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.
Click here to download a PDF of today's TACenergy Market Talk.
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The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.

Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.
