News & Views
Disappointing Demand Readings From The DOE
Disappointing demand readings from the DOE, and the latest war of words between the U.S. and China are getting credit for a weak finish to May trading, dampening the results on what has otherwise been a very strong month for energy contracts. June RBOB and HO futures expire today, so watch the July numbers (RBN/HON) to see where spot markets will be heading for the weekend.
Total petroleum demand in the U.S. declined last week, disappointing many looking for the Memorial Day bump to keep the recovery rally in place. While gasoline demand did tick higher on the week, inventories outside of the West Coast continued to build. Diesel continues down its unusual path of being the weak link in the energy chain, as soft demand and exports send inventories towards record highs. While there have been numerous stories of refineries ramping up run rates or bringing idled units back online to match the demand recovery, these inventory overhangs and soft margins may limit both the capability and desire to do so.
The EIA’s unaccounted for crude oil calculation reached a new record for a third straight week at -999,000 barrels/day, suggesting actual U.S. oil production is about one million barrels/day lower than the official output estimate, a testament both to the scope and flexibility of the U.S. energy industry, and to the challenge of gathering statistical data in real time.
Lies, damn lies and…The EIA isn’t the only one struggling to keep their data accurate these days. The IMF noted how the abrupt nature of the pandemic has disrupted the production of statistics, which is likely to hamper policymakers in their efforts to spur recovery.
The latest example of how oil output cuts are easier said than done: A Reuters report this morning notes that Russia’s Rosneft Oil Company is unable to reduce output to mandated levels while still fulfilling its long term contract obligations.
Week 21 - US DOE Inventory Recap
[Click here to download a PDF of the DOE Week 21 Report.
Energy Complex Teeters On Edge Of Technical Breakdown
Rising inventories are checking demand optimism this week as the energy complex teeters on the edge of a technical breakdown that could knock another 10 to 20 cents off of refined products, despite a strong rally in U.S. equity markets.
The API was reported to show a large build in U.S. crude oil inventories of 8.7 million barrels last week, which sent the complex on an immediate selling spree after the report was released. However, Cushing, OK saw another large draw down of 3.3 million barrels, which has helped WTI prices recover most of their overnight losses. Gasoline inventories were said to increase by 1.1 million, while distillates continue their recent trend as the weakest link in the energy chain, as inventories had another large build of 6.9 million barrels last week.
The relative weakness for diesel is an unusual phenomenon that hasn’t been experienced in more than a decade. In fact, diesel started the year in the strongest position fundamentally, with many concerned that IMO 2020 marine specs would create a run on low-sulfur grades that refiners wouldn’t be able to keep up with. Two months ago, diesel was once again looking strong in the early stages of stay-at-home orders, as a surge in distribution demand kept distillate demand high while gasoline consumption collapsed. That pendulum has swung to another extreme. Distillate inventories are reaching extreme levels as demand stagnates and the export market isn’t strong enough to balance the equation for U.S. producers.
The DOE’s weekly status report is due out at its holiday-delayed time of 10 a.m. Central time, with the “unaccounted for” crude oil figure perhaps the most interesting number to watch.
PADD 2 diesel stocks are also worth watching in today’s report, as evidence mounts that inventories in the Midwest may be swelling to record levels as the typical post-planting demand slowdown hit just in time for April Arbitrage barrels to arrive from the Gulf Coast. Group 3 ULSD basis values have collapsed to record lows in recent days as inventories along the local pipeline systems reach new all-time highs, and collapsing basis values in Chicago-area pipelines suggest those inventories are rapidly rising as well.
D6 RIN values have reached multi-year highs this week, as refineries start to ramp up production – increasing their RFS obligation – and concerns are mounting that next year could create another structural shortage in RIN availability as U.S. gasoline demand won’t recover enough to clear the mandated bio-fuel blending requirements.
The EIA marked another milestone in the changing landscape of U.S. energy consumption, noting that renewable fuel usage surpassed coal for the first time in 130 years, when firewood was the country’s main source of heating fuel. It’s interesting to note that according to this report, the EIA can apparently approximate fuel consumption from 1776 but they still don’t know how much oil is being produced in 2020.
Rally In Energy Prices Stall While Awaiting Weekly Reports
The rally in energy prices looks like it’s stalled out as we await the weekly inventory reports, and charts suggest we may be due for another round of selling after prices have failed to hold at two month highs. There is little in the way of news that seems to be driving the action, and U.S. equity futures are still pointed higher, suggesting this may be a largely technical sell-off.
ULSD futures have traded up to $1.02 in five out of the past seven sessions, but have failed each time to settle north of that level, and haven’t settled north of $1 in over a week. RBOB is seeing a similar pattern, with the $1.07 - $1.09 range acting as a bit of a technical ceiling over the past week. That lack of conviction by buyers looks like it’s left products susceptible to another sharp selloff, although so far the upward trend-lines have not been broken. If those trend lines do break down, there’s an easy 15 cents or more of downside room for products in the next week or two.
The IEA published its World Energy Investment report for 2020 this morning, and predicted the largest annual decrease on record as emergency measures force companies and governments to slash spending. The report notes that all forms of energy investment are being negatively impacted by COVID-19 related issues, but oil investment is seeing the worst of it, with predictions for 50 percent declines in spending, versus 10 to 20 percent declines for gas, electricity and renewables.
Another IEA report released this morning takes a closer look at the change in transportation behavior in recent months, and looks at previous events to help determine the deciding factors in whether or not the shift in transport modes will last.
The EIA published a comparison of 10 North American crude oil contracts this morning, using the April 20 price plunge to show their interconnected pricing structures. Similar to the physical refined product markets around the U.S., the prices among crude grades are similar, but vary based on location, quality, and timing.
The Dallas FED’s survey of Texas manufacturing companies shows that while things are still bleak (near the lowest levels of the 2008 financial crisis), they are improving noticeably since April.
Signs Of Economic Recovery Continue To Appear
Energy and equity markets are rallying again this morning as signs of hope for economic recovery continue to appear. Specific to energy, comments from the IEA Director and Russian oil minister over the past few days seem to be encouraging buyers that the supply and demand equation is balancing.
From a technical perspective, the buying after Friday’s selloff helped heal some of the overbought condition on the charts, but we will need to see prices break through last week’s highs to say that the upward trend is fully back online.
Baker Hughes reported another 21 oil rigs were taken offline last week, marking a 65 percent drop in active oil rigs since March 6. The combined oil and gas rig count also fell by 21 rigs, which sets a new all-time low.
Money managers seem to be encouraged by the drop in U.S. drilling activity, adding to their net length in WTI for a seventh straight week, and approaching the top end of the five-year seasonal range for bets on higher prices. The net length increases have been primarily driven by new long positions rather than short covering, suggesting that the big funds are betting on a price rally in the back half of the year.
The managed money category of trader is much less optimistic for Brent and refined products than they are for WTI, with only minimal changes last week and net positions well below historical averages. That lack of buying suggests the enthusiasm for WTI has more to do with the U.S. oil industry’s ability to rapidly change course, than it does with expectations that global demand is rapidly healing.
The Dallas FED published a new study on the impacts of social distancing and economic activity, noting that while states are reopening, the pace of recovery for businesses is lower and may stay that way for a while.
Snapping A Six Day Win Streak
The energy rally finally looks like it’s run out of steam temporarily with lower values across the board, which would snap a six day win streak for WTI. With little in the way of news, and low volumes suggesting many have already started a four-day weekend, this move lower screams of profit-taking rather than the end of the upward trend.
There is some concern that prices have out-kicked their coverage as U.S. fuel demand remains 20 percent or more off normal levels for this time of year, and charts are showing another rounding top pattern that could mean another sharp selloff to end the month.
Today is often one of the busiest demand days of the year for gasoline as stations prepare for the holiday rush, and the weekend that unofficially kicks off the summer driving season. This year is unlike any before it for U.S. driving demand, but there continue to be plenty of signs that things are slowly improving on that front.
Apple’s mobility data reports continue to show steady improvement in driving activity, while public transit continues to lag far behind. Google’s mobility reporting parses the data into different categories, but shows a similar pattern with demand for driving to residences and parks now higher than pre-COVID-19 levels, while travel to workplaces is still down 24 percent and transit stations are down 34 percent.
While the increase in driving demand so far in May is allowing refiners to begin ramping rates back up, it isn’t yet doing much to help their overall margins as the rally in crude largely driven by the collapse of the super-contango in WTI is pushing crack spreads lower and diesel – which for years has been helping prop up margins, is now dragging them lower.
As if those refiners didn’t have enough to worry about already this year. NOAA is predicting a busy Atlantic Hurricane season, with up to 19 named storms, and potentially six major hurricanes, similar to the devastating 2005 season that wreaked havoc on the country’s energy infrastructure. On the bright side, if a storm does target the Gulf Coast, those events typically bring a boost to margins for any plants that can continue operating.
Path Of Least Resistance For Product Prices
The U.S. Department of Energy was unable to find almost seven million barrels of crude oil in the U.S. last week. It’s true; they said so in yesterday’s EIA weekly status report, in a number nobody normally pays attention to, but is now contributing to a strong rally in oil prices.
WTI prices are now just one decent day away from filling the gap in the chart left behind during the March meltdown. Typically we see a tendency for product prices – particularly for gasoline – to trend higher while heading into a driving-season holiday. Until the upward momentum breaks, it seems like the path of least resistance over the next couple of days is for prices to continue moving higher.
The DOE listed nearly one million barrels/day of oil as unaccounted for last week, the second week that figure has surpassed -900,000 barrels/day, marking the only two times in 20 years of data we’ve seen that much crude go missing. It’s not too terribly surprising that a weekly government report could have this type of error factor, and what it most likely means is that actual U.S. oil production has probably declined much more quickly than the official estimates can keep up with. It all likelihood, U.S. oil production is probably close to 10 million barrels/day instead of 11 million barrels/day, meaning a drop of nearly three million barrels/day since the COVID shut downs began in a testament to the industry’s ability to adapt based on cash flow rather than mandates.
That adjustment factor will likely show up in the monthly report data and helps explain how Cushing, OK stocks have plummeted just one month since the panic occurred surrounding them overflowing.
Diesel continues to look weak fundamentally in the DOE data, and in more industry reports like the weekly rail data report, or regional basis values that are hitting double-digit negatives in the Midwest. So far that weakness isn’t outweighing the futures rally, but it has prevented ULSD from keeping up with the rest of the complex, leaving it in a perilous technical position. Ultimately, diesel prices may end up meaning more pressure on local spot and rack prices if increasing refinery production to keep pace with the gasoline recovery means even more diesel is made without a home.
Week 20 - US DOE Inventory Recap
Concerns Over Storage Appear Largely Behind Us
One month ago, oil futures traded in negative territory for the first time ever, and then plunged to unthinkable levels a few minutes later. Today, the newly prompt July WTI contract is going for $32/barrel, a casual $72 above the lows set by the May contract.
Gasoline cash markets around the country are up 80 - 90 cents during that same time, as concerns over a lack of storage appear to be largely behind us now that drivers are starting to hit the road again. The diesel outlook is less optimistic however, and it shows in prices that have only rallied 20 - 30 cents in the past 30 days.
The API reported a decrease in oil inventories of 4.8 million barrels, led by five million barrel draw down at the Nymex delivery hub in Cushing, OK. Gasoline inventories were said to have a small decrease of 651,000 barrels, while distillates continued to swell, increasing by five million barrels on the week. The DOE’s weekly report is due out at its regular time this morning.
The EIA took a deeper look at the drop in oil rigs over the past two months. Many believe that the agency’s estimates of oil production have been overstated as the models used aren’t keeping pace with the reality on the ground.
The technical breakout that started last week has the energy complex looking very bullish, targeting the chart gaps left behind by the opening shots of the Oil Price War in March, some 20 cents above current levels for RBOB and ULSD. That said, the recent run-up has also left several short term indicators in overbought territory, so another round of heavy selling seems likely whenever this latest rally runs out of steam.
Optimism Abundant As Prices Reach New Levels
Optimism is abundant this week as energy and equity prices reach their highest levels in over two months. Demand recovery around the globe is the hot topic as countries and states continue to relax restrictions, and reports suggest China’s consumption is almost back to pre-pandemic levels.
Apple’s mobility trend data, based on demand for its mapping software shows that U.S. driving demand is now down less than 20 percent from pre-COVID-19 conditions, while public transit demand is still off some 70 percent.
That divergence in modes of transportation highlights what may become a major challenge for refiners in the back half of the year. Gasoline consumption looks like it will continue moving higher, but diesel demand in many forms, from planes, buses, trains, oil rigs and 18-wheelers looks like it may take much longer to recover. To make more gasoline, refiners will be challenged to find a home for that extra diesel, as storage tanks have filled up rapidly in the past five weeks.
What a difference a month makes. June WTI futures expire today, and that contract is trading at a premium to July. Backwardation in the forward curve, even if it’s only for one expiring contract, seemed impossible back on April 20 when the May WTI contract plunged to -$40.
Supreme Refusal: The supreme court denied reviewing two cases this week that have direct impact on refiners. The first case was attempting to shift the point of obligation under the Renewable Fuel Standard from refiners to blenders. The other was an appeal by Venezuela to prevent the sale of Citgo.
Buying Spree In Energy And Equity Markets
Oil and gasoline prices reached a two month high in overnight trading as the world continues to reopen from lock-downs, and officials signal there’s more fiscal and monetary stimulus coming to help the economy heal.
The FED Chairman said in an interview aired Sunday that there was “really no limit” to what they could do with lending programs to help prop up the economy, which seems to be contributing to the buying spree in both energy and equity markets today as traders cheer one of their favorite concepts (free money) while ignoring the warning that an economic recovery may take more than a year.
Baker Hughes reported another 34 oil rigs taken out of service last week, bringing the U.S. oil rig count to its lowest level since 2009, and the total rig count (including natural gas) to a new record low in the 33 years since this report has been made available.
This article from Bloomberg suggests that U.S. oil output has been reduced much more than the EIA has reported so far, and that a large correction in the official data is forthcoming. The recent price action, rig count, and inventory data all seem to support that theory.
Money managers are on board to make bets on higher WTI and RBOB prices but are less enthused with Brent and ULSD. Large speculators increased their long bets in WTI to a new one year high, but reduced bets on higher Brent prices for the first time in six weeks. The increase in RBOB and reduction in ULSD positions held by money managers seems to match the trend in U.S. consumption as drivers start their return to the road, but commercial fuel use is not keeping pace.
This strong gasoline, weak diesel conundrum is the reverse of what the industry felt as the country was starting to shut down in March, and will provide new challenges to refiners starting to ramp up production once again as storage space for distillates suddenly looks scarce. We’re already seeing a handful of regional markets across the country run tight on gasoline allocation as demand ticks up faster than pipeline can keep pace, and excess diesel in some lines seems to be getting in the way of gasoline resupply.
Jerome Powell: Well, there is a lot more we can do. We're not out of ammunition by a long shot. No, there's, there's really no limit to what we can do with these lending programs that we have.
End To A Choppy Week For Energy Prices
Optimism is back to end a choppy week for energy prices as fundamental reports from around the world seem to be better than expected, and technical are starting to favor more upside.
WTI and ULSD futures are both breaking through the top end of their May trading range this morning, putting oil prices at their highest level in six weeks. If those contracts can end the week above that range, the door is open for them to make a run at the chart gaps left behind in early March when prices first started their collapse. If that happens, the target for WTI is around $33, ULSD is in the $1.35 range and RBOB should make a run at $1.25.
Equity markets had a strong recovery rally Thursday, only to point lower again this morning as new fears of a trade war continue to curb the enthusiasm of investors. The correlation between equity and energy prices remains in negative territory after being attached at the hip during the early stages of the COVID-19 crisis. Both asset classes are experiencing the lowest levels of volatility in two months, which is no doubt a relief for many, while many others wonder how long it will last.
The Dallas FED released on outlook at the heavy impact falling energy prices and lack of storage space will have on total U.S. business investment. The report predicts a 35 percent drop in investment in the industry between Q1 and Q2, which is dragging down total U.S. non-residential investment by more than six percent.
Energy Prices Continue Choppy Trading Action
Energy prices continue their choppy trading action, starting Thursday’s action with modest gains, after another selloff Wednesday. The IEA’s monthly oil market report seems to be contributing to the optimism this morning, with a global demand forecast that’s less bad than previous estimates.
Yesterday’s DOE status report showed U.S. crude oil stocks declining for the first time in 16 weeks, as lower production and fewer imports were able to offset another drop in refinery runs, while export volumes of oil held relatively steady. Cushing, OK stocks dropped by more than one million barrels on the week, leaving inventories at the NYMEX delivery hub some seven million barrels below the record levels set in 2017, and suggesting the May contract plunge into negative territory last month was less about tankage, and more about amateur trading.
The DOE report also suggest the industry may have over-healed its gasoline containment issues from a month ago, and now left itself with diesel containment challenges. While several regional markets are now facing short term gasoline shortages due to demand picking back up more quickly than supply can keep up, diesel inventories have spiked from below their seasonal range five weeks ago, to above the top end of that range currently.
Right on cue, Colonial Pipeline filed for a temporary rule change with the FERC Wednesday, which would allow the pipeline operator to liquidate product that was shipped without a capable receipt destination at negative values if necessary, and charge the shipper back for any pipeline delays or shutdowns caused by “shipper misbehavior.” The filing cites merchant storage along its destinations filling to capacity and an uptick in product being shipped without a valid destination, forcing the company to auction off more abandoned product.
So why did gasoline prices drop seven cents on a day when inventories were reported to decline for a third week and U.S. demand ticked up by eleven percent? It’s hard to make a strong fundamental argument based on the headline data – although gasoline output was up more than demand on the week, and exports dropped sharply for a second week. With U.S. refiners becoming more dependent on exports in recent years to balance the fundamental equation, last week’s plunge to new five-year lows for gasoline exports could spell trouble longer term if it doesn’t reverse course soon. In addition to the export and production swings, there’s a technical argument for the heavy wave of selling once RBOB futures failed to break resistance and formed a short term rounding top on the chart. That technical weakness suggests that unless RBOB can get back above $.90 to end the week, there’s more selling likely in the back half of May.
Week 19 - US DOE Inventory Recap
Debate Over Economic Restarts Face Off Against Fears
The holding pattern continues for oil prices this week as a debate over signs of economic restarts, both domestically and abroad, face off against fears of a second-wave of the coronavirus. WTI and ULSD futures are both holding in their recent trading range, while RBOB futures are breaking their upward trend, and threatening a larger selloff.
We’re in the data-deluge week with the EIA, OPEC and IEA all releasing their monthly reports, in addition to the weekly API and DOE data. The first three of those reports have been released already and show a common theme of slowly improving fuel demand, spread unevenly across the various refined products.
OPEC’s oil output rose by 1.8 million barrels/day in April, as Saudi Arabia made good on its threat to flood the global market right as the world was experiencing the largest demand drop in history. That story should flip in May as the price war has ended, and country’s slowly reopen for business.
The API was reported to estimate that U.S. oil inventories built by 7.5 million barrels last week, which was larger than most published forecasts.
The industry group also estimated another gasoline inventory draw-down of 1.9 million barrels, while distillates were up by 4.7 million barrels. You’d be forgiven if you thought the API showed the opposite build/draw in inventories based on the price reaction overnight with RBOB down two cents and ULSD up one, which suggests the early action may have more to do with the charts after RBOB’s trend line broke Tuesday.
Wheels off the charts: The EIA’s monthly short term energy outlook showed how the wild action of the past two months has broken the mold. The front page of that report typically shows a price forecast for WTI, including 95 percent confidence intervals for those projections. This month the EIA is “unable to construct” those intervals because of “data issues” surrounding the extreme volatility and lack of liquidity in options markets it created. In other words, given the two standard deviation from the mean calculation of a confidence interval, and prices doing what they’ve done, the price estimate is around 30 dollars for WTI, but the confidence would be somewhere in the range of plus or minus $50/barrel from that mark.
The STEO was able to estimate that global energy consumption will start outpacing production in the back half of this year, and that energy related CO2 emissions would fall by 11 percent, the largest drop in over 70 years of data.
The DOE’s weekly report is due out at its regular time this morning. Watch the refinery yield and export figures to see how refineries are reacting to their undesirable transition from an excess of gasoline inventory to a glut of diesel. While it may take a few weeks for plants to shift gears, and longer still to show up in the data, the increased complexity and flexibility of many U.S. refineries seems to be more capable of solving the demand puzzle than ever before.
Traders Torn As Opposing Trend Lines Converge
The choppy action in energy prices continues as traders appear to be torn between new supply cuts and new threats to demand. This consolidating action after two weeks of steady buying looks like it’s setting up a big move on the charts as opposing trend lines converge.
Believe it or not, after just two weeks of price recovery, reports are surfacing the some shale producers are already increasing output. It seems unlikely that prices in the low $20s are really encouraging new output, which may indicate logistical complications with shutting down oil wells may be forcing some production to be opened back up.
Speaking of opening back up, expect to see refinery rates continue to increase in the inventory reports this week (API this afternoon, DOE tomorrow morning). U.S. refiners did a remarkable job shifting production away from Gasoline and Jet and into ULSD during the demand collapse, and now as demand is favoring gasoline, it will be important to watch how fast they’re able to shift those yield percentages once again.
The EPA announced new Greenhouse Gas calculation guidance for ethanol producers that have rapidly been shifting to produce hand sanitizer alongside fuel ethanol, which is seen as a potential life saver for the industry. With gasoline demand recovering, and the increased demand for sanitizers looking like it will be here for a while, we could soon see that corner of the market rapidly shift from a supply glut to a supply crunch.
Pivotal Week For Price Action
It’s another choppy start to trading for the week as energy futures rode a roller-coaster overnight and have left the complex with mixed results in the early going.
Prices moved higher just after midnight following reports that Saudi Arabia would make additional output cuts, but gave up those gains in the early morning trading, only to rally a second time right at 8 a.m. Eastern. It’s not yet clear what drove the second buying spree that pushed oil up one dollar/barrel and products up two cents/gallon in just a couple of minutes, as the timing doesn’t fit the Saudi story or the latest Iranian missile debacle, and equities are still holding in negative territory for the day.
This appears to be a pivotal week for price action as WTI, Brent and ULSD all look like they could have lots of room to move higher on the charts, IF they can break above their May highs. Meanwhile, RBOB gasoline has already broken through to new highs this morning, and looks like it could have 30 more cents of upside in the next few weeks, appearing to be the most bullish of the energy contracts as driving is suddenly once again in style. Both ULSD and RBOB contracts are flashing over-bought warning signs after two weeks of strong gains, so a sharp sell-off can’t be ruled out despite the optimism on many fronts. This technical test seems to mirror the big what-ifs fundamentally impacting energy markets, primarily surrounding whether or not states are reopening too soon.
Baker Hughes reported 33 more oil rigs were taken offline in the U.S. last week. The weekly drop moved the total oil rig count to its lowest level since 2009, and the combined oil and gas count to its lowest level on record in the 32+ years of data available.
Money managers continue to add modestly to net length in both WTI and Brent, although WTI’s increase was driven by new long positions being added, while Brent’s was mainly due to shorts positions being liquidated. Although the WTI net length held by large speculators is in the middle of its five-year seasonal range, that combined bet on higher prices is now at its largest level in the past year. The managed money category of trader hasn’t seen much change in refined product holdings over the past month with diesel futures holding slightly in net-short territory, while RBOB sees below average net length.
As more data comes to light on the WTI price crash on April 20, it’s becoming more clear that there were numerous traders, and brokerages, involved that did not know what they were doing.
Rally Outkicking Its Coverage?
It’s a quiet start to end another strong week for energy prices that saw the forward curve continue to shrink rapidly as demand picks back up and the storage concerns start to ease (see the charts below).
The path forward is less clear however as some choppy action to end the week leaves traders debating whether the rally has out-kicked its coverage, or if the reopening spurring demand could mean worse news later in the year.
From a technical perspective, the pause in the recovery rally for WTI and ULSD looks like it could be forming a pennant or flag pattern on the daily charts. That pattern is known as a continuation pattern meaning prices should exit in the same direction as they entered, meaning we could see another 20 - 25 cents of upside for refined products later in May should they be able to punch through the highs set earlier this week.
Equity markets continue to show more signs of optimism, rallying again overnight on signals that China and the U.S. could actually agree on something – in this case new steps forward in their trade agreement.
As demand for gasoline picks back up across most states, we’re seeing pockets where the supply network is having a hard time keeping pace, pushing basis values higher and creating some limited allocation issues at the rack. Those issues are not widespread, but highlights the challenges facing refiners and shippers as America returns to business.
The April jobs report smashed all previous records with employment in the U.S. dropping by 20.5 million, which increased the headline unemployment rate to 14.7 percent, and the U-6 unemployment rate to 22.8 percent. Energy futures ticked up in the wake of that report, because amazingly enough it was better than many forecasts, but quickly gave back those gains.
Early Rally In Both Energy And Equity Markets
Gasoline futures are making a run at one dollar this week, trading up eight cents/gallon this morning, after bouncing sharply off of trend-line support during Wednesday’s sell-off. Diesel prices are also up sharply today, but can’t keep pace with gasoline, and are well off their highs for the week following weak fundamental data.
Positive export figures reported by China seem to be contributing to the early rally in both energy and equity markets today, which is comical interesting given all that’s been made about that government falsifying data in recent weeks.
Gas vs. diesel spread trades are known as a “widow maker” as they were once thought to be a relatively safe seasonal play, only to show extreme volatility that would end careers. That volatility has been on full display over the past few months as gasoline prices plummeted to a 50 cent discount to diesel in March, only to rally to a premium today.
The uneven effects of the COVID-19 lock-downs are the main driver behind those wild swings, as diesel demand didn’t fall nearly as hard, but is now lagging the recovery seen in gasoline, as was on full display in the DOE reports this week.
Stagnate demand, and steady refinery output sent diesel inventories up more than nine million barrels for the week, completing the largest four-week build in history for distillates. Domestic diesel stocks are now holding north of 48 days’ worth of supply, compared with a seasonal five year average of 33 days.
Gasoline meanwhile has seen the opposite track the past two weeks, reversing from an all-time high of 51 days of supply to 38 days currently as Americans are beginning to hit the road again. The gasoline recovery seems more simple than diesel, as it will tie directly to the relaxation of stay at home orders, with the biggest risk being reopening too soon sparking a second wave of the virus. The equation is more complex for diesel, since U.S. producers rely on more than one million barrels/day of exports to countries that may still be in lock-down, and demand from mass transit systems that may be avoided for some time even when businesses reopen.
Crude oil inventories built less than many forecasts were predicting last week as refiners started increasing run rates, domestic output continued to be cut back, and exports remain surprisingly strong. That smaller inventory build kept total U.S. oil inventories below the record high set back in 2017, and when factoring in the capacity available in the SPR suggests that the industry is solving the storage puzzle.
Week 18 - US DOE Inventory Recap
Oil Producers Feel Pressure From Host Nations
Energy futures are starting the week in tentative fashion, trying to hold onto small early morning gains after trading lower most of the night.
OPEC’s record-setting output cuts have officially started, and major oil producers are feeling pressure from numerous host nations to join in the effort, in addition to the pressure they’re feeling from the negative cash flow taking place at most production facilities these days.
Equity markets around the world are moving lower as a new round of verbal sparring over COVID-19 stokes fears that the U.S./China trade war will be rekindled this year and hinder the global economic recovery.
RBOB gasoline futures continue to struggle to break resistance around $0.78/gallon, with rallies into that range repelled eight times in the past three weeks, including Thursday and Friday. This may prove just to be a short term speed bump, but this area was also the range that set the low back in 2008, so there could be a longer term hurdle as that old support becomes new resistance. If this resistance does break, the chart path is open to make a run towards $1.30, which was the gap left behind on charts during the March meltdown.
Baker Hughes reported 53 more oil rigs were laid down last week, bringing the total U.S. rig decline to 52 percent over the past seven weeks. As the charts below show, the Permian basin continues to account for most of the decline – simply because it had the majority of active rigs – while the slowdown is fairly proportional across most of the U.S. shale basins.
Money managers are piling back into long bets on WTI, with net length held by the large speculative category of trader reaching a five month high last week. That class of trader seems much less optimistic about Brent and refined products however, with only minor changes seen in the past few weeks.
The EIA took a closer look at U.S. refiners reaction over the past six weeks to the collapse in demand and fuel margins.
Why Are Gasoline Prices Moving Lower Today?
A bumpy and disorganized overnight trading session seems to be a fitting way to start the month of May, as much of the world treads cautiously towards the beginning stages of reopening after six weeks of lock-down. May Day celebrations around the world will keep trading volumes lighter than normal today, adding to the choppy action.
Most energy contracts were selling off overnight only to rally back in the past hour, with June WTI breaking north of the $20 mark for the first time since the Monday melt-down. Refined products are also struggling for direction, with nickel trading ranges in the early going and mixed results across the contracts.
A good lesion in the difference between futures and physical prices: The expiration of the May RBOB and ULSD contracts in the midst of a super contango means the June contracts are trading some seven to 11 cents higher than where May left off, but those values don’t carry over to cash markets which are seeing minimal change so far today. This phenomenon is often misunderstood, and not often talked about since in normal times the calendar spreads in futures are a small fraction of where they are today. Ask anyone who was invested in the U.S. Oil ETF last week if they understand this lesson now.
Small oil companies in the U.S. have been defying the odds for years, outpacing production estimates consistently thanks to new drilling technology. It’s little wonder that these companies are now once again exceeding estimates in their ability to shut-in production faster than expected, which should help alleviate some of the near term storage concerns. There’s a new lifeline for some of these producers as one of several new Federal Reserve lending programs has been opened to the industry this week.
The opposite of a small oil company, ExxonMobil, released earnings this morning, showing a quarterly loss for the first time in years due to a $2.9 billion non-cash write down of inventory values. The statement noted weaker refining margins both in the U.S. and around the world, but its total downstream margins were high thanks to “favorable mark-to-market derivatives and improved manufacturing on lower scheduled maintenance.”
Wondering why May RBOB settled lower Thursday even when prices were higher at the close? Read about the difference in settlement procedures on expiration day here. That will also help explain why gasoline prices are moving lower today, even while a comparison to May’s settlement makes it appear that RBOB futures are sharply higher on the day. April was a month that broke the charts, so it seems fitting to end it with more confusion.
Normal Daily Settlement Procedure
NYMEX RBOB Gasoline (RB) futures are settled by CME Group staff based on trading activity on CME Globex during the settlement period. The settlement period is defined as: 14:28:00 to 14:30:00 ET for the Active Month and 14:28:00 to 14:30:00 ET for calendar spreads.
Final Settlement Calculation for Expiring Contract
On the day of expiration, the expiring month will settle based on the VWAP of the outright CME Globex trades executed between 14:00:00 and 14:30:00 ET.