Market Talk - 2022 february
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Energy Prices Are Surging And Equity Markets Are Sliding Once Again
Energy prices are surging and equity markets are sliding once again as Ukraine has become a modern day version of the Alamo , and has generated an unprecedented international response. While 3-4% moves are a big deal, the market reaction is still relatively calm given the circumstances, and uncertainty.
Russian energy exports continue to be given a loophole, the new sanctions and bank restrictions announced over the weekend will make the transactions needed to move those supplies more challenging, and also likely to draw retaliation in various forms.
The potential scenarios of how this will play out are extremely complex, and will continue driving price volatility as both rumor and reality make their way through the market. So far, about all we can say with certainty is that despite the latest price spike, petroleum futures did not reach the highs set last Thursday after the start of the invasion. That leaves at least one piece of technical resistance on the charts that may prove pivotal this week to determine if $100 oil and $3 refined products are here to stay.
This morning there have been a few reports that a coordinated release of strategic petroleum reserves was in the works, which briefly had futures pulling back, until the headline reading algorithms realized that the last coordinated SPR release still hasn’t happened as announced back in November.
Reminder that today is the last trading day for March ULSD and RBOB contracts, so any cash markets that haven’t already transitioned to the April contract will do so today. Also a reminder that since April RBOB futures are summer-grade spec, prompt futures values will increase by around 15 cents tomorrow, but basis values adjust lower to offset that spread on the board until the terminals make their transition.
Money managers were reducing their net length in ULSD, Gasoil and WTI contracts ahead of the Russian invasion, and are likely to want a do over and reversed that pattern in the days since the latest CFTC data was collected. Brent crude contracts did see both healthy short covering and new long positions added, increasing the large speculator net length by 6% in the latest report, which makes sense as the market digested the threat to European supplies and pushed the Brent/WTI spread to its widest in 2 years.
Baker Hughes reported a net increase of 2 oil rigs active in the US last week, with the Permian basin again accounting for the entire increase, offsetting a net decline of 1 rig in other basins. Natural gas rigs increased by 3 last week, and are surely to get more attention now as the world scrambles to find alternatives to Russian output.
Markets Around The World Are Transitioning From Full Panic To Major Discomfort As The Russian War On Ukraine Continues
Markets around the world are transitioning from full panic to major discomfort as the Russian war on Ukraine continues, but the fallout has been isolated so far. This time yesterday brought with it breathless comparisons to other notorious market shocks, as Europe was not only facing its most severe military conflict since WW2, but it came with an only-slightly-veiled threat of nuclear war should other countries try to intervene.
Equity markets staged a huge recovery Thursday afternoon, and energy prices pulled back sharply, as traders digested the new reality that most have only read about in history books online, with several factors seeming to play into the calming down we witnessed throughout the day.The US President had promised sanctions would be “swift and severe” if Russia invaded Ukraine. Thursday he announced a variety of moves that may be seen as severe, but avoided cutting Russia off from the SWIFT payment system, which is seen as a way to keep a penalty in reserve if needed, allow European banks to continue receiving loan payments from Russian firms, and probably most importantly, allow for Russian energy exports to continue.
Expectations that the FED would take it easier on interest rate hikes to try and offset some of the economic impact of the war & sanctions also seemed to encourage stock markets. The CME’s FedWatch tool shows that 2 days ago, there was a 33% probability of a 50 point rate hike at the March FOMC meeting, but that likelihood dropped to 21% yesterday.
While the panic has subsided, we’re a long way away from a calm market. After refined product prices pulled back 15-18 cents from the overnight highs Thursday afternoon, energy buyers did step back in pushing prices 5-6 cents higher last night, only to see a drop to 2-3 cent losses earlier this morning. That type of volatility is to be expected as long as the fighting and constantly changing stance on sanctions continues.
Physical product trading in the US had a fairly muted reaction, with most regional cash markets seeing only small basis moves on low liquidity, which is common when the futures market goes wild. RIN values did move higher on the day as the risk of trickle down effects from Black Sea supply disruptions to grain markets took hold, but like the rest of the energy contracts those prices pulled back sharply from the initial round of panic buying.
The lack of reaction in USGC products was particularly noteworthy given the ongoing shutdown of the products pipeline FKA Plantation as the company investigates a leak in Georgia. Values for shipping space on Colonial had already jumped last week as the annual RVP transition opened up the Gulf-East Coast arbitrage window, and those values held steady Thursday, suggesting the big physical traders aren’t yet too concerned that the pipeline will be down for long. There are already reports that some retail stations in the US are seeing long lines as consumers fill their various forms of fuel tanks due to the Russian invasion, and if the Plantation line stays down for another couple of days, that phenomenon could get much worse.
Some notes from the DOE report Thursday (that no one seemed to pay attention to for more than a minute or two):
US diesel inventories declined for a 6th consecutive week, and are holding 30 million barrels (nearly 1.3 billion gallons) below their average for this time of year. Demand both domestically and abroad remains strong, which helps explain why the coasts (PADDs 1, 3 and 5) are all tight, while the landlocked locations (PADDs 2 & 4) are relatively well supplied. There’s a similar but less severe phenomenon with US Gasoline inventories which are slightly below average in total, with coastal markets seeing tighter supplies than normal. Another theme is that while supplies are well below year-ago levels this week, that’s about to change for many markets as refiners continue to operate relatively well through a parade of winter storms, and while there have been a handful of upsets, there is nothing even remotely resembling the disruption we were facing a year ago.
Week 8 - US DOE Inventory Recap
Stock Markets Around The World Are Tumbling
Oil prices surged north of $100, and several RBOB and ULSD contracts traded north of $3/gallon overnight, up nearly 20 cents/gallon so far this morning, after a full-on Russian assault of Ukraine. Stock markets around the world are tumbling, as solutions to this conflict seem to all come with a high level of economic and/or human damage.
More sanctions have already been promised by the US and allied countries, and Ukraine has requested that Turkey close off the Black Sea straits, which would block Russian warships, and roughly 2 million barrels/day of oil shipments.
So, how high can prices go now? The charts show a pretty strong band of resistance for crude oil around the $110 range, which repelled rallies in 2011, 2012 and 2013, prior to prices collapsing late in 2014. For refined products there’s a wider range between $3.20-$3.40 that acted as a price ceiling during those years, that should at least act as a stopping point if this rally continues. If for some reason prices break through those chart layers, then we’d target the 2008 highs. That said, the best cure for high prices is high prices, and this latest spike may end up forcing prices lower later this year by forcing drivers off the road and travelers to reconsider their European vacations.
As the charts below show, the US does import oil and refined products from Russia, but the relatively small fraction of the country’s declining import demand should be replaceable and most likely swapped with barrels that would otherwise go to a sanctions-resistant buyer like China.
While the war in Ukraine will no doubt dominate headlines, the pipeline formerly known as Plantation was closed Wednesday to investigate a possible leak in a suburb of Atlanta. While there are no reported connections between the situations, the timing is certainly a harsh reminder that Russian hackers took the nearby Colonial pipeline offline for almost a week last year, and that new cyber-attacks should be expected if the new cold war continues to escalate. The winter storm sweeping the eastern half of the country may delay the repairs on the plantation line, but it’s also keeping many drivers off the road so it may not have as much of an impact on regional supplies if it can come back online in a day or two.
While the 7-8% increases in oil and refined product futures are obviously a big deal, they pale in comparison to natural gas prices in European markets that are up roughly 30% on the day so far. As has been widely reported over the past few months in the runup to this conflict, Europe gets roughly 40% of its natural gas supplies from Russia. The EIA this week highlighted how the US, Qatar and Russia account for 70% of all European LNG imports, but the unfortunate reality is there simply is not capacity currently to replace the Russian supplies.
An Uncomfortable Calm Is Gripping Global Energy Markets After Some Wild Back And Forth Action
An uncomfortable calm is gripping global energy markets after some wild back and forth action the past two days. Crude oil prices have eased by $4/barrel and Refined products have pulled back 10 cents from their Monday night highs in the wake of the Russian invasion of Ukraine, and are starting Wednesday’s session on a quiet note. Even the notoriously volatile natural gas prices are acting relatively docile despite the huge potential fallout from the economic cold war.
There’s a noteworthy divergence emerging between near bullish fundamentals and technical that are looking suddenly bearish. On the fundamental side, demand estimates continue to increase as COVID restrictions rapidly ease, while supply increases continue to lag behind the estimates for 2022, even before factoring in the potential disruptions from Russia. Technical studies meanwhile are starting to look top heavy after the sharp reversal Tuesday as traders appear to have once again played the buy the rumor and sell the news game with energy contracts. Diehard chartists love to say that the headlines follow the prices, not vice versa, and the price action in the next few days will provide an interesting case study into that argument.
It’s not just crude oil that’s tight. Prices for soybeans and its oil have been moving sharply higher again in recent weeks as demand for both food and fuel from the beans increase, and supplies from South America are struggling pushing up the price for everything from tofu to D4 RINs. China announced it would release soybeans and edible oils from its strategic reserves to help minimize the increase in prices.
4th quarter earnings releases from refiners are showing some consistent themes this week. Big improvements in demand, good but not great margins, and challenges with both severe weather and labor impacting operations.
Speaking of refinery operations: Traders didn’t seem too concerned about the explosion and fire that injured 5 workers at one of the Country’s largest refineries Monday, with US Gulf Coast basis values barely flinching after the long weekend. That plant was undergoing maintenance already so output may not be impacted, and local terminal operations are not showing signs of any product tightness following the fire.
The IEA released its global Methane tracker this week, once again shouting from the rooftops about the need to reduce these emissions and some of the “cost effective” ways to accomplish that goal. One interesting note from the report: Turkmenistan accounted for nearly 1/3 of the major emissions events recorded globally last year. Perhaps Russia will invade them next to help the world combat climate change.
Now What? That Seems To Be The Question Of The Morning After Energy Prices Spiked
Now what? That seems to be the question of the morning after energy prices spiked and equity futures sold off sharply after the news broke of troops being ordered into the breakaway regions of Ukraine Monday afternoon. While WTI and RBOB did touch new 7 year highs overnight, they’ve since pulled back by 5 cents or more and stocks have recovered most of their losses, as an eerie sense of calm has taken over while the world tries to figure out what comes next.
The markets now have to guess if this is just another step closer to Russian taking the rest of Ukraine, or a way for Putin to back down while still being able to claim victory on both political and economic fronts.
Interestingly enough, stocks seemed to get a small boost, and energy futures pulled back from their highs, after reports that China is not backing Russia’s move, saying that the Ukraine is not an exception to sovereign rights for all nations, which could help limit the economic fallout of this event. Those reports did not mention China’s stance on Taiwan or Hong Kong’s sovereignty.
March RBOB futures did trade north of $2.80 overnight, while the April (summer-spec) contract touched a high of $2.9375 putting it within easy striking distance of the $3 mark when it takes over the prompt position this time next week. ULSD futures did not join the rest of the complex in setting fresh 7 year highs overnight as the extreme backwardation we saw earlier in the month has evaporated and knocked 10 cents off of prompt prices. ULSD did break back north of $2.90 for a while overnight however, so it’s too soon to rule out a push towards the $3 mark for diesel, especially if the Natural Gas markets get rolling.
Speaking of which, so far natural gas markets in the US and UK seem to be taking news that Germany will halt certification of the Nordstream 2 pipeline from Russia in stride, which may help explain the relatively muted response in the rest of the energy arena.
While cash traders largely took the day off Monday without the reporting agencies assessing spot markets, so far there’s not much happening in physical or credit markets, which is likely a sign of the wait and see trade.