News & Views
Moves In Energy Futures Remain Relatively Muted
January trading is winding down with gasoline trying to lead the energy complex on another rally, while oil prices are resisting the pull higher. Both ULSD and RBOB futures are hovering near 11 month highs, with buyers pushing up crack spreads that are struggling to keep pace with surging RIN values that are threatening to be the straw that breaks the backs of some refiners struggling through the COVID demand destruction.
The moves in energy futures remain relatively muted, even as equity markets around the world are seeing a sharp increase in volatility this week.
Electric cars are all over the news this week after the President announced a plan to overhaul the federal fleet with electric vehicles, which caught many – who anticipated a push towards renewable fuels – off-guard. A Reuters report yesterday suggests that big oil lobbyists are reaching out to big ag in Washington to try and come up with a way to fight that plan. Meanwhile, GM announced plans to completely phase out internal combustion engine powered vehicles by 2035, joining California’s governor in the lofty electric vehicle goals that will be powered by _________ (they haven’t got that far yet). A recent study by California’s energy commission suggests to accomplish the goal, the state alone will need 1.5 million electric charging stations in the next 10 years, while the President’s plan lays out just 500,000 for the entire country.
Valero’s Q4 earnings release shed more light on the challenging operating environment for refiners. The company’s refining segment reported an operating loss of $476 million (excluding LIFO adjustments) during the quarter, compared to $1.4 billion in income during Q4 2019. The company’s renewable diesel and ethanol segments were profitable during the quarter, but also saw reduced earnings compared to the prior year. Perhaps most notable in the release is that Valero, via its Diamond Green joint venture, is planning to quadruple its renewable diesel production in the next couple of years with an expansion of their existing facility in St. Charles, and with a new plant at Valero’s Port Arthur refinery.
The EIA this morning published a closer look at the global demand destruction in Petroleum products last year, which shattered all records for the 40 some years the agency has been tracking this data.
Chaotic Trading Grips Pockets Of U.S. Equity Markets
Gasoline futures just broke above $1.60 for the first time since you first heard about COVID-19, after Reddit users decided to band together and punish those shorting the RBOB market. That’s not really why it happened. It just seemed fitting giving the headlines of the day. In reality, the chaotic trading that’s gripped pockets of U.S. equity markets this week hasn’t seemed to spill over into energy markets yet, which have been relatively quiet over the past few weeks during the steady climb higher.
After a slow overnight session there has been a bit of excitement just before 8 a.m. central, as refined products have rallied 2-3 cents off of small overnight losses, pushing which seems to be following a bounce in equities after the Q4 GPD estimate and initial jobless claims were released. If you’re wondering why equity and commodity markets might rally after a weaker than expected read on the economy, remember we’re back in the days of bad news can be good news as it will encourage more fiscal and monetary stimulus that props up prices.
RIN values continue to lend support to gasoline and diesel prices, as their steady march higher continued Wednesday. No word yet on if any hedge funds had been shorting RINs before this move, but as long as that rally continues it will put more pressure on refiners that don’t have their own blending capabilities. That seems to be a contributing factor for refined products setting new 11 month highs this morning while crude oil prices are still lingering just below technical resistance.
The DOE’s weekly status report showed the largest draw down in crude oil inventories in six months, which helped the entire complex wipe out the modest losses it had seen earlier Wednesday morning. The bounce was not able to sustain itself however as it became clear for those that could read beyond the headline numbers, that a one million barrel/day drop in imports, and a one million barrel/day increase in exports were the drivers of that big decline in inventories, not a surge in refinery runs and overall consumption. That suggests the drop is a short lived event and we should see a large bounce back in the next week or two as those trade flows stabilize.
Gasoline demand dipped and remains well below normal seasonal levels, roughly 1.1 million barrels/day (11%) below the prior five year average. Diesel demand meanwhile increased, and is holding near the five year average seasonal range, and impressive feat given the known reductions in diesel-consuming vehicles involved in mass transit. Refinery runs dipped slightly on the week, and are about 1.2 million barrels/day below where we’d expect them to be in late January most years.
Energy Futures Ticking Modestly Lower
Energy futures are ticking modestly lower to start Wednesday’s trade, following equity markets into the red without yet threatening the upward trend. The correlation of daily price moves between the S&P 500 and petroleum futures remains strong (close to 90%), even as the relationship between moves in the U.S. Dollar and energy contracts has fallen apart in recent weeks.
Gasoline is leading the move lower this morning, pulling back from the 11 month highs set Tuesday, after the API reported an increase of three million barrels of gasoline inventory last week. That report also showed a build of 1.4 million barrels in distillate inventories, while crude stocks dropped by 5.3 million barrels. The EIA’s weekly report is due out at its normal time today.
The Fed’s Open Market Committee wraps up its first meeting of the year today. The market is pricing in zero percent probability of an interest rate change at this meeting, and in fact, is not expecting a change until September at the earliest, according to the CME’s Fedwatch tool based on assurances from the Fed leaders. With so much focus on fiscal stimulus in Washington, it’s hard to imagine the FED saying anything today that would suggest a pullback in Monetary stimulus, and reassurance of that stance seems to be what the bulls need to hear today.
The CME Group (parent company of the NYMEX, CBOT AND CBOE exchanges) is jumping on the carbon credit trading bandwagon, with plans to launch an emissions offset futures contract in March. The move by the CME adds yet another to a long list of various emission program contracts, and comes at a time when the exchange’s most popular offering – WTI crude oil futures – are coming under pressure from competing contracts based in Houston.
A new way for refiners to cut emissions (and costs?): Flint Hills is reportedly analyzing adding a large solar farm to its MN refinery complex to help power the plant’s operations.
Aggressive Goals For Vaccine Rollouts
Gasoline prices rallied to fresh 11 month highs overnight, heading for a sixth straight day of gains, after the energy complex bounced off of trend support and erased early losses Monday. Relaxing COVID restrictions in New York and California, and aggressive goals for vaccine rollouts are all getting some credit for the rally. U.S. equity markets saw a similar bounce after some heavy early selling Monday, with markets choosing to focus on the potential for growth to come, rather than some weaker manufacturing data reported yesterday.
Oil and diesel prices are also moving modestly higher after Monday’s recovery, and the bullish trend lines are still intact, but so far those contracts lack the enthusiasm seen in gasoline. WTI is just $1/barrel, and ULSD just $.02/gallon away from reaching their own 11 month highs, which would open up the charts to another 15-20 cents of upside. If they fail to break that ceiling however, they’re about to get squeezed by that rising trendline which could end up sparking a large selloff that should bring diesel prices back to the mid $1.40 range.
Good news for many U.S. refiners, the rally over the past several weeks has helped crack spreads recover to their best levels in nearly a year in some markets, after a brutal fourth quarter, which offers hope for the numerous companies struggling to make ends meet. The bad news is that RIN prices continue to rally, which is offsetting a large portion of those gains in processing margins for many of those plants, amid rising crop prices and expectations for a tougher stance by the EPA on renewable fuels.
One curveball to ethanol advocates who cheer for higher RIN prices: The President’s new plan reduce carbon emissions includes transitioning the federal fleet to electric vehicles, not those that run on corn and soybeans.
Looking for a fundamental reason why the rally could eventually run out of steam? Remember that refiners are still running well below capacity, and the Limetree Bay facility (formerly known as Hovensa) that’s been trying to start up for more than a year is finally producing finished products again, adding more supply to the Atlantic basin that really doesn’t need any more.
Busy Week For Earnings Releases
It looks like we might be in for a bit of sideways trading after Friday’s attempt as selling off fizzled out, and then Sunday night rally attempt did the same. It will be a busy week for earnings releases that should keep equity markets on their toes, and there will no doubt be plenty of news from Washington that could influence prices, but the charts suggest we may be consolidating as short term indicators move to neutral territory.
A healthy bounce in gasoline demand estimates from the DOE helped RBOB futures claw back from heavy early losses to finish Friday’s session slightly higher. While that bounce helped keep the bullish trendlines intact for now, we’ll need to see futures push through their January highs in order to regain the upward momentum and avoid a larger sell-off. It’s not unusual to see gasoline prices rally 50% from the winter to spring, but since they’ve run up more than that during the winter, we may be due for a spring pullback instead of a rally unless demand can climb back closer to what we’ve seen in non-COVID years.
Money managers seemed cautious on oil and gasoline contracts, with small increases in net length in WTI and RBOB added last week while Brent saw small declines. The large speculators seem to be getting more bullish on distillates after months of neutral positioning as both ULSD and Gasoil contracts saw substantial increases in net length (bets on higher prices) last week. Those buyers are facing an immediate test as ULSD futures are trading right near the bullish trendline that’s held prices since early November, and if that line breaks there’s a good chance we see a 10-12 cent drop in the next couple of weeks.
Baker Hughes reported a net increase of two active oil rigs in the U.S. last week, marking a 9th straight week of gains. Unlike most weeks however, the Permian basin (which accounts for nearly 2/3 of all active oil rigs in the country) did not drive the increase, and in fact was down by one oil rig on the week. As last week’s DOE report showed, despite the pick up in drilling activity over recent months, actual U.S. oil output has remained flat during that stretch, holding steady around 11 million barrels/day, compared to 13 million barrels/day this time last year.
A Pivotal Week On The Charts
Energy prices faced their biggest selloff since the first trading day of January overnight as rising COVID case counts in China and spreading lockdowns across Europe appear to be hitting demand, dampening the bullish enthusiasm that’s gripped the market since early November. This next week looks like it will be pivotal on the charts, as we’re seeing a rounding top for most of the petroleum contracts that have not yet broken below the bullish trend lines. If prices can manage to recover today, there’s still a case to be made that the bulls are in control. If they dip much further, the charts will favor another 10 cents of downside for products in short order.
The charts below show the dramatic change in the forward curves for oil and diesel prices over the past month as the price rally has pushed prices into backwardation. That change could be a double-edged sword for flat prices, as it takes the storage buyers out of the market, which also helps to encourage reductions in inventory levels. That strength in the curve also seems contradictory to the demand patterns playing out across Europe, Asia and the U.S., as new lockdown measures are hampering demand all over. The Saudi’s decision to cut one million barrels/day of oil production was enough to override that demand drop in January, but it’s looking like something else will be necessary to prevent a larger selloff now.
The DOE’s weekly inventory report is due out at 11 a.m. Eastern today, after the rare two-day delay this week caused by the inauguration. In normal years, we expect to see demand increasing sharply in the back-half of January as the country shakes off the holiday hangover effect and gets back to work. This year it seems like that bounce may have to wait until the vaccine rollout starts outpacing the impacts of lockdowns.
Oddly enough, California’s energy commission didn’t take Wednesday off like the DOE did, and reported that the state’s production of gasoline and diesel plummeted to multi-month lows (see charts below). The sharp decrease in refinery output appears to be in response to swelling inventory levels over the previous two weeks as the demand has dropped sharply due to the ongoing COVID fallout.
More bad news from refiners: Irving Oil announced another layoff, this time for 60 employees at its St. John refinery, a major fuel supplier to the U.S. East Coast, due to “the collapse in demand for motor fuels.” Meanwhile, nearly 200 union workers at the Marathon refinery in St. Paul Park, MN walked off the job last night, apparently waiting for the coldest time of the year to start picketing. The refinery is reportedly continuing operations as normal, and even if it wasn’t, given its location and size isn’t likely to create much of an impact on either the Group 3 or Chicago basis markets this time of year.
The RIN market continues to rally, even as grain prices have pulled back this week, as last minute moves by the outgoing EPA administration regarding small refinery waivers, and emissions permitting, were postponed by federal court rulings, which should allow enough time for the new administration to nullify them.
Traders Look To What Comes Next
It’s a quiet start to Thursday trading with energy futures seeing very small losses and equity futures pointing to small gains. The markets seem to be breathing a sigh of relief after Wednesday’s inauguration went peacefully, and perhaps traders are also just pausing to see what might come next as the business of getting the next administration approved by Congress proceeds with the backdrop of a race between COVID treatments and new infections playing out around the world.
Nothing too surprising or groundbreaking from the list of executive orders signed on the first day of the new U.S. President’s administration. Energy did play a prominent role with orders that will effectively halt the Keystone XL pipeline construction (again), ban oil & gas development on federal monument land, along with directions for agencies to “consider revising fuel economic and emissions standards.” From the markets’ lack of reaction, it seems like these announcements were all well telegraphed ahead of time, and there’s little substantial change that will impact the country’s supply near term.
You can read the API’s response to the executive orders here: https://www.hydrocarbonengineering.com/gas-processing/21012021/api-comments-on-biden-executive-orders/
Speaking of the API, their weekly inventory estimate was reported to show builds for oil and refined products last week with crude stocks of 2.5 million barrels, gasoline up 1.1 million and distillates up 800k. Those builds are getting some of the credit for the selling in energy markets this morning, but in fact this selloff started earlier Wednesday afternoon before the APIs were released, with most energy contracts giving up most of their early gains before settlement. That pullback is another sign that the upward momentum is waning, but at this point the charts are giving little input as to whether this is just a pause, or the start of a trend reversal.
The DOE’s weekly report won’t be out until Friday morning due to the MLK holiday and inauguration.
Promise Of Big Changes
Petroleum futures are moving modestly higher for a second day as the U.S. prepares to transfer power, with a promise of big changes coming soon, but little detail as to what exactly that means. The big 4 energy futures contracts are holding their bullish trend lines, but still have some work to do to break above the high water mark set last week.
Janet Yellen’s testimony during her confirmation hearing Tuesday seemed to provide a spark to energy and equity markets as she made it very clear that the plan was to “act big” with stimulus packages. The expected spending spree also put the U.S. dollar back under pressure after a two week bounce. While the dollar/oil correlation has weakened in recent weeks, as long as markets are focused on money printing (aka stimulus), expect to hear more about that relationship as a daily factor in price movements.
While most of the U.S. focus is on domestic changes, there’s plenty of activity to keep an eye on in the Middle East. Iran is trying to make noise again, apparently trying to pressure the new administration by increasing military exercises while hurling the equivalent of a schoolyard insult by issuing sanctions against the outgoing administration. Meanwhile an explosion and fire hit seven oil tankers in Syria, and it’s unknown at this time what caused that blast. It’s amazing to think that just over a year ago, U.S./Iranian tensions had analysts calling for $100 oil.
The API Inventory report is due out this afternoon, but the EIA report has a rare two-day delay due to the MLK day holiday and the inauguration, and won’t be released until Friday.
The EPA issued a statement Tuesday night that read:
At 7 PM today (EST), January 19, 2021 EPA will provide decisions to some small refineries that have petitioned the agency for RFS small refinery exemptions. At the same time, EPA will update the Renewable Fuel Standard Small Refinery Exemption website (https://www.epa.gov/fuels-registration-reporting-and-compliance-help/rfs-small-refinery-exemptions) to reflect that information.
As of 7:30 a.m. Central on January 20, that website still showed 45 pending petitions for the 2019 and 2020 compliance years, and it appears that the outgoing EPA only approved two petitions for 2019 and one for 2018, apparently leaving the rest to be reviewed by the new administration. RINs look to be bid slightly stronger to start the day following that (lack of) news.
Markets Hold Their Breath Ahead Of U.S. Presidential Inauguration
Energy markets have gained back the modest losses we saw in Monday’s abbreviated trading session, and are trading close to flat from Friday’s close. The upward sloping trendlines remain in place, but the bulls have some work to do to regain the momentum after the rally stalled last week.
U.S. equity markets are pointing higher, and the U.S. dollar is pointing lower, both of which may be contributing to the small bounce in energy futures to start the day as the markets seem to be holding their breath ahead of tomorrow’s U.S. presidential inauguration.
Pipelines look like they might be one of the first battlegrounds for the new administration with the Keystone XL developer offering a plan to make the pipeline “Carbon Neutral” in an effort to stop the incoming President from pulling the permit for the project on day 1 as reports suggest he is planning to do. The Keystone XL pipeline has been a political football for more than a decade at this point, but it’s the threat to Enbridge’s Line 5 traversing Michigan that could have more impact if it’s forced to close since it is currently in operation, with Marathon’s Detroit refinery likely to feel the most impact as nearly 1/3 of its crude comes from that line.
There’s a general expectation that an “ambitious” climate-related plan will be rolled out, but few details have yet been revealed, leaving the talking heads to debate whether the plan could be a great victory for the environment, or the end of the American Dream. Those hoping for moderation will find solace that despite one party controlling the legislative and executive branches, support from both parties is still likely to be needed for new laws to make it through the Senate.
Several reports in recent days have noted that California politicians are taking key roles in the new cabinet (in addition to the VP, who will have tie-breaking capabilities in the Senate). It’s possible that this could end up leading to federal programs that resemble the Golden State’s alphabet soup of environmental policies that put multiple different taxes and fees on fuel sales in order to limit certain fuel sales and fund new “clean[er] energy” projects.
The IEA’s monthly oil market report revised global demand estimates lower for the year due to the resurgence in COVID cases, and accompanying lockdowns. The report did offer some optimism for rapid improvement in the back half of the year as vaccine efforts and stimulus packages should both contribute to increased consumption, but that expected growth is not large enough to offset the drop in demand expected in Q1. The report did not offer a lot of optimism for refiners near term, noting that despite the cold snap that’s caused a spike in heating demand in Europe and Asia, refinery margins haven’t improved much as more plants coming out of turnaround were able to offset the increase in distillate demand.
NYMEX Futures Trade In An Abbreviated Session
It’s MLK Day, so NYMEX Futures are trading in an abbreviated session and won’t have a settlement today. The Spot market assessors are all closed for the day and most cash traders and brokers have taken the day off as well, meaning most rack prices posted Friday will carry through until Tuesday.
The NYMEX contracts are picking up where they left off Friday with some modest selling. While the upward momentum was clearly lost last week, the bullish trendlines remain intact for now, but WTI needs to hold on above $52 to avoid a larger correction.
Baker Hughes reported a net increase of eight oil rigs drilling in the U.S. last week, the eighth straight weekly increase in that count. The total rig count is now at a fresh eight month high, but remains less than half of what it was pre-COVID. The Permian basin accounted for the entire move last week, adding 10 rigs while the rest of the basins in the country declined by two.
Speaking of the Permian basin, ExxonMobil responded to a report in that an employee that claimed the company was overstating the value of its assets in the Permian basin. The company’s argument was that the actual drilling performance exceeds the modeling used.
The EPA on Friday issued a proposed rulemaking that would waive refiners RFS obligation for a year due to the devastating impacts COVID has had on the industry. RIN prices barely flinched however, as the move is seen as symbolic only as the new administration will be in control before the 30 day comment period on the proposal ends. Since one of the new President’s first acts is expected to be redacting the Keystone XL pipeline permits, few expect that his administration will go out of its way to help traditional refiners.
Money managers seemed conflicted last week, increasing bets on higher oil and gasoline prices while cutting back on distillate net length. Colder weather in parts of the world has caused a spike in some regional natural gas markets, but so far that strength does not seem to be spilling over into diesel fuel.
Weak Mornings And Strong Afternoons
Weak mornings and strong afternoons have been the theme for trading this week as so far all dips have been bought, keeping the upward trends intact for petroleum futures. We’re seeing another soft start this morning, but gasoline prices have already bounced two cents off of their overnight lows, leaving the door open for another late-day rally.
The U.S. dollar is ticking slightly higher and U.S. stocks are pointing modestly lower this morning, both of which are likely weighing on energy prices in the early going while the markets read through the $1.9 trillion stimulus plan announced by the incoming administration. It appears that this first round of stimulus is focused on direct payments, unemployment benefits, vaccine programs and other government aid, while another plan in the works for February will have more focus on green(ish) energy projects.
OPEC’s monthly oil market report focused on the rising prices over the past two months, highlighting the impact of monetary stimulus on the world economy in addition to the fundamental supply/demand improvements behind the rally. OPEC’s oil output continued to climb in December, let by gains in Libya, Iraq and the UAE. Libya’s production is now up more than 1.1 million barrels/day over the past three months after a cease fire allowed output to resume. Next month we should see a large decline due to the Saudi’s plan to go alone in dropping output by one million barrels/day to allow the market to stabilize.
One common theme in both the OPEC and EIA monthly reports released this week is a cloudy outlook for 2021 demand as the timing and scope of vaccine rollouts remain uncertain, as do new lockdown requirements as we’re seeing this week in China. The OPEC report also shows that as bad as things have been for US refiners this past year, margins are still much worse in Europe, suggesting we could see more closures there before the pandemic ends.
EPA rumors continue to roil the market for RINs, with an announcement Thursday that the agency would extend compliance deadlines but would not approve a long list of pending small refinery waivers sending RIN values up more than a dime on the day after they’d dropped 20 cents from last week’s highs.
Sellers Come Out In Force
The energy rally seemed to run out of steam Wednesday despite some positive demand estimates from the DOE, and once the upward momentum was lost the sellers have started to come out in force this morning.
A drop in Chinese oil imports in December and a rally in the U.S. dollar are both getting credit for the selling, even though the correlation between the dollar and energy prices has weakened in the past few weeks.
So far the bullish trend lines have not been threatened by the selloff, and we’ll need to see prices drop another 2-3% before they are. Peg the $50 area for WTI as the key technical and psychological pivot point, while RBOB trend support comes in around $1.46 and ULSD at $1.52 to determine if we’re just getting a short term correction or a reversal of the 2.5 month rally.
The DOE’s weekly estimate for total U.S. petroleum demand jumped by more than 2.5 million barrels/day last week (roughly 15%) as drivers got back on the roads and trucks went back to work following the holidays.
Unfortunately for refiners, that tick up in demand was not enough to stop gasoline and diesel inventories from another week of large builds with both products seeing their inventories swell by more than four million barrels, driven primarily by a large drop in exported volumes on the week. Those exports will be a key number to watch in the coming weeks. If we see a quick recovery, than this week’s figures were probably a short term logistical phenomenon, but if they don’t it could be a sign that global demand is suffering once again.
Charts from the DOE’s weekly status report fall below.
Political Theatre In Washington This Week
The bull market continues in energy futures, with several NYMEX petroleum contracts reaching new 11 month highs this morning even as U.S. equity markets pull back, and fundamental reports flash warning signs about weak demand.
As long as the trend-lines hold, the charts favor a run at $55 for WTI in short order, which should pull RBOB futures north of $1.60, and ULSD (which broke $1.60 overnight for the first time since February) towards $1.65.
The entire complex remains overbought, and due for a more substantial correction at some point, but as we’ve seen the past two weeks, the bulls are still eagerly buying any dips and keeping that trend line in place.
Plenty of political theatre going on in Washington this week, and while the news channels are focused on impeachment, the action for energy markets may be coming via the EPA. Yesterday the agency announced a new final ruling on how greenhouse gas emission standards may be set under the Clean Air Act. Opponents see this as another last-minute attempt by the outgoing administration to complicate efforts to change policies by the incoming group, while proponents see this as just another step to limit the red tape in the EPA, which is seen by some as a major victory in the past four years. There is also an unsubstantiated report this week that the EPA may issue new small refinery waivers for 2019 – even as that issue is scheduled to go before the Supreme Court in a few months – which seems to be contributing to the pullback in RIN values.
The API reportedly showed a draw in crude oil inventories of 5.8 million barrels last week, but builds in gasoline (1.9 million barrels) and distillates (4.4 million barrels). The DOE’s weekly report is due out at its regular time today. We may see some re-stocking on crude inventories in the new year, and demand will be watched closely as we just went through our worst couple of weeks for consumption by several accounts since the COVID lockdowns in April.
Energy Futures Erase Monday's Losses
Energy futures have erased Monday’s losses in similar but less dramatic fashion to what we saw in the first two days of trading last week. The rapid recovery keeps the bullish trend intact, and leaves the door open for a rally towards $55 for WTI, and north of $1.60 for refined products in the next week. Cash markets continue to flash warning signs with soft basis values and pipelines with excess capacity both showing that demand is softer than the rally in futures that’s approaching 60% since Nov. 1 might have you believe.
A rally in the U.S. dollar got some of the credit for Monday’s selling, even though the correlation between daily movements in the dollar index and energy futures has shrunk over the past couple of weeks. Case in point, the dollar is still ticking higher this morning, along with oil and refined products. While the currency relationship may be taking a break, the equity/energy correlation is holding strong as the simple factor of when demand will return has a huge potential impact on both asset classes.
Gasoline led the move lower for most of Monday’s session, with a big sell-off in RIN values contributing to the weakness in gasoline. It may seem that RIN values driving gasoline futures action is like the flee on the tail wagging the dog, but it does make financial sense as RIN values directly correspond to refinery margins, which have to adjust higher to offset higher RIN prices, and can slide lower when RINs fall and still end up with the same net result.
News that the Supreme Court would review the case of small refinery exemptions seemed to be the reason for RINs having their biggest sell-off in 10 months, with D6 values falling from 95 cents last week to 75 cents Monday. It also seems that a brief round of short covering in the wake of a lawsuit announced last week may have contributed to the spike and then rapid pullback in RIN values.
Markets Due For Technical Correction
After reaching their highest levels in nearly a year overnight, the energy complex has pulled back sharply in the early going this morning. As has been the case during any selloff recently, COVID case counts and drama in Washington DC are both getting some of the blame. There’s also a case to be made that after a euphoric rally, both energy and equity markets had reached overbought territory and were due for a technical correction.
You might remember we saw a similar large reversal lower last Monday, but buyers stepped in before the upward-sloping trend lines were breached and the bulls took over the rest of the week. It looks like 50 will be a big number to watch this week, with WTI needing to hold above $50 to keep the huge rally intact, and refined products needing to stay above $1.50 to keep the upward momentum going.
Baker Hughes reported eight more oil rigs were put to work last week in the U.S., bringing the total rig count to a new eight-month high, that would still be a record low prior to 2020. The Permian basin accounts for 179 of the 275 total oil rigs active in the country, and made up half of last week’s gain.
The CFTC’s COT report was a mixed bag last week with Money managers adding to net length in RBOB and Brent contracts, but reducing ULSD and WTI positions. Perhaps most notable is that RBOB length held by large speculators is now at its highest level since the start of COVID, even though gasoline demand has dropped sharply in recent weeks. That flow of funds could prove pivotal in the weeks to come, because if the big funds see RBOB as a long term bet and are willing to ride out the bumps until the vaccine rollout gets business back to “normal” then any dip like today might be a good buying opportunity. On the other hand, once those funds decide the party is over, the liquidation of that length could create a snowball effect to the downside.
RIN values pulled back for the first time in a couple weeks Friday after the Supreme Court agreed to review last year’s ruling by a circuit court that limited the ability of the EPA to grant small refinery exemptions. The hearing won’t be until April, and a ruling may not come until the summer by which point it’s possible the entire RFS could be changed depending on how the new congress prioritizes its agenda for the year. Another interesting note on this case, the Plaintiffs (HollyFrontier & Wynnewood Refining Co) have both announced plans to convert units to Renewable Diesel production, which means if the supreme court rules in their favor, it may end up helping their competitors more than themselves.
Wild Week Of Market Whiplash
Remember a week ago when everyone was excited for a fresh start in 2021? It’s been a wild first week of the year with markets whiplashing in reaction to large amount of major news stories that ranged from surprising to surreal. In the end, both equity and energy markets look like they’ll end the week with strong gains, and keep the charts pointing higher in the near term as new multi-month highs are being set this morning.
Saudi’s go-it-alone battle to prop up global oil prices is ultimately the big story that seems to have helped energy prices maintain their upward momentum after a huge reversal lower Monday had them on the brink of collapse. While the short term surprise is seen as a gift by many, the other producers need to remember there’s no such thing as a free lunch.
The Senate was flipped, giving Democrats control of the executive and legislative branches for at least two years. That same day, we saw democracy face a most unusual attack, and ultimately prevail. This morning, markets seem to be celebrating a return to (relative) normalcy after the current U.S. President finally conceded defeat and cleared the pathway for the transition of power in less than two weeks.
For perspective on how busy it’s been: In most weeks, Iranian sabre rattling such as threatening the U.S. Capitol, seizing a Korean oil tanker, and (probably) planting a mine on an Iraqi tanker would have been front page news, and this week it was hardly even mentioned.
The December payroll report released this morning showed a decline of 140,000 jobs in the U.S., as COVID shutdown measures snapped a growth streak for employment dating back to last April. Both the headline and U6 unemployment rates held steady for the month at 6.7% and 11.9% respectively. The bright side of the report was that the estimates for October and November were both increased, by a total of 135,000, nearly offsetting the monthly total. Refined product futures pulled back by almost a penny from their morning highs after the report, as it is another fundamental data-point that there are some major headwinds pushing against fuel consumption this winter.
Today’s interesting read from the WSJ: Why consumer behavior suggests that oil consumption will continue to grow far longer than recent headlines might have you believe. (In other words, everyone likes talking about green energy, but nobody likes paying for it).
A Day Of Chaos In Washington
After a day of chaos in Washington, U.S. markets are starting out in quiet fashion to start Thursday’s session. Energy futures reached new 10-month highs overnight, and seem to still have room to run higher from a technical perspective, while current fundamentals are throwing a giant red flag to challenge this rally.
Wednesday morning we learned about a threat to attack the U.S. Capitol by Iranian factions, Wednesday afternoon saw a much different attack on the building. While people all over the world reacted to the shocking videos from Washington, markets seemed to largely ignore story, and continued on their way overnight as if nothing had happened.
The Senate looks to have been flipped as Democrats have taken both Senate seats in the runoff election, which should mean more new legislation in 2021. Economic stimulus and climate change policies appear to be at the top of the list for those new laws, which could well be bullish for energy prices near term, and bearish for the energy industry long term.
Futures markets seemed to choose to look at the big drawdown in crude oil stocks last week (which can be largely explained by year-end tax avoidance efforts holding crude offshore) and ignored the large builds in refined product inventories driven by one of the largest weekly demand drops on record. It’s not unusual for the first week of January to be the worst week of the year for consumption due to the holidays shutting down many businesses, and with COVID shutting down much more that decline is not too surprising, the question is whether or not we’ll see a sharp recovery in the next two weeks.
As expected, the RIN market reacted most dramatically to the senate election results with both bio and ethanol RINs reaching new three-year highs in the early morning, but then trading dried up in the afternoon. We saw a similarly wild trading pattern after the last presidential election with prices soaring north of $1/RIN, only to drop by 70% in the next few months. It seems unlikely we’ll see a similar move this time given the polar opposite stances on renewables between the Presidents, but with the mandated market for RINs, nothing is certain.
Senate Election Results Impact On Financial Markets
We’ve had a busy couple of weeks’ worth of price action so far in 2021, and we’re just starting our third day of trading. Energy prices have gone from the cusp of a technical breakout to the upside, to a huge reversal that threatened a price collapse, and back again to 10 month highs in just two days. Prices are starting Wednesday’s session with more of a wait-and-see approach after being unable to sustain their rally overnight. OPEC-inspired whiplash is getting most of the credit for the big swings in energy markets, while the Senate election results look like they’ll be the big story today that will likely have broader impacts on financial markets.
Saudi Arabia surprised pretty much everyone Tuesday by announcing it would unilaterally cut its oil output by one million barrels/day, which would allow Russia and other countries to increase their output, without flooding the global market as demand continues to sputter. While the move shocked the markets, which responded with a furious rally in oil and refined product futures, it seems to be in some ways the Kingdom making good on the promise it made in the fall to do whatever is necessary to stabilize the global oil markets and teach speculators a lesson. This move also sets the stage for some interesting political theatre once demand returns, as the Saudi’s will no doubt remember those that supported them in this effort, and probably even more those that did not.
Not buying it? As the basis charts below show, differentials for physical prices in most regional U.S. spot markets dropped on the day as cash markets seem to think the current supply/demand realities are not as optimistic as the futures market action suggests. That hesitation by the big physical traders could be enough to stall the momentum in futures, just as they look like they’re breaking technical resistance and poised for another rally. The API report in the afternoon gave more reason for fundamentalists to have doubts about the recent run-up as both gasoline and diesel saw large very large inventory builds last week (5.5 and 7.1 million barrels respectively) but that report seems to have been largely lost in the shuffle of the bigger news stories. The DOE’s report will be out at its normal time today, but you’ll be forgiven if you miss it while watching the election coverage.
Early results appear to show that Democrats will win both seats in Georgia, flipping control of the Senate, and giving the party control of Congress and the White House for at least two years. There will surely be some selling as control of the legislative and executive branches will no longer be split, assuming the current calls hold, but some other reports suggest we could see some risk assets rally as this change could also make new fiscal stimulus measures easier to sign into law.
For energy markets in particular, a flip in the Senate will almost certainly mean more aggressive laws to combat climate change, which in some cases may mean tighter restrictions on traditional oil producers and refiners. That is not necessarily bearish for prices however as more restrictions tend to mean less supply (and less investment) which could end up driving an extended rally in prices if demand recovers this year.
The reaction in RIN markets today may give us an early indication of how traders in the refined product space view the changing of the guard in the Senate. RIN prices have already been surging lately, in sympathy with corn and soybean prices that are reaching multi-year highs largely due to concerns over South American grain exports, and this latest bit of news could encourage another strong rally if the market believes the new congress will push for increased renewable mandates. Then again, the RIN market is notoriously volatile, and there could be some buy the rumor sell the news once the current bout of short covering is over.
Week 1 - US DOE Inventory Recap
2021 Starts Off In Volatile Style
2021 started off in volatile style with numerous equity and commodity markets seeing large intraday swings that created out-side down reversal bars on the daily charts, and threatened to break the upward momentum that’s propped up most of those markets the past two months. Equities are following the technical script, with futures pointing lower this morning after experiencing that bearish reversal pattern yesterday, but energy markets are trying to rally again, bucking the textbook trading guideline in the early going.
There’s a trading adage that bull markets don’t end due to bearish news, they end when the market fails to rally on bullish news. That could well be the case for oil and the rest of the energy complex after an Iraqi oil tanker needed emergency assistance over the weekend to defuse a mine attached to its hull. In addition, Iran seized another oil tanker in the Persian gulf and announced it was increasing uranium enrichment. Yet, prices made that large downward reversal on the day after reaching fresh 10 month highs earlier in the session.
Adding to the volatility, OPEC & Friends were unable to reach an agreement Monday, and are meeting again today to try and find a consensus in the first of their new monthly meetings. Reports suggest Russia & the non-OPEC members it represents were pushing for an output increase while Saudi Arabia and the rest of the traditional OPEC delegation wanted to hold firm.
All eyes are on (the U.S. State of) Georgia today as the balance of power in the Senate, hinges on the outcome of two runoff elections. It’s widely believed that the financial markets prefer divided government as a check and balance of any single party’s power, and we should get a good test of that theory as the votes are counted.
RIN values continued their rally, reaching new three year highs in Monday’s trading after the EPA missed another deadline to set 2021 targets for the RFS, leaving that decision for the new administration, who most presume will be less friendly to oil refiners. One note of caution for the RIN rally, both Corn and Soybean prices had large intraday reversals (similar to what we saw in energy and equity markets), which threatened to break the strong rally that’s pushed those crop prices to multi-year highs, and contributed to the strength in renewable credits. Also, don’t forget that refiners bear the brunt of the RFS obligation and as more of them are forced to lower rates, convert units to renewable production, and/or shutter completely, the demand for those credits decreases.
First Trading Session Indicates Another Volatile Year
If the first trading session is an indication of things to come, it’s going to be another volatile year for energy markets. Oil and diesel prices surged 4% or more to reach 10 month highs in overnight trading, with WTI coming just a few ticks away from the $50 mark, only to see those gains completely erased before a second rally started around 7:30 central. Headline writers can’t quite keep pace with the big early swings that may be caused by expectations for the OPEC meeting taking place today, the latest updates on the global vaccine race, or simply due to the positioning of capital as the new year begins.
ULSD futures were up a nickel around 3 a.m., and RBOB futures were up more than 4 cents, but both have since traded all the way back into negative territory, with the most heavy selling starting around 6 a.m., only to bounce back into positive territory again. This early action could be significant technically, as the complex is on the verge of a breakout to the upside on the charts, but if the rallies continue to be followed by heavy selling, we could be stuck in an extended period of sideways that tends to be whiplash inducing.
U.S. equity markets are starting the year on a more bullish note, with S&P 500 futures trading at record highs, following a strong start to trading in Asian and European markets, and the U.S. dollar is falling once again, reaching its lowest level since April 2018.
The CFTC’s commitments of traders report was delayed again due to holidays and should be out later this afternoon. The ICE’s version of the report showed minimal change in the managed money positions in Brent, but a large increase in bets on higher prices in Gasoil, suggesting a renewed interest in diesel prices from the big speculators.
The EIA is starting off the year highlighting its U.S. Energy Atlas, and interactive mapping program that shows details on energy infrastructure of all types nationwide. The interactive nature of that program seems particularly useful these days as the past year saw more refinery closures announced than the country had experienced in nearly 40 years. So far we’ve made it three days into 2021 without any new announcements of plants being shuttered, but we’re also in the worst few weeks for demand of the entire year historically so there still could be more to come.