling like just a matter of time before we see a system that creates a meaningful supply disruption.
July Purgatory Trading Pattern Continues
The July purgatory trading pattern for energy markets continues this week as prices struggle to break out of their neutral pattern. WTI has landed on a $41 price for the past seven trading sessions, while Brent has ended the day with a $43 for the past five sessions.
If you are getting bored with energy prices going nowhere, take a look at the Gold market that has rallied to a record high as investors seek a safe haven in a money-printing-gone-wild environment with extreme levels of economic uncertainty.
The API was reported to show a decline in U.S. oil inventories of 6.8 million barrels last week, that immediately put a bid under WTI prices that’s lasted through the overnight session. Refined product inventories had slight builds (one million barrels for gasoline and 187k barrels for diesel) that are keeping the optimism in check. The EIA’s weekly report is due out at 9:30 Central Time.
The Fed’s Open Market Committee (FOMC) has another meeting today, and will release their statement at 1 p.m. Central. The CME’s Fedwatch tool shows that not only is there no chance of an interest rate change expected today, there’s a zero percent probability of a change in the next eight months priced into the market currently. That means the market reaction to the statement should be minimal today, and that the press conference following the official statement may have more influence on prices.
The record setting Atlantic hurricane season continues. The national hurricane center is predicting a new tropical storm (Isaias) will form in the next day and is heading towards Florida. The current forecasts suggest it will stay at “only” tropical storm strength, but as we just saw with Hanna – and as has been a pattern the past few years – don’t be surprised to see additional strengthening beyond what the current models show before it reaches the coast. On its current path, the storm does not appear to be a threat to any refineries, but the port of Tampa may need to close as it passes.
Week 30 - US DOE Inventory Recap
Petroleum Futures Shrug Off Another Attempted Selloff
Petroleum futures shrugged off another attempted selloff Monday, continuing the July sideways trading pattern as uncertainty seems to be taking some of the risk appetite out of this asset class.
Volatility has been declining steadily for both energy and equity markets over the past few months, and the correlation between the two remains elevated. This suggests that any one of the major geopolitical issues happening at the moment (COVID-19 case counts and reopening plans, a new trillion dollar stimulus bill struggling to make it through Congress, and some less than neighborly theatrics from the world’s two super powers) have the potential to shock prices out of this range.
Unfortunately for refiners, this price (and demand) stagnation in July aren’t improving their margin situation, and the forward look remains bleak for many. Total announced yesterday it was selling its UK plant, and there are unconfirmed reports that another U.S. plant – this one along the Gulf Coast - is planning to idle its facility in the next few weeks, adding to a growing list of shutdowns.
Not everyone is looking to exit the business however, as Meridian Energy Group cleared a major regulatory hurdle to build a new refinery in North Dakota to attempt to take advantage of the U.S. glut of light sweet crude from shale plays. Although several reports suggest this plant would be the first built in the U.S. since the 1970's, they would be forgiven for forgetting the small refinery built in North Dakota in 2013 that was sold at a loss less than three years later.
Meanwhile, there have been a rash of operational issues at Gulf Coast refineries reported in the past few days, with some indication that power and other weather-related issues from Hurricane Hanna’s remnants may have been a contributing factor even though that storm made landfall hundreds of miles away. So far USGC basis markets have not reacted much, suggesting that the lack of demand continues to act as a buffer to any supply shock.
The Dallas Fed released its Texas Manufacturing survey for July, showing that the state continues to recover rapidly from the COVID shutdown. That said, comments that the recent resurgence point to the recovery taking longer than previously estimated, and 3/4 of respondents indicating that revenues are below normal July levels, making it clear there’s still a long way to go.
Energy Markets Trade Sideways
Energy markets continue to trade sideways to start the week as traders seem to be content to wait and see how the numerous geopolitical issues and COVID-19 counts play out before making any major moves.
Hanna strengthened into a hurricane before making landfall Saturday. While the storm brought damaging winds and rain, it shifted far enough south that it appears to have limited impact on the terminal and refinery operations in the Corpus Christi area. Gonzalo has dissipated but the NHC is giving 90 percent probability that we’ll see another storm this week, with an early path suggesting a possible threat to Florida or the south east coast.
Money managers added small amounts of length across the energy complex last week, with RBOB contracts seeing the most notable shift higher, although most positions are well below typical levels and open interest in U.S. contracts continue to be below normal levels as well. Ordinarily, the uptick in long bets on RBOB would be seen as counter-seasonal, as we’re wrapping up the driving season and start to prepare for the fall RVP transition. This year all seasonal norms seem to be thrown out the window.
Baker Hughes reported U.S. oil rigs increased by one last week, snapping an 18 week streak of declines that slashed drilling activity in the country by nearly 75 percent. Both the Permian and Eagle Ford basins saw two new rigs put to work last week, offset by drops in other locations. While oil rigs increased, the combined Oil & Gas total declined again, setting a new record low for the 33 years that this data is available.
The EIA this morning took a look at the nearly $50 billion in asset write-downs by U.S. oil producers in Q1, which was record setting but may be small in comparison to what we’ll see when the Q2 earnings statements are complete.