Buying Spree In Energy And Equity Markets

Market TalkMonday, May 18 2020
End To A Choppy Week For Energy Prices

Oil and gasoline prices reached a two month high in overnight trading as the world continues to reopen from lock-downs, and officials signal there’s more fiscal and monetary stimulus coming to help the economy heal.

The FED Chairman said in an interview aired Sunday that there was “really no limit” to what they could do with lending programs to help prop up the economy, which seems to be contributing to the buying spree in both energy and equity markets today as traders cheer one of their favorite concepts (free money) while ignoring the warning that an economic recovery may take more than a year.

Baker Hughes reported another 34 oil rigs taken out of service last week, bringing the U.S. oil rig count to its lowest level since 2009, and the total rig count (including natural gas) to a new record low in the 33 years since this report has been made available.

This article from Bloomberg suggests that U.S. oil output has been reduced much more than the EIA has reported so far, and that a large correction in the official data is forthcoming. The recent price action, rig count, and inventory data all seem to support that theory.

Money managers are on board to make bets on higher WTI and RBOB prices but are less enthused with Brent and ULSD. Large speculators increased their long bets in WTI to a new one year high, but reduced bets on higher Brent prices for the first time in six weeks. The increase in RBOB and reduction in ULSD positions held by money managers seems to match the trend in U.S. consumption as drivers start their return to the road, but commercial fuel use is not keeping pace.

This strong gasoline, weak diesel conundrum is the reverse of what the industry felt as the country was starting to shut down in March, and will provide new challenges to refiners starting to ramp up production once again as storage space for distillates suddenly looks scarce. We’re already seeing a handful of regional markets across the country run tight on gasoline allocation as demand ticks up faster than pipeline can keep pace, and excess diesel in some lines seems to be getting in the way of gasoline resupply.

Jerome Powell: Well, there is a lot more we can do. We're not out of ammunition by a long shot. No, there's, there's really no limit to what we can do with these lending programs that we have.

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Pivotal Week For Price Action
Market TalkWednesday, Apr 17 2024

Prices To Lease Space On Colonial’s Main Gasoline Line Continue To Rally This Week

Energy markets are sliding lower again to start Wednesday’s trading as demand concerns and weaker stock markets around the world seem to be outweighing any supply concerns for the time being.

Rumors continue to swirl about an “imminent” response by Israel to Iran’s attacks, but so far, no news seems to be taken as good news in the hopes that further escalation can be avoided, even as tensions near the Red Sea and Strait of Hormuz continue to simmer.

Prices to lease space on Colonial’s main gasoline line continue to rally this week, trading north of 11 cents/gallon as Gulf Coast producers still struggle to find outlets for their production, despite a healthy export market. Gulf Coast CBOB is trading at discounts of around 34 cents to futures, while Gulf Coast RBOB is trading around a 16-cent discount, which gives shippers room to pay up for the linespace and still deliver into the East Coast markets at a profit.

Back to reality, or just the start of more volatility? California CARBOB basis values have dropped back to “only” 40 cent premiums to RBOB futures this week, as multiple flaring events at California refineries don’t appear to have impacted supply. The state has been an island for fuel supplies for many years as its boutique grades prevent imports from neighboring states, and now add the conversion of the P66 Rodeo refinery to renewable diesel production and the pending changes to try and cap refinery profits, and it’s easier to understand why these markets are increasingly vulnerable to supply shocks and price spikes on gasoline.

RIN prices continue to fall this week, touching 44 cents/RIN for D4 and D6 values Tuesday, their lowest level in 6 weeks and just about a nickel above a 4-year low. While the sharp drop in RIN and LCFS values has caused several biodiesel and Renewable Diesel producers to either shut down or limit production, the growth in RIN generation continues thanks to projects like the Rodeo refinery conversion, making the supply in RINs still outpace the demand set by the Renewable Fuel Standard by a wide margin.

The API reported draws in refined products, 2.5 million barrels for gasoline and 427,000 barrels for distillates, while crude oil stocks had an estimated build of more than 4 million barrels. The DOE’s weekly report is due out at its normal time this morning.


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Pivotal Week For Price Action
Market TalkTuesday, Apr 16 2024

Equity Markets Have Been Pulling Back Sharply In Recent Days As Inflation And Trade Concerns Inject A Sense Of Reality Into Stocks

It’s a mixed bag for energy markets to start Tuesday’s session with gasoline prices holding small gains, while oil and diesel prices show small losses as the world anxiously debates what comes next in the conflict, we’re still hoping we don’t have to call a war in the Middle East.

An early sell-off picked up steam Monday morning with refined products down more than a nickel for a few minutes, before reports that Israel was vowing to respond to Iran’s attack seemed to encourage buyers step back in an erase most of the losses for the day.

Equity markets have been pulling back sharply in recent days as inflation and trade concerns inject a sense of reality into stocks that had been flying high earlier in the year. The correlation between gasoline and crude oil prices had been fairly strong for the past couple of months but has since weakened as the weakness in stocks hasn’t yet trickled over into the energy arena. Both asset classes are seeing a tick higher in their volatility (aka Fear) indices this week however, and when fear starts driving the trade, we often see these prices move together.

Diesel has been underperforming the rest of the energy complex for most of the year so far, and those hoping for lower diesel prices got more good news when the Dangote refinery in Nigeria began loading diesel for domestic use Monday, in the latest milestone for the giant project that will have a major influence on Atlantic basin supply. Naturally, local lawmakers are already complaining that the refinery’s prices are too high.

The EIA this morning highlighted the record amount of crude oil China imported in 2023 after reopening the country post-COVID and after completing numerous new refinery builds in the past few years. Russia accounted for the largest increase in shipments to China last year, as China is one of the few countries that doesn’t mind ignoring sanctions. Speaking of which, the US House is expected to take up a new vote this week on sanctioning Chinese imports of Iranian crude, which the EIA notes are often hidden by relabeling the crude to make it appear as if it originated in Malaysia, Oman or the UAE.

We’re just 2 weeks away from the startup of Canada’s long-awaited Transmountain pipeline expansion that will bring roughly 600,000 barrels/day of capacity to the Pacific basin. That new outlet is great news for Canadian producers long restricted by takeaway capacity, and bad news for Midcontinent refiners who have grown accustomed to the discounted Canadian grades. A Bloomberg article Monday noted that Iraq’s Basrah Heavy crude is most likely to be displaced by West Coast US refiners who can now buy much closer to home.

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Pivotal Week For Price Action
Market TalkMonday, Apr 15 2024

Gasoline And Crude Oil Prices Reached Fresh Multi-Month Highs Friday Morning As News Of The Anticipated Attacks Spread

Buy the rumor, sell the news seems to be the pattern for energy contracts that are heading lower this morning after Iran’s well-telegraphed attack on Israel over the weekend was thwarted by a coalition of air forces and no further escalation has ensued so far.

Gasoline and crude oil prices reached fresh multi-month highs Friday morning as news of the anticipated attacks spread, and those new highs keep the technical outlook pointing higher on the weekly charts, but we’ll need to see a new high set this week or else the argument for the end of the spring rally may begin.

Marathon reported unplanned flaring at the Wilmington section of its Los Angeles area refining complex early this morning, a week after reported issues at the Carson facility, which combined make up the largest refinery in the state. California’s basis values did pull back sharply after a big rally last week, and now we’ll wait to see if this latest upset sends them higher once again.

Money managers continue to act moderately bullish on energy contracts, adding net length across the board last week, even as new short positions were added in most of the contracts.

Perhaps most notable in the COT report last week was a surge in open interest with RBOB gasoline reaching its highest level in 3 years, while Brent crude oil contracts reached their highest levels since the full-scale invasion of Ukraine kicked off more than 2 years ago.

It seems likely that the increased violence around the Middle East, and the attacks on Russian refineries are contributing to the increase in bettors in the energy space, particularly now that margin requirements have returned to more tolerable levels after spiking during the chaotic trading of 2022. This same pattern may also be contributing to the surge in energy company stock prices, even though margins are far below the record-setting levels we saw the prior 2 years.

The big increase in short bets on gasoline last week also suggests that some traders are starting to prepare for the spring peak in prices that often happens in late April or May.

A Reuters report suggests that Russia has been able to repair nearly 1/3 of the refining output that was taken offline due to Ukraine’s drone strikes, bringing the offline capacity to 10% down from 14% at the end of March, but that still means more than 650,000 barrels/day of capacity is offline, roughly the size of the largest refinery in the US.

Baker Hughes reported a drop of 2 oil rigs last week, erasing the increase in the rig count we saw the week before. Natural gas rigs continue to decline, falling by 1 last week to a fresh 2 year low at 109 total for the US. Baker Hughes changed the format of their report a couple of weeks ago, which is still challenging some data providers and analysts who continue to report the last numbers that show up on the old report.

A CNN article over the weekend highlighted the challenges still being faced at the PES refinery outside of Philadelphia nearly 5 years after an explosion knocked that plant offline for good. This type of struggle is one major factor in why some refiners are choosing to convert their facilities to renewables production in recent years, which effectively extends their timeline on any remediation needed if the facility was closed for good.

Click here to download a PDF of today's TACenergy Market Talk.