Bull Market In Energy Prices May Have Ended
The bull market in energy prices may have officially ended this week if the early wave of selling can hold up through the afternoon. The week started with the US removing Iranian-sanction waivers, and Thursday saw new highs for the years after reports that Russian oil was being rejected in Europe. The Iranian news was countered by the IEA’s report that other countries besides Saudi Arabia now had spare capacity to increase oil shipments if needed, and Russia has already committed to fixing its quality issue via an alternate pipeline route, and suddenly in about 24 hours the week’s gains have been erased.
If WTI (currently trading at $63.91) settles below $64, it would snap a streak of 7 consecutive weekly gains, and creates a bearish-looking bar on the charts, just in time for the “Sell by May and go away” chants to begin. The correlation between equity and energy markets remains strong, and with stocks ticking lower after multiple US indices reached new record highs this week, the stage is set for a large potential correction in both asset classes.
Adding to the negative sentiment this morning: ExxonMobil (a DJIA component) reported a sharp drop in quarterly earnings and its stock is down more than 2 % in early trading. The news channels appear to be struggling to figure out why the earnings were weak in Q1 even though the company made a report to the SEC estimating Downstream earnings would drop by nearly $2 billion due to tighter crude spreads and hedge losses more than 2 weeks ago.
The bulls may counter that the strong backwardation in Brent crude proves that buyers are still having a difficult time finding crude oil near-term, suggesting there may be a fundamental reason why today’s selling may be nothing more than a good buying opportunity. In addition, we have not yet broken the bullish trend lines that started when prices bottomed out on Christmas eve, so it’s still a little too soon to call an end to the 2019 run. How the money managers that have been steadily increasing their bets on higher prices react to this pull-back may well determine if this is just a bump in the road for energy bulls, or the end of it.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.