Conflicting Headlines And Inventory Data Points Continue To Confound The Market
Energy contracts had their biggest 1-day selloff since July on Wednesday as a steady round of selling that started Tuesday afternoon continued throughout the day. Just when it looked like that the bulls had thrown in the towel and we were in for a technical breakdown, prices have rallied sharply overnight, wiping out most of Wednesday’s big losses as conflicting headlines and inventory data points continue to confound the market.
No official announcement from OPEC yet, but most reports continue to show expectations that the cartel will stick with its current output plan, in spite of pressure from world leaders to increase more.
Headlines about Iran seem to be causing at least some of the whiplash in prices, with news of a return to nuclear negotiations getting credit for some of Wednesday’s selling, followed by Iran claiming that the US had tried to seize one of its oil tankers in the Sea of Oman reminding everyone that negotiating with Iran is a fool’s errand challenging.
Equity markets have rallied to new record highs after the FOMC made it clear that they still believe inflation levels at their highest levels in 30 years are still transitory, and that the FED can be patient with interest rate hikes. Even though the correlation between energy and equity markets has been close to zero in recent weeks, the market’s reaction to that statement does seem to take a fear-induced selloff off the table for now.
Who would ever guess that on a day when the DOE reported US Gasoline inventories reached a 4 year low, and PADD 1 inventories (home to the NYMEX delivery hub) reached a 7 year low, would also be the day when gasoline futures had their biggest daily drop in nearly 4 months. Of course, given the size of the rally over the past 1, 4 and 18 months, this seems a little bit like the market’s tendency to buy the rumor and sell the news, in this case pertaining to tightening supplies. This is also a good reminder that the futures market is less concerned about where we are today, than where we are headed, and with seasonal factors all pointing to gasoline stocks building steadily over the coming months, and high prices surely to dent consumption, it’s getting harder to see a reason to keep on betting on prices above a 7 year high.
Despite the big bounce this morning, charts near term continue to favor lower prices as refined products are setting lower lows and lower highs on the daily charts ever since prices peaked in late October. The $2.40 range for RBOB and $2.50 area for ULSD look to be good near term pivot points to watch. If prices can climb back above those levels, there’s a chance we see another run at the October highs, but if they can’t, another big move lower seems likely.
One more bearish factor to consider, it wasn’t just futures that were selling off heavily Wednesday, most cash markets saw basis values decline as well, pushing cash markets even further down on the day. When the big physical traders aren’t believing what the robots are doing the exchange, we’ll often see those diffs move contrary to futures, but yesterday’s action suggests that the concern of the winter demand doldrums for gasoline is real. No such concerns for ethanol prices however as spots continue to surge to record highs across the country, even as US ethanol output remains well above normal levels. While the ethanol forward curve has become murky due to a lack of trading in those futures, it looks like there’s 50-60 cents of backwardation between now and the end of the year, which means whenever the ethanol logistics logjam breaks there’s going to be a huge move lower in a hurry.
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The Perceived Cooling Of Regional Tensions In The Middle East Area Attributing To The Quiet Start To Today’s Trading Session
The energy complex is drifting lower this morning with RBOB futures outpacing its counterparts, trading -.9% lower so far to start the day. The oils (WTI, Brent, heating) are down only .2%-.3% so far this morning.
The perceived cooling of regional tensions in the Middle East area attributing to the quiet start to today’s trading session, despite Israel’s seizure of an important border crossing. A ceasefire/hostage-release agreement was proposed Monday, and accepted by Hamas, but rejected by Israel as they seemingly pushed ahead with their Rafah offensive.
U.S. oil and natural gas production both hit record highs in 2023 and continue to rise in 2024, with oil output currently standing at 13.12 million barrels per day and January 2024 natural gas production slightly exceeding the previous year. With WTI currently changing hands at higher than year-ago levels, this increased production trend is expected to continue despite a decrease in rigs drilling for these resources.
Less than a week after the Senate Budget Committee’s hearing centered on the credibility of big oil’s climate preservation efforts, a major oil company was reported to have sold millions of carbon capture credits, without capturing any carbon. Fraud surrounding government subsidies to push climate-conscious fuel initiatives is nothing new, on a small scale, but it will be interesting to see how much (if any) of the book is thrown at a major refiner.
Today’s interesting read: sourcing hydrogen for refining.
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Energy Contracts Are Trying To Find A Floor After Taking Their Largest Weekly Losses Of The Year So Far Last Week
Energy contracts are trying to find a floor after taking their largest weekly losses of the year so far last week.
There’s not much in the way of news yet this morning, so the modest buying is largely being blamed on reports that Saudi Arabia raised its prices for Asian and Mediterranean buyers in June, signaling that demand is strong enough in those markets to shoulder the increase.
RBOB gasoline futures have already dropped 28 cents from the high set April 12th, leading the argument that prices have peaked for the season. The 200-day moving average comes in just under $2.50/gallon this week, some 6.5 cents below current values, and helps set a pivotal chart support layer. If prices break there, there’s a strong case that we’ll see another 20-30 cents of downside, similar to what we saw this time last year.
Money managers continued to reduce their net length in NYMEX contracts last week, as WTI, RBOB and ULSD saw a net decrease of more than 17,000 contracts of speculative length. The hedge fund liquidation seems to have run its course for this latest news cycle however, as new short positions accounted for the majority of the decrease, and WTI and Brent both saw new length added by the big speculators. Money managers are now net-short on ULSD, which could be another reason to think the bottom is near if you subscribe to the theory that the bandwagon-jumping hedge funds usually are wrong.
Baker Hughes reported a decline of 7 oil rigs and 3 natural gas rigs last week, bringing the combined total rig count to its lowest level in more than 2 years. Perhaps most noteworthy in this week’s report was that Alaska saw 5 of its 14 active rigs taken offline in just 1 week. It’s not yet clear if this may have anything to do with the startup of the transmountain pipeline which will have Western Canadian crude now competing more directly with Alaskan grades.
Click here to download a PDF of today's TACenergy Market Talk.
Energy Markets Are Pointing Modestly Higher To Start Friday’s Session
Energy markets are pointing modestly higher to start Friday’s session, in a meager attempt at a recovery rally at the end of what would be the worst week in over two months if prices settle near current values. The liquidation of speculative bets placed on higher energy prices ahead of the direct conflict between Israel and Iran continues to appear to be the driver of the weakness, and we’ll have to wait and see if this modest bounce is a sign that the liquidation is over, or just a pause before it picks up again. Most contracts remain in a precarious technical position with the potential for a slide towards $70 for WTI and $2.20 for both refined products if the buyers don’t get serious soon.
Stocks are pointing sharply higher after a slowdown in job growth reported in the April Non-Farm payroll report. The BLS reported an increase of 175,000 jobs for the month, down sharply from the 315,000 jobs added in March, and the February & March estimates were revised down a combined 22,000. Both the “official” (U-3) and “real” (U-6) unemployment rates ticked up by .1% to 3.9% and 7.4% respectively. The immediate positive reaction to negative news suggest that the bad news is good news low-interest-rate junkies believe this may help the FED’s dilemma of the US economy being too strong to cut rates. The big jump in equities has not seemed to spill over into energy contracts yet, as crude and refined product contracts changed very little following the report.
San Francisco diesel basis spiked 15 cents Thursday to reach the highest level of any market in the country so far this year at 35 cents over prompt futures. While there aren’t yet any refinery upsets reported to blame the spike on, PBF is undergoing planned maintenance at its Martinez facility, and of course P66 just finished converting its Rodeo plant to RD after Marathon converted its Martinez facility in the past couple of years, meaning there are at most only 2 out of the previous 5 refineries in the region operating near capacity these days. The question now is how quickly barrels can shift north from Southern California which continues to show signs of a supply glut with weak basis values and spot to rack spreads.
PBF continued the trend of Q1 refinery earnings that were sharply lower, but still healthy by longer-term historical standards. The company noted that its Saint Bernard (the parish, not the dog) Renewables facility co-processing at its Chalmette refinery had received provisional approval from CARB to lower its CI scores and help improve the amount of LCFS subsidies it can receive. That facility is operating at 18mb/day which is roughly 86% of its capacity.
Cenovus highlighted the restart of its Toledo and Superior refineries in improved refinery run rates in Q1 2024 vs Q1 2023 and noted that it had ramped up production at units that were slowed down for economic reasons in December and January (you may remember this as the time when midcontinent basis values were trading 50 cents/gallon below futures). The company did note that the January deep freeze slowed operations at Superior, but did not mention any change in operating rates despite numerous upsets at its 50% owned Borger refinery.
Dress rehearsal for a busy hurricane season? So far there are no reports of refinery issues caused by the flooding in the Houston area this week. At this point, most of the flooding appears to be far to the north of the refining hubs on the Gulf Coast but with more storms in the forecast and 88 counties already declaring disaster status, this will be something to watch for the next few days.
Click here to download a PDF of today's TACenergy Market Talk.