News & Views
Second Quarter Winds Down In Quiet Fashion
The second quarter is winding down in a quiet fashion so far with minimal moves in refined products, although oil prices are feeling some downward pressure in the early going. From a chart perspective, most energy futures are moving into a neutral territory which suggests the summer doldrums may soon be upon us with choppy but aimless trading to be expected.
July RBOB and ULSD/HO futures expire today, so look to the August (RBQ/HOQ) contracts for price direction this afternoon.
This was an unprecedented six months for energy markets. Remember in January when the U.S. and Iran started lobbing missiles at each other, threatening to send crude to $100/barrel? What a quaint idea that seemed just three months later when prices for WTI went negative for the first time ever, then about 25 minutes later went to negative $40/barrel.
Perhaps most remarkable about all of it is that as the dust is settling, oil prices are ending the same quarter that saw a 350 percent price drop in one day, with their largest quarterly percentage increase in three decades.
Looking back, the second quarter may be remembered as either the ultimate sign of American resilience, with U.S. energy and equity markets rallying sharply in the face of so much fear and uncertainty, or perhaps as one of the biggest head-fakes of all time if those fears come true later in the year.
It’s been a rough week so far for the oil majors. Exxon announced it was preparing substantial
job cuts over the weekend, BP announced it was selling its chemicals unit Monday, and now Shell announced it was planning an asset write down of up to $22 billion this morning.
Refiners aren’t faring much better these days as margins remain tight, and production increases are hampered by the unknown impact of the latest activity restrictions. Some Midwest refiners are also having to deal with the closure of Enbridge’s line 5 – which could become permanent – and is forcing at least temporary run cuts at OH and MI refineries.
Better times ahead? The Dallas FED’s Texas Manufacturing outlook showed a strong recovery in June, indicating an expansion in factory output after three months of steep declines. Similar to the energy outlook published last week, the factory survey shows expectations that most operations will be close to full capacity by the end of the year. That optimism may be a key barometer to watch in July as we’ll get a chance to see whether or not the tighter restrictions at the state and local levels impact these businesses.
After a volatile June, RIN values have been quiet as we approach month end. The possibility of retroactive small refinery exemptions continues to seem to be the market driving ping pong ball in the renewables market, with governors on the ag side of the debate weighing in with the EPA this week.
Click here to download a PDF of today's TACenergy Market Talk.
Open Or Closed?
Open or closed? That seems to be the debate for energy and equity markets as June trading winds down and we approach what is typically one of the busiest travel weeks of the year.
So far this morning bullish sentiment is outweighing limited rollbacks in US states reopening plans, after that news sparked a heavy selloff across asset classes last week. In the energy space, once again gasoline prices are the most volatile as RBOB futures rallied nearly six cents off of its overnight lows to manage small gains this morning after dropping 15 cents last week.
Baker Hughes reported a decline of “only” one oil rig last week, bringing the total U.S. count to a fresh 11 year low for oil, and the latest in a streak of record lows for combined oil and
gas drilling. The bright side of the report was the weekly drop is the smallest since the COVID-19 collapse in rig counts began, and with prices now hovering close to $40, the positive second derivative in rig counts suggests the end of cut backs may be near.
Money managers continue to seem unenthusiastic about energy trading with only minor changes in positions over the past several weeks, while open interest for WTI dropped to its lowest since February. The drop in open interest is likely due to a combination of factors including volatility returning to normal levels, new oil contracts competing with WTI for market share, and the end of the super contango storage trades.
Speaking of storage: The EIA this morning took a closer look at record high U.S. oil inventories, in reference to reported tank capacity. Although the country has more crude oil on hand than ever, that’s still just 62 percent of working capacity. The NYMEX delivery hub in Cushing, OK, reached 83 percent of capacity in April, but has dropped to 58 percent currently. The report also highlights how both storage capacity and inventories have risen dramatically in the Gulf Coast region over the past year.
Energy Prices Stumble Into The Weekend
Energy prices are stumbling into the weekend after an impressive bounce-back Thursday seemed to stem the tide of selling. U.S. equity markets have followed a similar pattern, rallying sharply after heavy selling, following the FED’s announcement that it would roll back part of the Volcker rule that restricted banks from certain trading activities.
The weekly action has been rough for refiners as gasoline took the hardest hit, adding further pressure to crack spreads that are already treading in troubled waters. The forward curve charts below suggest that the market is expecting those margins to improve slowly over time, but at the current rate of demand recovery, prices suggest a challenging environment for the next nine months.
The EIA this morning reported that the U.S. reached new record for refining capacity at the start of the year. This report of capacity is less relevant than normal half way through the year, as it includes both the PES refinery capacity – even though it’s been closed for a year – and the Holly Cheyenne facility that’s being converted to RD production. The report did note the Limetree bay (FKA Hovensa) plant was reactivated last year, which is counted in the rarely mention PADD 6.
As U.S. oil output and refinery capacity has grown, the industry has been shifting away from the Cushing, OK hub, while the U.S. Gulf Coast is seeing more traffic. The race to profit from this shift goes beyond the physical markets as reporting agencies are rushing to add to the growing list of USGC based crude oil contracts vying to take share from the WTI contract.
The Dallas FED’s Energy Survey for the second quarter showed the largest drop in activity on record at -66%, which acts as no surprise to anyone who has been awake at some time during the past three months. What was unique in this report was that the FED included a section of special questions to better understand the industry reaction to the pandemic, and the results have several surprises. For example, of the 165 oil and gas firms that responded, only five percent reported pipeline or storage restrictions as a cause for reducing their output. In addition, 85 percent expect to have their shut-in production back online in September, and nearly half expect that even in the $30 range that production will come back online. Charts fall below.
Click here to download a PDF of today's TACenergy Market Talk.
Fear Is Back In The Driver's Seat
Fear is back in the driver’s seat for many markets this week with gasoline prices down 19 cents since running into resistance at the 200-day moving average Tuesday, and diesel is down a dime in that two day stretch. Equity market are seeing similar selling across the board, as new restrictions imposed by states have many fearing a demand collapse like we saw this spring.
If you just saw the 10 cent drop in gasoline prices or nickel drop in diesel Wednesday, you might justifiably assume there were some ugly inventory numbers in the DOE report that sent the market reeling. In reality, the DOE report was fairly neutral with only minimal inventory changes and a strong increase in both gasoline and total petroleum demand on the week.
The head scratching numbers from the DOE were the sudden increase in crude oil production of ½ million barrels/day on the week, and the reduction of 600 of the unaccounted for crude oil. It seems that either the agency is either demonstrating how challenging it is to estimate oil production made up of thousands of individual wells on a weekly basis, or actual output has actually recovered much faster than just about anyone expected in the past couple of weeks. That increase in output was enough to offset increased refinery runs and a strong week for exports to push total U.S. crude oil inventories to a new all-time high.
Gasoline demand is now roughly ¾ of the way back from its COVID-19 slump after a big jump last week. Total U.S. consumption is now estimated at 8.6 million barrels/day, up from a low of five million barrels daily during the worst of the initial stay at home period, but still more than a million barrels daily below where we should be this time of year. It seems safe to say that the market is currently more concerned that we’re going to see another drop based on the states’ reactions this week rather than a continued climb in the coming weeks.
Week 25 - US DOE Inventory Recap
Pausing After Weak Finish To Tuesday's Session
The rally in stocks and energy futures is on pause Wednesday, after a weak finish to Tuesday’s session. New tariff tiff talks are taking credit for some of the early selling, in addition to the daily scary headlines of rising infection counts around the world.
RBOB gasoline futures are leading the move lower – taking back their spot as the most volatile of the petroleum contracts and snapping a streak of eight straight daily increases – even though the API reportedly showed a large decline in gasoline inventories of almost four million barrels last week. The industry report also showed a decline in distillates of 2.6 million barrels, while total U.S. crude oil stocks had a small increase of 1.7 million barrels even though refinery runs ticked higher on the week. The DOE’s version of the weekly stats is due out at its normal time this morning.
Tropical Storm Dolly was named Tuesday, but is expected to stay well off the Eastern coast of the U.S. and Canada. It’s been a busy season so far, although the traditional storm producing areas have taken a brief pause as an enormous plume of Saharan dust makes its way across the Atlantic, preventing tropical development before settling along the U.S. Gulf Coast. Meanwhile, non-tropical storms have been creating some headaches across refinery country this week, with numerous emissions events reported as a result of power outages and lightning strikes, although the limited reaction in cash markets suggests minimal if any impact from those minor events.
Looking for something more severe in your weather report? A major earthquake in southern Mexico knocked the country’s largest refinery offline Tuesday following a fire. Like most of Mexico’s refineries, that plant has been operating well below capacity for some time due to a lack of maintenance funds and expertise, so this incident may not have a lasting impact, but there is a chance it could create some bidding for waterborne barrels otherwise destined for the U.S. West Coast.
Markets Climb The Wall Of Worry
WTI was able to punch through $40 in Monday’s session, sparking a move to fresh three month highs for both oil and refined product contracts overnight. Equity and energy markets appear to be climbing the wall of worry in hopes that reopening can continue despite rising infection counts, and the fact that the U.S. and China trade deal is still moving forward.
RBOB gasoline has led the way for much of the eight day rally, and looks to be the first to test new upside resistance at the 200 day moving average just under $1.34. ULSD looks like it has room on the chart to close the gap left by the March meltdown with a move to $1.38. While the weekly charts suggest more upside is likely, faster moving indicators have prices in overbought territory, setting the stage for another round of fast and heavy selling as we’ve seen a handful of times already during this recovery rally.
A WSJ article this morning suggests refiners may ultimately put an end to the bull run for crude, as crack spreads continue to hover around break-even levels. The crack-spread chart below shows that the wide crude spreads that had enhanced margins for many U.S. refiners for years have also tightened up, adding to the challenge of this most unusual operating environment.
A lack of export demand has been a big challenge for many U.S. refiners in the past few months, and an EIA note this morning suggests that it’s not just refined product struggling to find a home overseas as LNG exports have been slashed in half this year.
A Quiet Start To Trading This Week
It’s a quiet start to trading this week as energy and equity markets continue to weigh reopening against rising infection counts. WTI is struggling to break through the $40 mark as the July contract reaches expiration, which looks like the last hurdle on the charts standing in the way of another rally after refined products broke to new highs last week.
Hedge funds look to be taking profits in WTI after a strong two month rally, reducing their net length for the first time in 11 weeks. Despite that reduction, the total outstanding money betting on higher prices in the large speculative trader category remains above the five year seasonal range. It’s a much different story for Brent crude as the total money betting on higher prices is below its five-year range, even though there was another small increase last week. Money managers continue to appear unenthused by refined products with minimal holdings outstanding and not much changing week to week.
Baker Hughes reported another 10 oil rigs were taken offline last week, half of them in the Permian basin. The decline brought the total oil rig count to a new 11 year low, while the combined gas and oil count reached a new record low since the 33 years that this data has been published.
The rapid decline in drilling activity showed up in the Dallas FED’s employment forecast for Texas, as the state saw a large increase in jobs during May after the huge drop in April, but the oil and gas sector continued to see sharp declines in its job count and permitting requests.
In other years, the dramas playing out in Iran and Venezuela would be market-moving news, but this year they barely get a mention as the global glut of oil supply makes their output irrelevant for the time being.
Fresh Multi-Month Highs Reached Overnight
The rally is on for energy futures as both RBOB and ULSD prices have reached fresh multi-month highs overnight after breaking through technical resistance Thursday. All WTI contracts are trading north of $40/barrel this morning, and the prompt contract came within a few pennies of setting its own three month high. Stocks continue their rally, which seems to be adding to the bullish feel in energy prices, as positive trade signs from China are added to the reopening optimism.
So far for the week, gasoline prices are up more than 15 cents, and diesel prices are up more than 11. If the early gains can hold, the charts are suggesting there’s another 10 to 15 cents of upside room over the next few weeks. While the weekly charts point higher, the six day rally since last Thursday’s wipe out has left shorter term technical indicators in overbought territory, meaning we’re getting due for at least a short term pullback.
Cash markets have also seen strength with basis values for most gasoline and diesel contracts increasing this week, suggesting the rally in futures has some real fundamental strength behind it. Part of that strength seems to be supply driven as refinery crack spreads still have not recovered enough to encourage refiners to further increase production, with new reports suggesting plants are choosing to delay unit restarts longer than initially expected.
Ethanol values have been rallying along with gasoline, with some spot market prices now trading higher than they were prior to the pandemic. RIN values have sold off sharply this week however after the EPA reported that RIN generation was up nearly 20 percent in May, and reports that the EPA was still considering some retroactive refinery waivers from the RFS.
Markets Chop Back And Forth
The struggle for directions continues this week as conflicting economic and inventory data has energy and equity markets chopping back and forth. RBOB gasoline futures are trading higher for a fifth day, testing resistance around the $1.22 mark for the eight time in 10 sessions, and if they can finally manage to sustain a break above that ceiling have a clear path to $1.40 on the charts. Oil and ULSD contracts have a more neutral technical outlook and are going nowhere so far today.
The EIA’s weekly oil output estimate dropped by 600mb/day last week. The large drop in oil output coincides with a drop in the unaccounted for crude calculation, which seems to confirm the suspicion of the past two months that the official estimates were overstating actual production by nearly one million barrels/day. There is still more than 600mb/day of oil unaccounted for in the petroleum balance sheet, which may mean real production has dropped below 10 million barrels/day in the U.S., from a high of 13.1 million barrels/day just three months ago.
Diesel inventories saw a small decline, the first time distillate stocks have dropped in 11 weeks. Diesel demand estimates had a second weekly gain after reaching their lowest level in more than a decade, and are now “only” about ½ million barrels/day (roughly 12 percent) below the seasonal average for this time of year. Refiners continue to demonstrate their relative flexibility in dealing with this supply glut, dropping diesel output to a two year low, even as total refinery runs increased on the week, reversing the pattern we saw on the front end of the COVID-19 shutdown.
Gasoline inventories also had a small draw-down – which helped prices recover from the selling sparked from the API’s estimated four million barrel build. Unfortunately for refiners, gasoline demand was estimated to have declined on the week, snapping a three week streak of increases, and giving a reminder of how challenging this recovery is to predict. The weekly consumption for gasoline is now roughly 15 percent below its seasonal five year average, and roughly 20 percent below year-ago levels. A bright spot for domestic refiners in this report was that gasoline exports had a strong increase, which should be good news for the coastal facilities that have come to rely on international buyers to clear their plants.
The Dallas Fed this week highlighted new studies that suggest consumers are much more sensitive to gasoline prices than previously thought, which contradicts decades of economic research on the topic. The end result is that the new findings suggest drivers are more likely to reduce miles driven when prices rise, and if prices stay high over a longer term they will switch to more fuel efficient options.
Week 24 - US DOE Inventory Recap
Energy Rally Takes A Breather
The energy rally is taking a breather as inventory data gives the market reason to pause, even as equity markets continue to point higher.
The API reported inventory builds across the board in the U.S. last week with crude oil inventories up 3.8 million barrels, gasoline up 4.2 million barrels and distillates up by 900,000 gallons. The EIA’s report is due out at its normal time this morning.
OPEC’s monthly oil market report left demand estimates unchanged from their last report, a less optimistic view than the IEA and EIA which had both made small upward revisions to their consumption SWAGs. The report also noted that U.S. crude oil exports were holding steady as Asian demand picked back up, while refined product exports continue to suffer as demand from Latin America continues to languish. That combination continues to pressure U.S. refiners that are struggling with weak crack spreads, and near-record product inventories.
The $1.22 range is providing upside resistance for RBOB, with the front month contract trading near that level in six of the past eight sessions but failing to hold above that level each time. This was similar to the action we saw in April when the mid $0.70 range repelled a dozen or so rallies over the course of two weeks. That resistance leaves ULSD as the only one of the big four petroleum contracts reaching new recovery highs this week, and given that’s the lowest volume contract, it faces an uphill battle to pull the rest of the complex higher on its own.
Spot ethanol prices have returned to pre-COVID-19 levels this week as gasoline demand continues its slow march higher, while many ethanol production facilities are running below capacity, or splitting time with making sanitizing products. Just like in oil refineries, ethanol plants face a complicated logistical puzzle this year as they try to match the demand recovery that’s difficult to predict.
Risk Is Back On As Easy Money
Risk is back on as easy money, some positive (AKA - less bad) economic data, and refinery issues all combine to push refined product prices 11 cents or more above their Monday morning lows.
After bad news from the FED last Wednesday led to the biggest selloff in months, good news from the FED that they were expanding their bond buying program helped spark a large rebound rally on Monday. As has been the pattern the past few weeks, that rally impacted both equity and energy markets, with the DJIA rallying more than 1,000 points from its early morning lows while crude rallied by three dollars/barrel and refined products added seven to eight cents from morning levels.
In addition, this morning we’re seeing positive retail sales data for May (the largest monthly increase ever, following the largest monthly decrease ever) and reports that a new trillion dollar stimulus plan is in the works. What’s a trillion between friends anyway? That news has the DJIA up another 900 points, while refined products are adding another four cents in the early going. The big test now is if prices can punch through their June highs, and continue the rally, or if this week’s roller-coaster ride is setting the side for a period of sideways trading.
Refinery issues are helping products outpace the rally in crude, giving crack spreads a much needed boost for beleaguered refiners. Both the Motiva Plant in Port Arthur, Texas (which is the largest refinery in the U.S.) and the P66 plant in New Jersey (a key contributor to the NYH market) were reported to shut units due to unplanned issues Monday. The Motiva news came on the heels of a separate report that the company would be combining its product and chemical facilities as a cost cutting measure due to the COVID-19 fallout.
The IEA’s monthly oil market report said that the second quarter was ending on an optimistic note, as global demand destruction was not quite as bad as expected, although "still unprecedented,” and the recovery in mobility sets the stage for a strong rebound in 2021. The report did suggest that weakness in jet and kerosene demand is likely to keep negative pressure on refinery margins for multiple years.
Click here to download a PDF of today's TACenergy Market Talk.
Markets Caught In Another “Risk Off” Wave
Energy and equity markets are caught in another “risk off” wave to start the week, as concerns over a second wave of coronavirus continue to dominate business headlines. The early sell-off is threatening a break of the weekly bullish trend line, which threatens a move back into the $20’s for WTI and Brent if that chart support can’t hold, which would drag refined products back below the one dollar mark.
The IEA published a study analyzing the change in energy demand in a work-from-home environment, noting the sharp drop in emissions from vehicles, offset to some degree by an increase in residential electricity and natural gas demand. It’s not just energy demand that is shifting in the work-from-home era, sugar demand is expected to drop for the first time in over 40 years as a result.
Baker Hughes reported seven more oil rigs taken offline last week, bringing the total U.S. oil and gas rig count to yet another record low. If you’re looking for the bright side in yet another rig reduction, this was the smallest weekly decrease in the 13 reports since the COVID-19 shutdown began. It’s hard to say which is more notable, the fact that drilling rigs have dropped by 71 percent in less than three months, or that there are still 199 rigs actively drilling new oil wells in this environment.
Money managers continue to make minimal changes in their petroleum contract holdings, according to the latest report from the CFTC. The large speculative category of trader saw modest increases in WTI and Brent length last week, while refined products saw small decreases.
BP issued a press release this morning that revised its long-term price assumptions for oil due to expected economic damage from COVID-19, and said it was planning on taking non-cash write downs of around $15 billion (give or take a couple billion) as a result. This type of write down it likely to become a theme when Q2 earnings reports are released as prices only started to drop in the last few weeks of Q1.
Biggest One Day Sell Off Sparked
Energy and equity markets both proved they had out-kicked their coverage with their recovery rallies this week, as euphoria over reopening turned into fear about the future, and sparked the biggest one day sell off in six weeks. Both asset classes are seeing a healthy bounce this morning as cooler heads seem to be prevailing as they realize that not much has actually changed in the past 48 hours.
WTI dropped eight percent on Thursday, wiping out June’s gains in a single session. That sounds like a big deal, and in most years it would be, but less than two months after prices dropped 350 percent in a day, it just doesn’t feel that scary any more. While Thursday’s big drop did break the upward trend on the daily charts, the weekly and monthly charts are still hanging on to theirs, so it’s still too soon to say that the longer term recovery rally in energy prices is over.
Recovery or head-fake? Group 3 ULSD basis values are up a dime in June as demand recovers and inventories in the region draw down from all-time highs. USGC basis values are also strengthening across the forward curve as bottom pickers and storage players both seem to be bidding to not miss some of the best values they’ve seen in a decade, while others seem to be betting that refiners will be forced to cut diesel runs to deal with excess inventory and weak margins.
Today’s interesting read: Why a lack of sports may be driving small time gamblers into the stock market and impacting things like the Hertz bankruptcy. Maybe they should ask some of the retail investors long WTI in April how that worked out for them.
Risk Has Gone Out Of Style
Risk has gone out of style after the FED painted a gloomy outlook for the U.S. economy Wednesday, and the dreaded second wave of COVID-19 cases appears to be upon us. The early selling in energy and equity markets is the largest in a month, and will break the upward trends in both asset classes if it lasts through the day. Assuming the bullish trend-lines break this week, the charts suggest we will see refined products test the $1 mark in the back half of the month.
The DOE weekly report set several new all-time high inventory records, even as demand showed signs of continued recovery. Surging imports accounted for the build in crude oil stocks – as expected based on the Saudi Armada reports – and the EIA made an adjustment to its crude oil output estimates, acknowledging that the weekly reports have been understating production cuts. Even after that adjustment, the “unaccounted for” crude oil number was more than 900,000 barrels/day negative, suggesting the agency still has some work to do to catch up with the reality in the field.
Diesel demand finally saw a large recovery bounce last week, rising 21 percent as the annual post-Memorial Day demand lull seems to have passed. Despite that bounce in consumption, diesel demand is still one million barrels/day (roughly 25 percent) less than it would normally would be, and inventories continued to build, reaching their highest levels since 1982.
It’s a similar story for gasoline as demand saw another healthy increase, but total consumption remains nearly two million barrels/day (~20 percent) below where it should be this time of year, and inventories increased as refineries increased production for a fourth straight week.
We’re finally learning about the winners from WTI’s April meltdown. Bloomberg is reporting that the great vampire squid Goldman Sachs has seen huge profits from its oil trading desk due to the spike in volatility this year. Meanwhile, regulations that attempted to keep banks from manipulating markets after they were bailed out a decade ago continue to negatively limit the trading that industry firms trying to hedge their positions can partake in.
Week 23 - US DOE Inventory Recap
Late Rally Pushes Prices Into The Green
After a late rally that pushed prices into the green after trading lower most of the session, energy futures are coming under pressure once again after more inventory builds check the optimism for economic recovery. The price action in the back half of the week looks to be pivotal from a technical perspective, as the recent selling has contracts testing their upward sloping trend lines,. Whether or not that support holds up may mean the difference in another large rally or a substantial correction lower.
The API was said to report another large build in U.S. oil stocks of more than eight million barrels last week, while distillates had another build of 4.3 million barrels, and gasoline stocks declined by 2.3 million barrels. The increase in crude oil was almost all in PADD 3 – likely driven by the spike in Saudi imports offloading along the gulf coast – while Cushing, OK inventories had another large decline of more than two million barrels. If the API estimates carry over to today’s DOE report, we will see U.S.diesel inventories reach an all-time high.
The EIA’s Short Term Energy Outlook painted a more optimistic outlook for the industry, which seemed to encourage Tuesday’s late bounce, suggesting the glut of global fuel inventories would start being reduced this month as demand recovery has been better than previous forecasts. The report also highlighted the stark difference in gasoline and diesel cracks during this recovery – consistent with what the weekly inventory reports have been showing - which could limit refiner’s ability to recover from this crisis.
The FOMC will make a policy statement this afternoon, and will release its economic forecast and host a virtual press conference. While most predictions suggest there will be no new policy announcements today, watch for language about Yield Curve Control, to become more commonplace in coming weeks.
Speaking of forward curves…the charts below show how quickly the energy forward curves have moved away from the super contango witnessed in the past couple of months, which should help encourage some barrels to be pulled from storage as long as the slow and steady demand recovery continues. Distillates still seem the most susceptible to pressure on the curve as the demand recovery hasn’t kept pace with the rapid increase in inventories and tankage is becoming scarce.
Notes from the STEO:
EIA now expects global oil inventories will begin declining in June, a month earlier than previously forecast, with draws continuing through the end of 2021. The sooner-than-expected draws are the result of sharper declines in global oil production during June and higher global oil demand than previously expected.
Declines in U.S. liquid fuels consumption vary across products. EIA expects jet fuel consumption to fall by 64 percent year-over-year in the second quarter of 2020, while gasoline consumption falls by 26 percent and distillate consumption falls by 17 percent. EIA forecasts the consumption of all three fuels to rise in the third quarter and into 2021 but to remain lower than 2019 levels.
After decreasing by 2.8 percent in 2019, EIA forecasts that U.S. energy-related carbon dioxide (CO2) emissions will decrease by 14 percent (714 million metric tons) in 2020.
Markets Around Globe Pull Back From Recent Highs
The rally is on pause Tuesday as markets around the globe pull back from recent highs, and assess whether or not the recovery in prices has out-kicked the coverage of the recovery on the street.
Oil prices are reacting negatively to the OPEC output cut deal as the details suggest oil production from the cartel will actually increase now that voluntary cutbacks are ending, and Libya – who is exempt from the cuts – is lifting its Force Majeure. This is the first time in eight trading sessions that WTI has set a lower low trade than the previous session, and while the upward trend is still intact, we’ll need to see prices hold above $37 in order to avoid a drop to the low $30's. Refined products are treading similar technical waters, with some signs of topping, without yet breaking the upward trend.
A strong positive correlation between energy and equity markets has returned during the rally of the past few weeks as hope for economic reopening seems to be spurring both asset classes to erase most of their COVID-19 losses. The S&P 500 moved back into positive territory for 2020 during Monday’s rally, something that seemed unthinkable just a few months ago. Volatility in both asset classes has also dropped sharply from the record highs set in March and April, as a sense of uneasy calm seems to be spreading around the world.
The FED starts a two-day FOMC meeting today, and the economic optimism is showing up in the CME Group’s FEDWATCH tool that shows a 16 percent probability of an interest rate increase at this meeting. When the FOMC cut rates near zero a few months ago, this gauge of Fed fund futures showed a zero probability of a rate increase in the next year. As has been the case during the pandemic, interest rates may be an afterthought compared to the other liquidity injections made by the FED that are approaching $3 trillion so far this year, compared to $1 trillion during the 2008 financial crisis.
Rapid Pace Of Price Recovery
Energy futures were rallying again overnight as OPEC & friends made a new deal this weekend, and a Tropical Storm passed over a critical energy supply hub. Most contracts have given up their gains this morning, however, as concerns mount that rapid pace of the price recovery could mean production may return faster than demand can heal.
WTI broke the $40 mark for the first time in more than six weeks overnight. Of course when WTI hit $40 six weeks ago, there was a negative sign in front of it. The last time WTI was at a positive $40, was Friday, March 6, the day before the Oil Price War started, so it’s fitting the return comes the day after Saudi Arabia and Russia found themselves on the same team again.
Baker Hughes reported another 16 oil rigs were taken offline last week, bringing the total oil rig count to a new 10-year low, and the combined oil and gas count to yet another all-time low. It’s worth noting that unlike most weeks where the Permian basin accounted for the majority of the rig count reduction, this week it was the Eagle Ford that declined the most, with nine rigs taken offline, which was nearly half of the remaining number in that basin. There will be much debate on how soon we may see a recovery in production now that prices are back near the $40 level, although it’s reasonable to think we won’t see meaningful additions in drilling unless prices can get above $40 and stay there for a while. It’s important to remember that with more than 7,000 DUC wells available, U.S. producers can ramp up output even without increasing the rig count.
Cristobal made landfall in Louisiana as a Tropical Storm Sunday, and had shifted far enough east to make things uncomfortable for the refiners and ports along the Mississippi river near New Orleans. Ports have been shut since Saturday, and the damage assessments are underway, but so far it does not appear that there was any notable infrastructure damage to the supply network.
Energy Prices Survive Multiple Selloff Attempts
Optimism is back as energy prices survived multiple selloff attempts this week, only to continue with their rally as technical support held. Feuding OPEC members appear to have virtually kissed and made up, and are expected to ratify their new output deal this weekend.
With WTI now threatening the $40 mark, and the bullish trend sending refined products to fresh multi-month highs, it seems the only thing standing in the way of another major rally is the threat that rising numbers of coronavirus cases could reverse the reopening trend and send the country back into hibernation.
The May Jobs Report showed the official unemployment rate dropping to 13.3 percent down from a high of 14.7 percent in April, as the reopening efforts began. The “U-6” unemployment rate showed similar improvement, dropping from 22.8 percent in April to 21.2 percent in May. The bad news is that means one in five Americans are still out of work.
Cristobal is still forecast to hit the coast of Louisiana early Monday morning as a tropical storm. The path has shifted slightly to the East in the past 24 hours, bringing it closer to the cluster of refineries around New Orleans, but it’s still looks far enough West, and is a size and speed that suggest it will be have minimal, if any, impact on supply infrastructure and prices.
The EPA is proposing cost-benefit analysis for Clean Air Act rule-making, a shift that may speed up approval process for numerous energy and other industrial projects. That proposal coincided with a separate executive order to speed up environmental reviews to help expedite highway and pipeline projects to help the economy recover. If the EPA proposal takes effect, it could make rulings easier to understand, and add benefits for both environmental and industrial concerns, although both new efforts are likely to end up spending a while in the courts.
Disappointment Over Output Cuts And Weak Demand
Disappointment over output cuts, and weak demand have taken the steam out of the energy price rally this week, although the selling has been limited so far, leaving the upward trend intact for now.
Cheaters never prosper? OPEC’s early meeting idea fell through after Russia and Saudi Arabia drew a line in the sand on members of the cartel who aren’t meeting quota. Given the decades of cheating that some of these countries are known for, it seems unlikely the new deal gets done, which seems to have yanked the rug out from under the rally in oil prices.
While the OPEC bid may be gone for now, there are reports that U.S. producers have once again over-healed themselves and may be now be inadvertently setting the stage for a short term oil supply crunch later in the year. The DOE’s latest weekly report seems to add validity to that theory, as the report showed more than one million barrels/day of oil was unaccounted for in the U.S. last week – the fourth straight week of a record in that missing oil figure - suggesting that actual daily output is closer to 10 million barrels/day, rather than the 11.2 million barrel/day official estimate.
Diesel continues to find itself in the unusual position as the weak link in the chain, with days of supply surging to a record high north of 64 days, compared to a seasonal average of 38 days this time of year. Diesel stocks are now at the second highest level on record, and with refinery runs continuing to ramp up, while demand and export volumes stagnate, it seems likely we’ll see a new inventory record set next week. Gasoline stocks meanwhile are sitting at 34 days’ worth of supply vs. a seasonal average of 24, but unlike diesel, are trending lower since reaching a record high of 52 days when the world stopped in early April.
So far, the disappointing demand estimates have only led to relatively minor selloffs, and technical support continues to hold, suggesting traders are willing to overlook current weakness, as long as the future optimism about the economy reopening remains.
Not much change in the forecast path or intensity of Cristobal over the past 24 hours, although it now looks like it will be over the Gulf of Mexico for an additional day, which could allow it to strengthen more and perhaps reach hurricane status. The current path threads the needle and would avoid a direct hit on any refineries, although some offshore oil rigs are already removing non-essential workers as a precaution.
Week 22 - US DOE Inventory Recap
Energy Prices Rally After Reported Deal
Reports that Russia and Saudi Arabia reached a deal on more oil production cuts helped energy prices rally to multi-month highs overnight, most notably Brent crude was trading north of the $40 mark. Pesky details that the deal was contingent upon other OPEC members actually complying with the current agreement seemed to throw cold water on that rally and prices started heading lower around 5 a.m. Despite the pullback, charts continue to point higher so as long as the week’s lows aren’t taken out by this round of selling.
The API reported a small draw in U.S. crude oil inventories last week that seemed to help with the early overnight rally. Refined product inventories continued to build however, with gasoline stocks up 1.7 million barrels and distillates up more than 5.9 million. The DOE’s weekly report is due out at its normal time today. Unaccounted for crude oil remains a huge number to watch, as are crude oil imports while the armada of Saudi oil tankers has been offloading, which has helped push total U.S. inventories higher even as Cushing stocks have seen a dramatic draw-down. The growing glut of distillates continues to be a major red flag challenging the premise of the recovery rally for both energy and equity markets.
Tropical Storm Cristobal formed Tuesday, and is currently forecast to hit Louisiana by Monday at Tropical Storm strength. There’s a lot that can happen between now and then, and although this is normally too early in the year for major hurricane development, the Gulf of Mexico waters are already warmer than normal, which could help this storm grow. The current path would avoid a direct hit on any of the refinery clusters along the USGC, but essentially all of the coastal refineries are in the cone of uncertainty so it’s too soon to write if off completely. The path will also take the storm through the heart of US offshore oil production, but with those operations already cut back due to the price collapse, this may have less impact on oil prices than it would in a normal year.
Another unintended consequence of the COVID-19 fallout: If there are any supply disruptions during hurricane season, the impacts may be less noticeable as the extra supply of oil and refined products will act as a buffer to the system. In fact, with Gulf Coast refiners reliant on exports to balance the supply/demand equation, if production stays online but ship traffic is delayed, we could see downward pressure on prices.
Expectations For Oil Output Cuts Outweigh Fears of Fallout
Energy futures have reached their highest levels since the start of the stay-at-home orders 2.5 months ago as expectations for oil output cuts, and concerns about a tropical storm seemed to be temporarily outweighing fears of economic fallout from continued rioting around the country.
Less than three months after the “Oil Price War” between Saudi Arabia and Russia started, it looks like the two are ready to agree to a new deal this week, that would extend the OPEC & Friends production cuts ahead of schedule. WTI is the first of the major energy futures contracts to trade into the gap left behind by the opening shots of that price war, and Brent is just a few cents behind, adding some more bullish technical signals on top of the fundamental optimism.
There will be a tropical storm in the Gulf of Mexico this weekend according to the latest forecasts from the National Hurricane Center. This is already the third named storm of the season that’s only officially 1.5 days old and so far making good on the predictions for a very busy year.
D6 (ethanol) RIN values surged to a fresh two year high Monday, as the EPA continues to give minimal guidance on the moving target of small refinery waivers to the RFS. D4 values are also rallying, but not keeping pace with the ethanol values as a statutory blend wall in 2021 looks likely which may force more bio and renewable diesel blending to make up for the short fall. Right on cue, Holly announced that it would convert its small refinery in Cheyenne, WY into a renewable diesel production facility.
A Furious Flourish To Finish Off May Trading
June trading is off to a quiet start after a furious flourish to finish May trading pushed energy futures to fresh two month highs, and salvaged the upward-sloping trend lines. Markets around the world seem jittery to start the new month, as traders and investors wait to see what might come from the spread of viral rioting, and the latest in the U.S./China trade war of words.
Once again, contract expiration in a volatile market with a steep forward curve is creating confusion between futures and cash prices. While the newly-prompt July product contracts are trading five to eight cents higher than where their June counterparts settled Friday, physical prices are up less than a penny so far from where they left off last week.
Money managers still like WTI, increasing their net-long positions in the NYMEX contracts for an eighth straight week, and reaching the largest bet on higher prices since August 2018. The large-speculative category of trader is still much less optimistic on the other petroleum contracts however, with Brent and RBOB holding steady in below average territory, while ULSD continues to see a net-short position.
Baker Hughes reported 15 more oil rigs taken off-line last week, 14 of which came from the Permian Basin. The combined oil and gas rig count dropped by 17 for the week, extending the streak of new record lows for drilling activity since the weekly count was started in 1987. The pace of the decline is slowing however as prices stabilize, and of course unlike crude oil prices, the rig count can’t actually go negative.