Market Talk - 2022 january
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Energy Futures Are Back On The Move Higher To Start The Week
Energy futures are back on the move higher to start the week, after ending on a softer note Friday in what appeared to be a round of profit taking after a strong rally. The charts continue to point higher, although another big pullback is likely along the way as several short term indicators remain in overbought territory. The saber rattling on either side or Ukraine, volatile stock markets, the backside of the Omicron hill, and another attack on the UAE are all making headlines to start the week, and could each take their turn getting credit for whatever move the market takes that day. It does seem that a major selloff will be challenging until the Ukraine situation clarifies in one form or another, and as long as that’s lingering a spike to $100 for oil and $3 for products cannot be ruled out.
The East Coast is digging out from the weekend storm that dumped 2 feet of snow in places, but terminal disruptions appear to have been minimal and power outages not as widespread as feared. For those that can’t get enough of these events, you’re in luck as another major storm is set to sweep across the US in the back half of the week, which may bring the first big snow and ice event back to Texas since last year’s Polar Plunge crippled the state.
It’s the last trading day for February RBOB and HO futures, so make sure you’re looking to the March RBH/HOH contracts for direction if your market hasn’t already shifted. The Feb ULSD (HO) contract has been particularly volatile lately, rallying 26 cents last week, then dropping by a dime from its high on Friday, before moving higher again today. With just a few hours left for that contract, don’t be surprised if there are more fireworks today.
Money managers looked like they were taking some profits off the table in Crude oil and gasoline contracts last week, reducing their net length slightly as of last Tuesday after weeks of increases. The large speculative trade category continued to add length in diesel however, with both ULSD and Gasoil contracts seeing new longs added during the week, and ULSD saw a fair amount of short covering, which may help explain part of the recent spike in prices.
Baker Hughes reported 4 more oil rigs were put to work last week in the US, resuming the steady increase after last week saw the first net decline in 3 months. The Permian basin, which accounts for more than half of the total US rig count, has held flat on its total count of 293 rigs for the past month, even as the EIA predicts that the basin will set new production records this year as efficiency gains are expected to help offset the headwinds of a tight labor market and the supply-chain bottlenecks most people are tired of hearing about by now.
Brewing Storms, Both Literal And Figurative Are Stirring Up Energy Markets For A 4th Straight Day
Brewing storms, both literal and figurative are stirring up energy markets for a 4th straight day, sending refined products and WTI to yet another round of 7 year highs this morning.
A powerful winter storm is heading for the east coast, and the “Bomb Cyclone” warnings have sparked a round of panic buying that we haven’t witness since the dreaded Polar Vortex of 2014, which was (coincidentally?) the last time fuel prices were this high. Why gasoline prices are joining the run up this morning when so millions of cars will be unable to drive for days is always a bit of a mystery, but once the snowball effect of buying in energy markets gets rolling, all bets are off.
Speaking of which, the February Heating Oil contract – which expires Monday – is breaking free from the pack of surging energy prices, trading 9 cents higher than the March contract this morning north of $2.86, a gain of 26 cents since last Friday. With less than 2 days until expiration, don’t be surprised to see some even more volatile swings in that contract, and a spike to $3 in the next two sessions is a real possibility.
Meanwhile, the figurative storm brewing around the Ukraine continues, with more signs of escalation keeping markets on edge. The US is working with energy producers to come up with backup plans to supply Europe with supplemental fuel should Russia continue to use its Natural Gas and Oil exports as its most powerful weapon in this war.
Help is on the way? A big story over the past several months was the expectation that OPEC and other producers would regain the upper hand and global oil supplies would begin building again after an 18 month decline. So far that hasn’t proved true as various disruptions and supply chain bottlenecks have limited output. The EIA this morning published a note doubling down on the theory that OPEC’s production will have its largest increase in nearly 20 years despite the headwinds in Libya and elsewhere, which may eventually help prices to collapse back to more comfortable levels. The big question in the meantime is how high will they spike until the supply reinforcements arrive later in the year.
While the world anxiously awaits a solution to the lack of adequate petroleum supplies in 2022, the even slower supply race for a lower carbon energy solution continues with plenty of new ideas hitting the market daily, but little if anything that will change the outlook soon. Yesterday we saw word from Valero that Sustainable Aviation Fuels were still not economically viable, particularly given the competition for renewable feedstocks, and a report that Marathon was considering buying the idled P66 refinery in LA to convert it to renewable production, which will continue to add pressure on the feedstock market if it actually happens.
Another Strong Start For Refined Product Prices As Another Round Of 7 Year Highs Are Being Set Across The Petroleum Complex
It’s another strong start for refined product prices as another round of 7 year highs are being set across the petroleum complex this morning. Supply concerns seem to continue to outweigh nervous equity markets, even after the FED made it clear that the free money party is coming to an end.
Diesel prices are once again leading the charge, trading up nearly a nickel on the day, making a run at the $2.80 mark just 3 days after they traded down to $2.60. This $2.80 range could prove to be a significant technical barrier as it was a support layer for months back in 2014, and when it finally broke prices collapsed in a hurry. Old support often becomes new resistance on the charts, but if it’s treated as nothing more than a yield sign as most resistance has lately, then a run at $3 seems inevitable as the supply crunch continues.
The DOE’s weekly report continues to encourage the rampant buying in diesel futures, with days of supply down to 25, a number that’s more fitting of a major supply disruption. While racks across most of the country have recovered from the historically week levels in the front half of January, there’s no sign of any major supply issues in US physical markets.
Gasoline prices have joined in on the fun, finally reaching new 7 year highs even though the prompt futures contract is still a winter spec. This recent surge, well ahead of the normal spring rally, leaves a run at the $3 mark a possibility for summer gasoline grades as well, even though fundamentals in the US also suggest that this market may be outkicking its coverage.
The FED did not raise rates Wednesday, as was widely expected, but equities reacted harshly to the FOMC Chair’s news conference in which he made it clear that they were preparing to end the money printing and raise rates throughout the year. This was a harsh reminder that the current chair is one of only 2 in the past 40 years that did not come from the academic world, and seems to take inflation more seriously than his predecessors. Already fed fund futures are showing a higher probability of 4 or more rate hikes this year than they did yesterday morning.
Refined Products Are Leading The Charge Higher This Morning With 5.5 Cent Gains
Up, up and away? Energy futures have staged a big rally off of Monday’s lows and several contracts are now within a few ticks of reaching fresh 7 year highs. Refined products are leading the charge higher this morning, with 5.5 cent gains putting ULSD just 16 points away from its highest trade since October 2014 and threatening another technical breakout to the upside. Brent crude meanwhile is just a few ticks below the $90 mark, already reaching a fresh high for the year overnight.
Looking at the charts, if we see new highs set and held this week, there’s a strong case to be made for crude making a run at $100, and ULSD taking a shot at $3. Fundamentally, as long as OPEC and Friends are unable to meet their output quotas, the argument for that type of price spike continues to strengthen as well.
The FED and Ukraine continue to be the big stories roiling markets, with US equities having more huge swings in Tuesday’s session, and starting out Wednesday pointing to healthy gains, while volatility is at its highest for stocks in over a year.
The FOMC will make their first monetary policy decision of what’s expected to be a very busy year for the FED. The CME’s Fedwatch tool shows only a 5% probability of a rate hike today, but a 97% chance of an increase by March. In addition, the probability of 3 or more hikes by the end of the year has increased to 92%, from 65% a month ago as the FED has been foreshadowing a tougher stance on inflation.
The API reportedly estimated a small decline in crude oil stocks last week of less than 1 million barrels, while distillates drew down by 2.2 million barrels. Gasoline meanwhile continued its seasonal stock build with an increase of 2.4 million barrels, marking the 4th straight week of gains. The EIA report is due out at its normal time today, and if the seasonal trend holds we should continue to see gasoline stocks increasing for another few weeks before starting to draw down ahead of the spring RVP transition.
How’s that plan working out? The DOE last week announced the 2nd largest award ever from the SPR as 7 companies raced to take advantage of the steeply backwardated price curve and gladly pay the government back in 2-3 years where they can lock in prices 20% or more lower than what they’re receiving today, which should easily cover the “interest” payable on those loans. Meanwhile, energy products continue to push multi-year highs despite the political theater of this coordinated SPR release that was supposed to help lower prices.
Whiplash Is The Theme Of The Week As Stock Markets Had Their Biggest Daily Swings In Years
Whiplash is the theme of the week as stock markets had their biggest daily swings in years while energy futures are getting swept up in the confusion. After a busy Monday, we’ve already seen a nickel swing in ULSD prices today, with RBOB and crude oil contracts seeing similar back and forth action in the early going.
Looking at only the charts, and not the headlines, refined products have so far been able to find technical support around the trend-lines that have fueled their bull run over the past 6 weeks. If we see ULSD continue to hold a floor just north of $2.60 and RBOB around $2.40, there’s a good chance we end up seeing another run at 2014 prices levels, but if those levels break (and hold) there’s a good chance we’ll see a 10-15 cent drop coming soon.
The DJIA had its biggest daily swing since the onset of the pandemic, rallying from an 1,100 point loss mid-day to end the session up nearly 100 points, but is pointing to another weak start down nearly 400 points this morning. The Nasdaq 100 had an even bigger bounce, rallying more than 5% off of its lows for the day, the biggest daily reversal since the financial crisis in 2008, but it too is looking weaker again to start today’s trading.
Perhaps the biggest headwind for stocks is that the FED has been signaling that it will not be coming to the rescue to prop up financial markets, and in fact will be tightening its monetary policy and raising rates, taking the free put option out of the market. How this impacts energy prices can depend on the day, as often times the correlation between the two asset classes can be strong and they move in lock step, but currently are only moving together for short periods of time.
The VIX chart below shows that stocks are more “nervous” now than they’ve been since we first learned about Omicron, and while energy volatility is elevated, it’s nowhere close to what we saw 2 months ago.
The escalating tensions around Ukraine have become a double-edged sword for energy prices as they weigh heavily on financial markets, adding to the unpredictable nature of trading this week after helping fuel the rally for the past 2 months.
A new report from McKinsey & Company suggests that the transition to net zero will require an extra $3.5 trillion in spending per year through 2050, for a total of $275 trillion. Too bad the FED has closed down its printing press for the time being or that would seem like pocket change. The report also noted that while the transition to new fuels may cost 185 million existing jobs, it will create roughly 200 million new positions.
A Sell-Off In Equity Markets Seems To Be Outweighing Supply Concerns Again To Start The Week
A sell-off in equity markets seems to be outweighing supply concerns again to start the week as energy contracts have turned from 2 cent gains overnight to 2 cent losses this morning as US equities moved deeper into the red following their worst week since the start of the pandemic.
The pen is mightier than the sword? The selling seems to be largely driven by expectations that the FED and other central banks are ending the money printing party and will soon raise rates to combat inflation, which for the moment is outweighing concerns that armed conflict may soon disrupt the flow of global energy supplies.
The march to war in the Ukraine seems remains the biggest story with numerous threats to both lives and markets. Read here for a list of possible market impacts expected should the invasion take place.
The IEA last week made a case that Russia’s withholding of natural gas had more to do with the price spike last year than the conversion to lower carbon fuel alternatives, and urged the world to learn a lesson from this, highlighting the growing threat from limited lithium supplies as EV’s gain market share.
Meanwhile, the existing war between Arab nations and Houthi rebels continues to add another level of concern as another missile attack on the UAE this weekend reminded the world that some of the largest oil producers are still trying to kill each other.
Money managers continue to add to their bets on higher petroleum prices with 4 of the big 5 contracts all seeing net length held by the large speculative trade category increase again last week. Reuters’ John Kemp argues that chronically low inventories are encouraging these bets on higher prices, which suggests they may continue for some time. (see the Commitment of Traders Report table & charts below)
Baker Hughes reported a net decrease of 1 active oil rig working in the US last week, the first weekly decline since October. The EIA on Friday reported that its forecasts suggests oil and natural gas output in the US should continue to grow and reach record highs next year.
Today’s interesting read, from the WSJ: The flaws in CAFÉ standards that will continue contributing to strong fuel demand.