Battle For Energy Price Action
September trading kicks off with energy prices moving higher, but still locked in their sideways pattern that’s held trading in check for the past two months.
A weaker dollar and stronger economic data out of China are getting credit for the early push higher, overcoming weaker U.S. fuel demand expectations in the daily headline battle for energy price action. The S&P 500 is pointing towards record territory this morning, after capping its best August performance in more than 30 years.
While stocks are rallying, the U.S. Dollar index is trading at its lowest level in more than two years, in large part of the FED’s aggressive policies to try and prop up the economy, which makes dollar-denominated goods like oil, gasoline and diesel fuel less expensive to foreign buyers. Although the correlation between the asset classes has been lower the past few years compared to the “QE era,” following the 2008 financial crisis, we definitely have periods where the dollar can still heavily influence commodity prices. One word of caution, as this Reuters article points out, hedge funds now have the most bearish bets on the dollar in a decade, and extreme speculative positions are often a contrary indicator. As the saying goes, when everyone is on the same side of the boat, that’s when it tips over.
Good news on the hurricane front for one day, there are now only three storm systems given a chance of development in the Atlantic basin this week. TD 15 is moving off the Carolina coast and will stay out to sea, with only a small chance of being named. A system moving through the Caribbean is given 80 percent odds of developing, but looks to be a threat to central America and not the U.S. The third system is given 40 percent odds of developing as it crosses the Atlantic, and the early indication is it too may stay out to sea. We’re just over one week away from the typical peak of hurricane season.
Today is the first day for October futures to take the pole position for RBOB and HO contract, which creates some skew in the continuation charts due to the RVP transition in RBOB and the contango in ULSD. Cash markets for both products are currently up more than a penny for both.
LA CARBOB basis continued to rally Monday following a pair of refinery hiccups reported in the region. Although that buying pressure pushed LA spot gasoline prices to their highest levels since March – even as prices across the rest of the country were selling off - as the chart below shows, those diffs pale in comparison to what we’ve seen in prior years as the soft demand continues to act as a buffer against higher prices.
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.