Market Talk - 2021 december
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Gasoline Plucked Energy Futures Out Of The Red Yesterday Morning
The demand figures from the DOE report seemed to be the impetus for the buying action we saw yesterday. The counter-seasonal spike in petroleum demand, specifically gasoline, plucked energy futures out of the red yesterday morning, continuing the streak of gains the big three American benchmarks have been enjoying for the past six sessions. Also, the confirmation of the API’s estimate of a drawdown in crude oil, gasoline, and diesel stockpiles offered no bearish support.
Futures are attempting to sell off again this morning, citing Chinese demand concerns as its reason. WTI and Brent prompt month contracts are down around 20-30 cents per barrel so far today while refined products’ March contract (widely referenced as the price-setting contract this late in the month) are both trading flat.
The EIA published an uplifting note this morning showing CO2 emissions from energy consumption hitting a 40-year low in 2020 in the US. The transportation sector, which makes up just under 40% of the nation’s emissions, was down 15% since 2019 due to COVID-19 lockdowns. It will be interesting to see how much that number comes back up with some companies’ ‘back to office’ push.
The NYMEX will be open tomorrow and settle at its regular time despite most market participants taking the day off to celebrate the new year. It is not a banking holiday however petroleum Price Reporting Agencies will not publish new prices tomorrow.
Week 52 - US DOE Inventory Recap
The Energy Complex Is Drifting Lower This Morning In Another Slow Day Of Futures Trading
The energy complex is drifting lower this morning in what looks to be another slow day of futures trading. Gasoline, diesel, and both major crude oil grades’ prompt month contracts are down ~.2% so far this morning.
One thing that could breathe some life into this thin market is the Department of Energy’s inventory report, due out at it’s regular time today. The American Petroleum Institute published their report late yesterday, estimating an across-the-board draw in total inventory levels for crude oil, gasoline, and diesel. A confirmation of those estimates could inspire enough buying to keep the 5-day streak of gains alive.
Barring another global shutdown (which as we know isn’t an impossibility) it seems to be the consensus that our oil supply glut days are over, for now. Rebounding demand, regional supply crunches, and decreased spending on energy discovery and infrastructure are the factors the banks, oil companies, and countries are warning could lead to an oil shortage in 2022. Those market dynamics paired with the looming threat of inflation could see oil prices make a run at $100 per barrel next year, a level not seen traded since 2014.
Ethanol prices fell sharply yesterday as prompt barrels begin their slide down the steep backwardation we’ve seen the past few months. Chicago ethanol, sometimes used as a national benchmark, was estimated around $2.62 yesterday, the lowest price seen since October.
As of yesterday Exxon will keep it’s Baytown refinery at reduced rates while it continues efforts to identify the source of last week’s explosion that injured four. It’s hard to tell if the Gulf Coast basis traders literally or figuratively hit snooze: they either know and don’t care or are taking the week off. It’s probably both.
The Bulls Are Taking Advantage Of The Low-Volume Week
The bulls are taking advantage of the low-volume week, rallying refined products nearly 3% over the past couple of trading sessions. Expectations of higher demand growth from China and India seems to be how we are justifying the buying strength so far this morning. American and European crude oil benchmarks are adding about $1 per barrel so far today.
While still very contagious, the Omicron variant seems to be affecting people less intensely than the Delta variant and the original coronavirus. It seems global governments are taking a softer stance on the latest novel strain, some eliminating social distancing protocols altogether. The Center for Disease Control has reduced the quarantine time for positive cases from ten days to five, leading energy bulls to believe that drivers will be getting on the road that much quicker.
Money managers increased their net long positions in the ‘big three’ American energy contracts last month, according to the report published by the CFTC yesterday. The net length in WTI futures held by the Producer/Merchant category of traders ticked lower last week but remained in the ballpark of 5-year highs. Given the price action over the past couple of weeks a redesignation of who’s called the ‘smart money’ might be in order.
Prompt month gasoline futures have punched through a couple moving averages this morning, marking bullish sentiment. Diesel futures have now made up everything lost on Black Friday’s selloff and are poised to make a run at the October high of $2.60. While technical strength seems to be the name of the game this week, it is important to note that price action on low volume should be taken with a grain of salt. We could see a short term correction next week once the holidays are over.
2,000 Flights Were Cancelled Since Christmas Eve Due To Staff Shortages
The energy complex is drifting lower so far this morning in what looks to be a quiet week for futures trading. Stranded between two holidays, this week’s price action will likely be inconsequential as attention has already shifted to next week’s OPEC+ meeting where Cartel’n’Friends will decide if they’ll go ahead with a 400 thousand barrel per day production increase in February. The American crude oil benchmark leads the way lower this morning, shaving nearly 80 cents off the prompt month contract, while gas and diesel trail behind with ~1 ½ cent losses.
It was a rough weekend for airlines: over 2,000 flights were cancelled since Christmas Eve due to staff shortages. The mild-but-contagious Omicron variant drove the increase in air travel workers calling in sick. While only 50 flights scheduled for today have been cancelled, there are no clear indications when air travel will return to ‘normal’, whatever that is.
Baker Hughes reported an addition of seven oil rigs last week, bringing the total active production platforms in the US to 586. Last year’s recovery rally in oil prices continue to drive decision making when it comes to flipping the ‘on’ switch: 9 out of the last 10 weeks have seen a net increase in operating production sites.
The Commitment of Traders report is delayed due to last week’s holiday and will be released today at 2:30 pm CST.
ExxonMobil reported an explosion and resulting fire at its 584mbd Baytown refinery early Thursday morning. Gulf coast gasoline basis values drifted higher (in a muted fashion) once it was discovered that the unit affected by the accident processes gasoline components. Four workers were injured.
Decline In US Oil Inventory Reported Yesterday By The Department Of Energy
The larger than expected decline in US oil inventory reported yesterday by the Department of Energy is taking credit for yesterday’s rally. National stockpiles fell by 4.7 million barrels last week, which follows the seasonal trend of moderate declines going into the holidays, however this marks the 7th consecutive week inventory levels have been below the 5-year low. The crude oil headline number seemed to overshadow the 5.5 million barrel build in gasoline stocks, which was larger than estimates but also expected this time of year. Diesel stocks added a modest 205 thousand barrels.
The two-pronged dose of positive news surrounding the Omicron variant surely didn’t hamper yesterday’s rally. Research showing the latest novel variant to have less severe symptoms (albeit much more contagious than previous iterations) has experts hopeful this may hasten the diseases progression from pandemic to endemic. The S&P 500 was up ~1% on the news.
Prompt month American natural gas futures are down nearly 5% this morning while European prices hit record highs as cold weather rolls in and Russian supply cut out. No end in sight: the latest public discourse has Putin denying the mass movement of Russian troops along the Ukrainian border while pointing the finger at the US and NATO for escalating tensions in the region.
Heating oil futures are the closest of the ‘big three’ energy contracts to completely retrace the losses suffered on Black Friday. If the $2.36 level can be reached, technicals leave the door open to a run at the $2.50 level in short order. Gasoline futures have about twice the distance to cover (about 13 cents) before it accomplishes the same feat.