News & Views
Energy Futures Try To Find A Bid
Energy futures are trying to find a bid this morning, in spite of headwinds from weaker equity markets, and a dire outlook for fuel demand. It’s the last trading day for April RBOB and ULSD (HO) futures, so watch the May contracts for price direction at the racks, while we could see some fireworks in the expiring contracts as we wind down one of the most volatile months on record.
With the U.S. more or less planning to stay on lockdown for all of April, and EPA restrictions being delayed or waived, it’s difficult to see a strong fundamental argument for prices to sustain any sort of meaningful rally in the next few weeks. The WSJ noted yesterday that cheap gasoline abounds at retail stations across the country, unfortunately - and largely because - no one is around to buy it.
Monday’s action could be seen as pivotal for gasoline prices trying to carve out a floor as early eight cent losses turned into a penny gain by the end of the day. Then again, that nine cent swing was less than half of the range that we saw in the previous three Monday trading sessions, so it could just be lost in the noise of volatility if prices don’t continue that rally this week.
WTI also dodged another technical bullet Monday, managing to hold above $20 by day’s end, despite trading below that level several times throughout the day. Here too, we’ll need to see prices rally above their downward sloping trend line this week to avoid another wave of technical selling.
The Dallas FED’s Texas manufacturing survey for March illustrates just how quickly the COVID-effect hit producers in the state.
The crack-spread charts below show the dire economic outlook for refiners over the next 6 - 12 months based on current forward curves, and help explain why it’s now more news worthy if a refinery isn’t cutting rates, as plants around the world are curbing production at unprecedented rates.
Another Monday Sell-Off For Energy Futures
It’s another Monday sell-off for energy futures, although so far without the fireworks of the previous three weeks. March 9, 16, and 23 all saw gasoline prices drop 20 cents or more, making this morning’s six cent losses seem relatively pedestrian. WTI is on the cusp of a technical breakdown, briefly dipping below $20/barrel overnight, and threatening a drop to fresh 20 year lows if that support breaks down this week.
The EIA this morning took a closer look at that record setting volatility in oil prices, which has dwarfed previous all-time highs. Since 1999 WTI has moved more than 10 percent in a single day one half of one percent of all trading days, and yet that’s happened six times already in March.
Baker Hughes reported a decrease of 44 oil rigs working in the U.S. last week, the largest weekly drop since the last time prices crashed five years ago. Using the 2016 lows as a guide, we would expect another 300 or so rigs to be taken offline (about half of the current total) in the next several months.
Oil refineries are also shutting down at a record pace, with several more reductions announced over the past few days due to negative economics and containment issues.
Want to know how quickly storage space is reaching capacity? A Bloomberg report says that some oil pipelines are already asking customers to curb output due to a lack of capacity. That phenomenon is also driving up rates for floating storage as traders seek to hold record amounts of oil at sea.
The EPA Friday announced delays in the spring RVP transition deadline, and for small refinery compliance with their RFS requirements.
Money managers continue to bail out of their long positions in Brent crude and RBOB contracts, licking their wounds after the large speculative category of trader went into the collapse betting heavily that prices would rise. Money managers have made small increases in WTI net length for a 3rd straight week, in a relatively small bet that the bottom may be in.
Mixed Energy Complex This Morning
The energy complex is mixed so far this morning with gas and diesel futures up 1.5 - 2 cents while American and European crude grades fall between 50 cents and a dollar per barrel. It looks like the gasoline crack spread carved out a bottom on Monday when it reached negative values for the first time since the 2008 collapse, and has traded up the rest of the week.
The EPA is supposed to announce its decision on fuel waivers later today. That announcement feels a bit anticlimactic after the EPA has said it is suspending enforcement of environmental laws in general.
WTI was dealt another fundamental blow after the new stimulus package left out funds for the previously announced SPR crude oil purchase, leaving the Department of Energy to suspend its buying plans.
Technically speaking, WTI still looks vulnerable to a drop below 20 dollars after failing to break out of its descending triangle pattern this week. On the other hand, the big drop earlier this month left a sizable gap on the chart and people that want to sound like technical traders often to say “gaps always get filled”.
For those looking for a fundamental reason for oil prices to rebound: New reports suggest Russia is working towards a new alliance with OPEC to deal with the drop in oil demand and prices.
Recovery Rally Running Out Of Steam
The recovery rally in energy and equity markets appears to be running out of steam this morning after some eye popping jobless claim figures puts the economic impact of the coronavirus shutdown in harsh perspective, suggesting the largest stimulus package in history may not be enough.
The U.S. Senate passed its two trillion dollar spending bill, which is expected to become law later this week. It does not appear that the bill will have immediate impacts on energy supply or demand. Several reports this morning are noting (with no lack of dismay) that “clean” energy funding wasn’t included in the stimulus package.
Weekly jobless claims were nearly four times greater than the previous records set in 2009, with more than 3.2 million Americans filing for unemployment last week. While we saw large drops in demand in the DOE report this week, that surge in jobless claims, coupled with the increased shelter in place orders this week suggests that the nine percent estimated drop in U.S. gasoline demand will be dwarfed in next week’s report.
More states are jumping on the RVP waiver bandwagon as the seasonal transition from winter to summer gasoline looks both impossible and unnecessary this spring. No official word yet from the EPA if they’ll follow suit on the federal level.
Week 12 - US DOE Inventory Recap
How Long Will It Last?
How long will it last? That seems to be the question of the day, whether in regards to the virus, shelter-in-place orders, or the recovery rally in stocks and energy prices after the DJIA had its best percentage gain in 87 years Tuesday.
Unfortunately, so far this morning it seems like the answer to the recovery rally is not very long as both stocks and energy futures have given back most of their overnight gains and several contracts are now moving lower. RBOB gasoline futures are holding to modest gains in the April and May contract, although remain well off their intra-day highs from Tuesday’s session.
From a short term technical perspective, this overnight pullback is looking bearish for energy futures as prices were unable to break the downward sloping trend-line that’s been in place since the March 9 price plunge. With fundamental supply/demand issues still just a guessing game, if those technical resistance layers aren’t breached this week, there’s a good chance we’ll see another round of heavy selling soon.
Worth noting in the political drama playing out in Washington: One of the sticking points in the stimulus package is the attempt to tie cleaner jet fuel requirements to any bailouts of the airline industry.
Speaking of Jet Fuel, the EPA is reportedly considering allowing temporary waivers to allow jet fuel to be blended with other lower-sulfur diesel grades to help the industry alleviate a glut of the suddenly unwanted product. The EPA is also considering a waiver or delay of the summer RVP requirements for gasoline, as winter grade inventories are piling up and may not be transitioned in time.
Following moves at numerous petroleum refineries this week, ethanol production facilities are announcing numerous cut backs to offset the plunge in ethanol-blended gasoline demand. On the bright side, as predicted, some ethanol producers (along with other alcohol distillers) are temporarily ramping up production of sanitizers instead of their normal products.
The API reported inventory draws across the board last week with Crude stocks down 1.2 million barrels, gasoline down 2.6 million barrels and distillates down 1.9 million barrels. The DOE’s weekly status report is due out at its normal time today, and the agency has not yet indicated that reporting would be delayed in the future due to the change in employees working remotely.
Glimmers Of Optimism Creep Through
It’s a rare risk-on day for global markets as small glimmers of optimism are creeping through the coronavirus panic pandemic. It appears that congress is close to an agreement on a huge stimulus package, and China is starting to ease travel restrictions, giving a light at the end of the tunnel for the U.S. and other countries at the early stages of their lock-downs.
Don’t jump at the head-fake: We’ve seen this pattern a few times during the March meltdown where an overnight bounce is unable to sustain itself. This time we saw gasoline prices up nearly nine cents overnight, while WTI was up nearly two dollars, before most of those gains were erased in early morning trade, so it’s still way too early to say that the worst is behind us.
On the other hand, RBOB futures have dropped $1.15/gallon in the past 18 days, leaving only 40 some cents to get to zero, so you could say with confidence that the majority of the losses have already been seen.
The bizarre world of gasoline prices: Many regional spot markets were going for 30 cents or less a gallon following our third consecutive Monday meltdown, and prompt barrels on Wolverine pipeline were going for 17 cents. Given the rapid drop in demand, and tanks reaching capacity, it is not hard to imagine a scenario where a shipper is forced to sell gasoline at a negative number temporarily to clear their inventory. Don’t think that’s possible? Read how it happened with natural gas prices last year.
Ethanol prices are trading at all-time lows, and yet they’re still some 60-80 cents more expensive than the gasoline grades they’re being blended into.
Numerous refinery changes have been announced this week, as plants coast to coast are forced to curb runs. Yesterday alone we saw announcements from Delta/Monroe and P66 on the East Coast, and two Exxon plants in LA and TX, while Husky, BP, Citgo, Marathon have all also announced cut backs and/or changes in maintenance schedules. Even those plants that haven’t announced changes seem likely to be making adjustments to deal with the rapidly dropping demand, and negative margins.
In addition to the U.S. plants, the Caribbean refinery formerly known as Hovensa has been working on restarting for several years, but those efforts look like they could be delayed after a worker tested positive for the coronavirus.
For now it seems like the run cuts are hovering around the 20 percent range, consistent with last week’s announcement from Colonial pipeline that it would reduce flow rates by the same amount. Depending on how long this shelter-in-place lasts, those cut backs could easily change to 50 percent or more in the next few weeks as the demand slowdown appears to be getting worse by the day.
Late-Day Sell-Off Wipes Bullish Optimism
After a late-day Friday sell-off wiped out any bullish optimism heading into the weekend, more heavy selling came out in the overnight session, before buyers started stepping in this morning, pushing WTI and ULSD futures to modest gains, while RBOB gasoline holds 6 to 7 losses for the day.
RBOB reached a record low on Friday of $0.6010/gallon, then took another seven cents off overnight trading at a low of $0.5279. Those values put some regional spot values below 40 cents/gallon if spot diffs hold today, which means we may see retail prices below one dollar in some areas this week. The question is will anyone will be there to see it?
The FED has had another active weekend, trying to ensure that lending markets stay healthy despite the virus, with a steady stream of unusual but apparently necessary liquidity measures. The FOMC also issued another statement this morning reiterating its attempts to promote stability.
The FED announcement seems to get credit for the morning boost to equity and energy prices, with both asset classes rallying off their overnight lows shortly after its release.
Want to know how dangerous these price swings can be? Friday the CME group was forced to auction off the positions of a clearing member that was no longer able to meet its capital requirements due to losses from the spike in volatility.
Money managers slashed their net-long holdings in Brent to the lowest in four years as speculative funds continue to head for the exits. RBOB also saw liquidation last week, while WTI actually saw a small increase in net length, and ULSD saw its net short position reduced as it seems some funds are ready to declare that the bottom is near for diesel prices.
Baker Hughes’ weekly rig count showed the first real signs of a drilling slowdown with a reduction of 19 oil rigs last week, 13 of which were in the Permian basin. With oil prices hovering near 18 year lows, expect the reduction in rig count to accelerate in the coming weeks.
While energy producer and refiner stock prices have taken huge hits during the March Madness meltdown, Delek has reportedly instituted a poison pill clause to prevent a hostile takeover by Carl Icahn, the majority owner of regional refiner CVR.
Don't Call It A Comeback?
Don’t call it a comeback?
WTI rallied 24 percent Thursday, it’s largest daily percentage increase on record, although percentages don’t mean nearly as much when the outright values started at 18 year lows. Diesel futures also had a big day, rallying more than a dime at their highs and taking back most of Wednesday’s heavy losses.
If the current gains can hold today, it would mark the first consecutive increases for both energy and equity markets in a month, but right now they appear to be on shaky ground as the majority of the overnight gains in both asset classes have already been erased.
Refinery reactions to the virus and its economic fallout are starting to be announced this week.
The largest refinery on the West Coast is reducing production due to the drop off in demand, along with a handful of other plants nationwide, while numerous others are delaying maintenance and sending home contract employees to help limit the spread of the virus.
Pipelines are also adjusting schedules to meet the rapidly changing fundamental situation, and Colonial pipeline (the largest products line in the world) announcing it would temporarily reduce flow rates by 20 percent due to the drop in demand.
Rumors continue to swirl that the EPA will soon grant emergency waivers to aid the spring gasoline RVP transition, but no official word has been released yet. With numerous stimulus, bailout, and other packages being put together to try and help businesses weather the storm, it’s a safe bet that there are more changes coming to regulations in the energy arena.
Two other big rumors making the rounds: The White House may attempt to intervene in the lose-money contest between Saudi Arabia and Russia, while Texas is considering the very un-Texan move of forcing a temporary reduction in the state’s oil production.
The forward curve charts below show both how fast the landscape has changed over the past month, and how valuable storage options are becoming, as weak demand sparks the first return of “super contango” since 2009.
Energy Prices Set All Sorts Of Records
Energy prices set all sorts of records during another heavy sell-off Wednesday with crude contracts reaching 18-year-lows, diesel prices dropping below one dollar, and spot gasoline prices in most major cash markets trading around 50 cents/gallon. Uncertainty over the severity and duration of the coronavirus fallout continues to overwhelm attempts to calm financial markets with stocks pointing lower yet again this morning, which threatens to erase an overnight bounce in energy contracts.
WTI hit $20/barrel for the first time since the aftermath of September 11 yesterday, and Western Canadian crude values dropped below $10/barrel. Crude’s capitulation was a brief spot of good news for refiners that saw a much needed bounce in crack spreads after reaching multi-year lows earlier in the week.
Refiners had been expected to reduce run rates or move up maintenance to offset the expected slowdown in demand in the coming weeks, but now news reports suggest that some maintenance has to be deferred due to the logistical challenges of moving large amounts of people to perform the work in close proximity to one another. In other words, turnarounds and social distancing don’t mix.
Intervention in fuel markets is also starting to ramp up with Louisiana announcing an RVP waiver for to ease the burden on refineries annual transition from winter to summer specifications. We’ve also seen hours of service waivers for truck drivers, and expect more actions at the state and federal levels until the crisis is past.
The DOE’s weekly report showed strong demand across the U.S. last week and large declines in refined product inventories. Those figures were largely ignored however as the expected demand drop is just starting in most parts of the country as schools and businesses shut down. One other reason the DOE’s demand estimates may not carry as much weight these days: They estimated that U.S. jet fuel demand was up on the week, which is something many are having a hard time believing.
Week 11 - US DOE Inventory Recap
Panic Selling Grips Markets Worldwide
WTI is taking its turn leading the energy markets lower this week, dropping another 15 percent since Monday’s close, and reaching a new 18 year low overnight as the panic selling continues to grip markets around the world.
On a percentage basis, this would be the worst month ever (down 45% so far in March) for WTI futures, which have been trading for nearly 40 years. On a $/barrel basis, this $20/barrel drop is still a long way away from the October 2008 record of a $33/barrel decline.
Gasoline futures were shrugging off the 8 percent drop in crude oil overnight , trading up three cents/gallon after the API reported a seven million barrel decline in U.S. gasoline inventories last week, but have succumbed to the bearish pressure and are now trading modestly lower. Diesel stocks also had a large draw of 3.6 million barrels in the industry estimate, while crude stocks had a small decline of 421,000 barrels. The EIA’s weekly report is due out at its normal time.
While they have a much shorter history than WTI, and a small fraction of the trading volume of their petroleum cousins, ethanol futures have also dropped to a record low this week at $0.94/gallon. Given that fuel ethanol is around 198 proof alcohol, perhaps the excess inventory may find a new life in the hot market for sanitizing products. No word yet on Twitter if that is actually a viable solution to the virus.
Many physical fuel markets around the country are seeing basis values drop this week as traders are hesitant to buy anything with so much uncertainty around demand. The drop in both calendar and basis spreads is beginning to drive up premiums for storage options around the world, whether they be in major pipeline systems, inland terminals, or the vessels at sea turning into floating storage.
Another notable phenomenon this week, it’s not just physical demand that is trending lower. Trading volumes in the major petroleum contracts have been dropping daily since the March 9 price plunge. This could be due to the extreme volatility forcing some trading programs to the sidelines to avoid being run-over. That lack of volume is a technical signal of low conviction which can be a sign that this trend is approaching its end. That said, low volume can also mean greater volatility since anyone needing to trade a large position will create bigger price movements than normal, so don’t expect these markets to calm down for a while.
Markets In The Green To Start St. Patrick's Day Trading
Markets are in the green to start St. Patrick’s day trading, with U.S. equities trying to recover from their worst day in over 30 years, and gasoline prices trying to claw back from their lowest levels in more than 15 years.
Uncertainty continues to rule the headlines as the world struggles with what comes next in the Covid wars, making volatility the only certain outcome near term. It was more of the same overnight as equity futures hit limit up only to see those gains wiped out before heading higher a second time. For energy, we saw RBOB rally nine cents, only to fall back to more modest gains this morning.
Refined products have outpaced crude in the selling over the past week, putting refinery margins at multi-year lows, making it more likely that we’ll see production cutbacks near term that will help balance the anticipated drop off in demand as much of the country self- quarantines.
Ethanol & RIN values have been falling in sympathy with gasoline prices as the anticipation for a drop in driving demand – and perhaps even some leniency from the government on struggling refiners – sends buyers to the sidelines.
Speaking of which, with so much uncertainty and record-setting market reactions, we can expect government intervention in fuel markets – perhaps in the form of RVP waivers this spring – as the industry may otherwise struggle to convert from winter to summer grades without the typical seasonal increase in demand.
Coronavirus Fallout Continues
Another day, another 20 cent drop for gasoline prices as the highly unusual becomes commonplace while the world deals with the coronavirus fallout.
Fear is ruling the trading day after an optimistic Friday finish, and in spite of the Fed announcing a 100 point cut in interest rates, along with other liquidity injections, some coordinated with other central banks, and assurances from the government that they would be taking action to limit the economic harm done by the attempts to limit the outbreak.
RBOB gasoline futures reached an all-time low (the contract started trading in 2005) overnight, trading at $.6778/gallon, nearly 11 cents below the previous low record set in the panic of 2008.
While the panic continues in futures markets, the physical reality is much different with numerous regional markets around the US facing tight supplies as a combination of heavy refinery maintenance, RVP transition, and in some cases a spike in demand as people prepare to self-quarantine. The concern remains that the short term shortage will turn to long-term excess if drivers stay off the road in the coming weeks.
So far the fear has been primarily focused on demand, but after a worker at the largest refinery on the West Coast tested positive for the disease, doubts about supply reliability cannot be ignored. A Reuters article highlights the steps being taken by major oil companies to continue operating through the crisis.
Money managers seem to be taking the energy price meltdown in stride, with relatively minor changes witnessed in ULSD, RBOB and WTI contracts last week, while Brent saw some heavier liquidation.
Baker Hughes reported an increase of one oil rig working in the U.S. last week. While the decision to put that rig to work was likely made months ago, it does look particularly optimistic at this point.
Stocks Suffer Worst Day Since 1987
The roller-coaster is pointing higher this morning as stocks point to a five percent rally after suffering their worst day since 1987. RBOB gasoline continues to be the most volatile of the energy contracts this week, with 25 cent losses Thursday transitioning to 12 cent gains Friday morning, while oil and ULSD have seen swings less than half of that size.
When Thursday’s gasoline collapse settled out, prompt values for most Midwest and East Coast cash markets were below 80 cents/gallon, with Chicago CBOB taking the title as cheapest in the country, ending the day just below 75 cents/gallon. In several instances, those were the lowest prices we’ve seen since 2008. The speed of the drop this week should be an early gift for retailers, that will see huge margins that might help them weather the anticipated drop in demand over the coming weeks.
With gasoline cracks dropping nearly eight dollars/barrel on the day, it appears that some U.S. refiners may be forced to act by either reducing run rates, or moving up maintenance, both due to weak economics, and what could turn into containment issues very rapidly if some of the more dire predictions about driving demand come true.
The plunge in gasoline was also a drag on ethanol and RIN values, as both blending economics and demand expectations for bio-fuels took a big hit on the day.
While ULSD prices have been volatile, they’re paling in comparison to gasoline this week. Perhaps the most notable piece of the diesel price action is the forward curve. A month ago, the spread between prompt and three-year forward values was six cents/gallon, and today it’s nearly 43 cents/gallon, demonstrating the market’s anticipation of the demand shock hitting hard, but not lasting very long.
Crude spreads have seen similar moves as diesel. See what Warren Buffett had to say about those spreads and expectations for oil demand.
With all that’s gone on the past two months, it’s easy to forget that at the start of 2020 there were concerns that a war with Iran could send crude oil north of $100/barrel and cripple the world economy. This week, U.S. forces battling with Iranian-back militias is barely even hitting the news wires.
Investors Flee To Find Safer Assets
The past 24 hours seem to have been a tipping point where the virus went from being a big news story to most, to something more tangible now that this March madness is actually impacting March Madness along with other major sporting and social events, not to mention one of the world’s most famous faces.
RBOB gasoline is leading the move lower, reaching a fresh four-year low at 97 cents/gallon overnight as expectations of increased work from home strategies may force sharp reductions in demand. ULSD and oil prices are also under heavy pressure, but have so far not come close to testing the lows from Sunday night.
RBOB contracts also had the largest relative speculative long position heading into this meltdown, so that means there was more room to fall as those funds exit their positions. On the flip side, the 80 cents/gallon drop in gasoline prices is a big boost to the pocketbook of many Americans, and the concerns over airlines could spark a surge in road-trip vacations, unlike the last major economic crisis when four dollar gasoline made stay-cations all the rage.
The DOE’s weekly report offered some sharp contrasts to the “more interesting” market news, with demand estimates for refined products pushing well above their normal levels for March, and stocks seeing another week of large reductions. Of course the bearish counterargument is those stats are a look back at what the situation was last week, and it’s the weeks to come that we’ll likely see the impact on demand.
Week 10 - US DOE Inventory Recap
Roller-Coaster Continues With Oil Price War
The roller coaster is heading lower to start Wednesday’s session after the Saudi’s lobbed a second volley in the new oil price war. That news sparked a three dollar reversal in crude oil prices and turned nickel overnight gains for RBOB and ULSD into three cent losses. Equity markets are also selling off heavily after Tuesday’s stimulus-inspired rally.
The API reportedly showed large draws in refined product inventories last week, with gasoline stocks down 3.1 million barrels and distillates down 4.7 million barrels. Crude oil stocks were said to build by 6.4 million barrels. While the giant swings in futures prices and fears of demand destruction continue to dominate the headlines, these fundamental stats are quietly pointing to tight supplies in a handful of markets around the U.S. The DOE’s weekly report is due out at its regular time this morning.
OPEC slashed demand estimates for the year, and increased supply estimates in its March oil market update. The supply increase is based on increased output from Saudi Arabia and Russia, which they predict will more than offset the expected production cuts in the U.S. as prices tumble. Given the fear swirling, it is worth pointing out that even with these much lower assumptions, the cartel is still calculation world oil demand to grow slightly for the year, just not by much.
The OPEC report also noted another physical detail lost in the headlines these days: Libyan oil output has dropped by one million barrels/day so far this year as violence shut down that country’s production.
New Lows In The Midst Of Monday’s Manic Meltdown
Volatility reigns as equity and energy markets try to rally back after Monday’s huge selloff. In the case of U.S. stocks, it was the worst day since the financial crisis in 2008. For oil, it was the worst day since Gulf War 1 in 1991. Oil prices managed to add back a cool 10 percent, and refined products were pushing double digit gains, but look to be struggling to hang on as the morning trading progresses.
Rumors of a new tax cut to try and prop up the economy are getting some of the credit for the rally in stocks, which reversed overnight losses after Italy announced it was placing the country on lock down.
The IEA’s March oil market report highlights the uncertainty surrounding the coronavirus, and the potential impacts on demand. OPEC’s monthly report is due out tomorrow, and will be interesting to see how the cartel handles the discussion surrounding the price war.
With prices reaching four-year lows in the midst of Monday’s manic meltdown, we took a look back at a handful of other price collapses, and where we saw values 6 months later for those customers looking at locking in their diesel prices this year.
Oil Price War Sparks Biggest Single Day Sell-Off
The opening salvo of an oil price war between Saudi Arabia and Russia has sparked the biggest single day sell-off for oil futures in 29 years. Adding to the negative sentiment is another day of heavy selling in global equity markets, as investors are running scared from potential fallout from the coronavirus.
In an odd twist, the huge sell-off across asset classes just so happens to come on the 11th anniversary of the longest bull market in U.S. stock market history, as stocks finally found a bottom on this day back in 2009. For reference, the S&P 500 was at 665.7 points that day compared to 2,819 currently, and the DJIA bottomed out at 6,419 compared to 24,564 this morning.
Barring a miraculous recovery, it seems like there could be severe fallout from this latest rout, that has quickly moved oil prices from hovering around break-even levels, to four year lows that will certainly end with bankruptcies for some producers.
The Permian basin is the most obvious target as it accounts for more than half of all U.S. drilling activity, and could turn the boom towns of West Texas back into temporary ghost towns like we saw the last time prices crashed. Meanwhile, Baker Hughes reported four more oil rigs were put to work last week, bringing the total count to 682, just below the five year average. Using the last sell-off as a gauge, it’s likely we could see that rig count drop below 400 if prices remain near current levels.
Money managers continued to head for the exits last week, reducing their net length in WTI, Brent and RBOB contracts. Expect to see even more dramatic reductions in this week’s report once today’s melt-down shows up on the data.
Panic Selling Grips Global Markets
Another round of panic selling has gripped global markets the past two days, wiping out gains from earlier in the week, sending energy futures to new multi-year lows. Energy and equity markets are once again attached at the hip as fear takes control of the daily price action, as fundamentals in the recent past take a back seat to concerns about what might happen to demand in the coming months.
The OPEC and Friend’s meeting is adding to the downward pressure this morning, as Russia appears to be stonewalling the cartel’s attempt at increasing production cuts.
The anticipated slowdown in economic activity did not show up in the February payroll report, with 273,000 jobs added during the month, large increases to the job estimates for December and January, and the unemployment rates holding near all-time lows.
Shell publicly announced that it is trying to sell both its Anacortes WA, and Mobile, AL refineries, months after reports suggesting they were shopping their remaining West Coast facility. Given the numerous headwinds facing refiners these days, these plants may join a growing list of plants up for sale that are struggling to find a buyer.
ExxonMobil meanwhile announced its plans to reduce its drilling activity in the Permian basin, citing the overhang of supply, and dropping economic activity due to the coronavirus as factors in their decision.
The Roller Coaster Ride Continues
The roller coaster ride continues, with thousand point swings in the Dow Jones Industrial average and nickel swings in gasoline and diesel futures becoming a daily event as uncertainty over the coronavirus is leaving many people apparently unsure if they should be buying toilet paper or stocks.
Energy futures failed in their second attempt this week to break through overhead resistance, which sets the stage for another drop in prices from a chart perspective, which helps explain why prices are dropping this morning, even though OPEC has agreed to cut production by 1.5 million barrels/day.
The DOE estimates U.S. crude oil production reached a new record high in the past week at 13.1 million barrels/day. That’s one million barrels/day higher than a year ago, and four million barrels/day more than three years ago. Those increases go a long way to explaining why the market doesn’t feel the effects of three of the world’s largest oil producers (Iran, Venezuela and Libya) all operating at a small fraction of their capacity.
Diesel inventories dropped for an eighth straight week as output levels fell to their lowest level in nearly a year. Both the inventory and output levels are following typical seasonal patterns, and we’d expect to see both start increasing over the next few weeks if those patterns hold true this year. With numerous unplanned refinery issues ongoing however, it could take longer this year to see those increases.
Gasoline inventories are also following their typical seasonal pattern, declining for a fifth straight week. Unlike diesel which is trending towards the bottom end of its five year seasonal range, total U.S. gasoline stocks are holding near the top end of their range as a glut of inventory in the middle of the country (PADDs 2, 3 & 4) offset relatively tight inventory on the East and West coasts (PADDs 1&5).
Week 9 - US DOE Inventory Recap
Another Wild Day For Stocks And Commodities
Tuesday was another wild day for stocks and commodities as the Fed made a 50 point rate cut prior to the scheduled FOMC meeting in two weeks – something they haven’t done since the financial crisis in 2008. We saw the DJIA jump 500 points in seconds following that announcement, and refined products followed suit with a four cent spike, but neither rally lasted long and stocks ended the day with large losses, while energy futures gave up all of their gains.
The overnight action has seen more large swings, with both stocks and energy contracts both holding solid gains for the moment. While the coronavirus remains the big story in terms of price movement, it’s also worth noting that primary election results are also appearing to have an influence, with some of today’s early rally being blamed on the lower chance that a socialist will be the next U.S. president.
This turbulence is an indicator of a market struggling for direction, and often coincides with changes in a trend. The trillion dollar question is if this means the end of the last month’s trend of heavy selling – or the end of the longest bull market trend for U.S. stocks on record?
For energy, we’ll need to see WTI break and hold above the $49 range and ULSD do the same at $1.58 in order to say that the worst of the sell-off may be behind us, with both contracts failing their first test at those levels during Tuesday’s big swings.
OPEC and friends are meeting Thursday and Friday this week, with all eyes watching for whether or not the Saudi’s can get Russia to agree to additional output cuts to prop up oil prices in the face of plunging demand.
The API was reported to show a small build in oil inventories last week, while refined product stocks continued their seasonal decline. Oil stocks were up 1.3 million barrels last week, while distillates were down 1.7 million and gasoline was down 3.9 million barrels. The DOE’s weekly report is due out at its normal time today. With air travel one of the hardest hit industries from the coronavirus fears, watch the Jet Fuel figures to see if that drop in demand is showing up in the data already.
The EIA published a look at the growing role of ethanol and natural gas liquids in total U.S. petroleum consumption, reducing the demand from traditional oil refineries.
Correlation Between Energy And Equity Prices Strengthens
A recovery rally is underway for a second day, following the largest single day point gain for the major U.S. equity indices Monday. Crude oil prices have gained five dollars off their low trades, and refined products have rallied 12 cents or more since last week’s lows. The correlation between energy and equity prices has strengthened over the past couple of weeks as the markets return to a period of risk-on or risk-off trading.
The volatility is not gone despite the bounce however, with large overnight price swings as the potential for coordinated central bank action to combat the economic impact of the coronavirus was anticipated, but seems to have largely come up empty based on the early headlines.
It looks like the $49 that acted as support for WTI in early February will now be the first layer of resistance to test the staying power of the recovery rally. ULSD has a similar cluster of support/resistance around the $1.58 range that’s already held off one overnight rally attempt and looks to be a pivotal level near term.
One potential side effect of recent drop in fuel prices and interest rates? Storage for crude and distillates may be back in high demand as forward curves have flipped from backwardation to contango during the 2020 market meltdown, particularly with the cost of capital reductions associated with those plays. This demand for storage could push spring basis values higher than normal as those with room to store extra will need a higher price to unwind that trade.
Worst Week For U.S. Equity And Energy Prices
We just lived through the worst week since 2008 for U.S. equity and energy prices as the world struggles to deal with the uncertainty of the coronavirus. Central bank intervention seems to be the theme of the day, helping some contracts find a price floor (at least temporarily) as the FED and other banks pledge to step in to support the economy.
While current values look tame with refined products up less than half a cent on the day, the overnight action saw early three to four cent losses swing to three to four cent gains, following closely with similar moves in U.S. equity futures, suggesting that the recent increase in volatility isn’t going away just yet.
Don’t adjust your dial: April RBOB took the prompt trading position today, adding some 11 cents in value from the March contract due to the transition to summer specs. You won’t see that move at the racks today as cash markets adjust for this with negative basis values until the physical terminal conversions happen over the next six weeks.
One data point that shows how fast the market outlook has changed: one week ago the CME’s FedWatch tool showed a zero percent probability of a 50 point reduction in the FED’s target rate in March, and this morning there’s a 100 percent probability given for that rate cut.
Money managers did not appear to be heading for the exits in the first few days of the latest sell-off, with WTI and Brent both seeing small increases in net-length (bets on higher prices) while refined products both saw modest selling. Of course, the data for the COT reports is compiled as of Tuesday, so we don’t know what happened when the selling picked up the pace Wednesday through Friday.
Want a reason for a price rally? The last time money managers (aka large speculators, aka hedge funds) were this negative on diesel positions was June 2017, which was also when ULSD prices bottomed at $1.40 before rallying north of $2.09 in the back half of the year.
Baker Hughes reported a decline of one oil rig in the U.S. last week, with the total count more or less going nowhere so far this year. If oil prices hold below $50 however, there are plenty of analysts suggesting we could see the rig count drop more substantially over the next few months, which would eventually end the string of record-setting U.S. oil production that’s going on three years and counting.
Today’s interesting read: How the virus lent a helping hand in the climate change battle.