Market Talk - 2021 october
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Divergence Seems To Be The Theme Of The Week For Energy Prices
Divergence seems to be the theme of the week as energy prices are having a hard time finding direction as October trading winds down, and we’re seeing some markets struggling with excess supply, while others deal with shortages.
We’re seeing this play out in futures where yesterday HO and WTI contracts staged a strong recovery rally, and managed small gains on the day after free falling in the morning, only to fall back into the red today. RBOB was the only contract unable to recover into positive territory Thursday, but then rallied 3 cents overnight, only to give up those gains in the past hour. The low trades set in Thursday’s session offer a good short term support level that the bulls need to hold if they’re going to have a chance to regain the upward momentum lost early in the week.
We’re also seeing divergence in basis values as West Coast markets have seen strong rallies this week after multiple weather-related refinery hiccups last weekend, while Midwestern values are dropping to multi-year lows. Ordinarily, this type of price spread between regions would mean fleets of tanker trucks long hauling fuel to take advantage of (and eventually help close) the arbitrage window, but given the driver shortages, those options are limited and may keep these spreads wider for longer. On the other hand, Chicago basis values may find some indirect support after a fire was reported at the Cenovus (FKA Husky) refinery in Lima OH that injured 4 workers.
While gasoline prices have dropped more than 10 cents after reaching a 7 year high to start the week, ethanol prices continue to set new records north of $3/gallon as logistical bottlenecks continue to plague suppliers. Even though ethanol prices have had a strong week, RINs have come under heavy selling pressure once again as the industry continues to wait impatiently for the long-overdue ruling on RFS volumes.
It’s the last trading for November product futures, and when the December RBOB contracts takes the prompt position Monday, it will start out some 7 cents below where October goes off the board. We’ve already seen most cash markets adjust to this steep backwardation with big jumps in basis values when transitioning to the December futures reference, but this phenomenon will still cause confusion next week for those watching the prompt contract only and then wondering why their rack price didn’t drop.
Lots of earnings reports to sift through this week, and no surprise that with prices near 7 year highs, most producers are seeing their best earnings in several years. One surprise announcement alongside an earnings release was that World Fuels is buying Flyers Energy group for $773 million.
Energy Futures Dropped 5% In The Past Two Trading Sessions
Energy futures dropped 5% in the past two trading sessions as the bullish momentum seems to have finally worn off, and roughly 30 million Americans tried to avoid driving for a couple of days due to severe weather sweeping large parts of the country.
Depending on how wide of a brush you use to draw your trend lines, you can argue that the month old rally that added 20% or more to most contracts is officially dead, and we’re likely to see more heavy selling as a result. As is often the case with the charts however, it’s not that simple as some of the weekly trends are still holding, thanks in part to prices bouncing off their lows this morning, which could mean this is yet another correction rather than a reversal in trend.
Want a good reason why WTI isn’t falling as fast as the other contracts this week? Take a look at the Cushing Crude stocks in the charts below, which have fallen to their lowest level in 3 years. That was probably the most noteworthy point in an otherwise lackluster DOE report. Prices did attempt to rally for a few minutes after those stats were released as refined product inventories declined, but soon gave way to another round of selling, suggesting this move has more to do with technical factors than fundamental.
Q3 earnings for many oil producers and refiners are being released this week, and not surprising given the recovery in prices the results are looking strong and the outlook is good for Q4 given what prices had done so far in October. The climate theme is a major point in most of these earnings releases, and there will be no shortage of headlines over the next week given those reports, the congressional hearings and the COP26 meeting this weekend.
Energy Futures Pulled Back From Multi-Year Highs Set In Tuesday's Session
Energy futures pulled back from multi-year highs set in Tuesday’s session as inventory builds and bad weather both appear to be dampening the bullish enthusiasm. Although we’ve seen several similar short-lived pullbacks over the past few weeks, charts are showing signs of a potential rounding top, that could mean sharply lower prices in the weeks ahead if we don’t see a bounce in the next few days. Of course, it’s too soon to make that call, and we’ll need to see another pullback of 5% or more before the bullish trend can be called broken.
The pullback in futures didn’t get moving until around midnight, well after the API reported its inventory levels for the week Tuesday afternoon, and yet those stock builds are getting some of the credit for today’s selling. Based on the timing of the pullback, it seems like that part of the selling was caused by the realization that even though there were numerous refinery hiccups on the West Coast, and multiple power outages at terminals on the East Coast, the severe weather sweeping the country this week is ultimately likely to have a more negative impact on fuel demand than supply.
Zombie Storm? The NHC is giving 40% odds that this Nor’easter could develop into a named storm after moving off the US Coast later this week. Fortunately, it does not appear that this storm will come back to haunt the coast on Halloween as the path keeps it moving east and away from shore…for now.
The API reported inventory builds across the board last week, with crude oil stocks up 2.3 million barrels, diesel up just under 1 million barrels, and gasoline up by about ½ million. The EIA’s weekly report is expected at 9:30 this morning. One interesting note from the API report, even though total US crude stocks have been steadily building over the past month, stocks at the Cushing OK hub (which is the delivery point for the WTI futures contract) continue to decline. This phenomenon could create a scenario where the short squeeze in futures drives WTI sharply higher, even while physical markets elsewhere aren’t feeling the squeeze. Long term, this may continue to drive liquidity to the Houston-based contracts that have been gaining popularity in recent years.
Meanwhile, the EIA’s winter fuels outlook is predicting higher expenditures for all heating fuels this winter as prices for many energy contracts are already at multi-year highs even before the first rounds of cold weather start to hit parts of the country this week. The report also highlights how the pull from overseas is contributing to tighter than average supplies. (Charts below)
Looking for a reason to buy this latest dip in prices? Saudi Aramco warned that spare capacity is rapidly dwindling, suggesting it’s unlikely that OPEC changes its resupply stance when they meet next week.
Gasoline Futures Are Leading The Energy Complex Higher This Morning
Gasoline futures are leading the energy complex higher this morning, setting yet another 7 year high, even after the rally in oil contracts stalled out Monday. Weather disruptions on the East and West Coasts seem to be a major factor contributing to the strength in RBOB as time spreads continue to surge with only a few days left before the October contract expires.
The Bomb Cyclone that hit the West Coast over the weekend disrupted operations at 3 different refineries in Northern California, sending basis values for San Francisco spots sharply higher on the day and outright prices to all-time highs in some cases.
So far there have not been any reports of upsets at the remaining East Coast refineries, but heavy flooding has been reported in the area, so some disruption to the supply network is still possible. Even if the refineries continue operating, this Nor’easter will definitely disrupt vessel traffic in and around the New York harbor at a time when supplies are unusually tight. At least one terminal in the area was shut due to power outages, and from the forecasts, it’s probably not going to be the last one to have a temporary disruption as the storm passes. Lines space values for gasoline shipped on Colonial remain in positive territory, which has been an extremely rare occurrence over the past two years, another sign of the tightness in prompt supplies.
Countries around the world are announcing their climate plans this week, ahead of the global summit in Scotland this weekend. One of the biggest questions heading into the summit is whether or not China (the country with the most pollution) will attend. Overnight reports suggest that the country’s president will not join the summit, which is a major blow to the credibility of any pact reached.
The other big headline today is that Tesla has surpassed $1 Trillion in market cap, and its founder is now worth more than Exxon. Meanwhile, even ambitious projections for electric car production puts them at less than 5% of the global vehicle count 10 years from now. Exxon meanwhile continues to pursue its own carbon reduction agenda through its carbon capture and sequestration (CCS) projects.
The Dallas Fed’s Texas manufacturing survey showed that growth in the state remains above average even as costs are rising (aka inflation), and raw material shortages are limiting output. A highlighted note from chemical manufacturers shows that some are unable to keep up with demand, as we’ve seen with a shortage of additives across several markets in the past month.
Minor Drag Coming From Diesel Contracts Seem To Have Lost Their Luster With Investing Community
WTI traded north of $85 overnight and RBOB gasoline is above $2.52, both fresh 7 year highs as the petroleum bulls were able to maintain control despite a few rounds of heavy selling last week. With those new highs set, the charts continue to favor a run towards $90 for crude, with some minor drag coming from diesel contracts that seem to have lost their luster with the investing community.
The most exciting market last week was New York Harbor ethanol that reached a multi-year high north of $3 early in the week, only to drop by 35 cents to end the week as the supply bottleneck seems to have relieved itself to the time being. RIN markets also had a noticeable pullback on Friday after a strong rally earlier in the week.
Money managers were all over the place with petroleum contracts last week, with large increases in net length held in WTI, RBOB and Gasoil contracts, while ULSD and Brent saw sizeable reductions in the bets on higher prices. There was a big jump in new short positions held by the large speculative class of trader in both ULSD and Gasoil contracts, while WTI saw a 22% drop in shorts last week. Those moves by the large funds are correlating to the price action we’re seeing today, with RBOB and WTI both breaking to fresh 7 year highs while ULSD lags behind, needing another 4 cents to catch up to the rest of the complex.
Baker Hughes reported a net decline of 2 oil rigs working in the US last week, snapping a streak of 5 straight weekly increases. Wyoming accounted for the bulk of the drop, with a net decrease of 3 rigs, while the other states combined to add 1. A WSJ article Friday highlighted the challenges drillers are having finding employees and equipment (along with pretty much every other industry) which seems to be limiting the number of active oil rigs these days much more than price. If you need a reminder of why we’re still extremely fortunate despite these tight supply chains, read about the explosion at an illegal Nigerian refinery last week.
While the US is facing a trifecta of severe weather this week with a Bomb Cyclone hitting the West Coast, Tornados threatening much of the south, and a Nor’easter pummeling the East Coast, the tropics remain quiet with just over 5 weeks left in the Atlantic Hurricane season, so any impacts this week are likely to be reduced demand in areas hardest hit, without any major threat to supply infrastructure.