Energy And Equity Markets Around The World Are Seeing Another Wave Of Heavy Selling To Start The Week
Energy and equity markets around the world are seeing another wave of heavy selling to start the week, after Friday’s session ended on a bearish note. Gasoline prices are leading the way lower this morning, and while they’re some 25 cents lower than the high trade Friday, the pattern we’ve seen lately suggests we shouldn’t expect the weakness to last too long.
Equity indices look much more bearish than energy futures, with their May lows taken out in the early going this morning, which leaves the door open to another big move lower. Energy futures meanwhile still have a ways to go before threatening the bullish trend lines that have helped refined product prices more than double since December. That global “Energy Shock” is center stage in the financial market fallout as a key driver of the inflation that’s holding at 40 year highs and forcing both the FED and the average consumer to consider change their behavior.
Before Friday’s inflation reading, fed fund futures were only pricing in a 3% chance of a 75 point rate hike at this week’s meeting, and now they’re pricing in a 23% chance of an increase greater than 50 points. The outer months are seeing similar moves, with the odds that the FED won’t continue with a series of 50 point or greater hikes in July and September dropping rapidly as the inflation battle realities sink in.
The expectations for a more hawkish FED seem to be contributing heavily to an inversion in the 2 year vs 10 year treasury yield curve, an indicator that is often pointed to as a precursor to most US Recessions. As the chart below shows, a major difference in that yield curve vs what we saw in 2000, 2007 and 2019 is that the shorter term treasury rates have not come anywhere close to inverting, which highlights just how dramatic the FED’s upcoming moves are vs what we’ve seen so far this century.
Money managers continue to show mixed feelings about energy contracts, adding to net length in ULSD, WTI and Brent, while reducing their exposure to RBOB and Gasoil contracts. Open interest for all contracts remains at noticeably low levels, as both hedgers and speculators seem to be waiting to jump back in.
Baker Hughes reported a net increase of 6 oil rigs and no change in gas rigs drilling in the US last week. New Mexico accounted for 5 of the 6 added rigs, which could be a sign that drillers are starting to work through the large amount of federal leases signed in the past couple of years, and affirms recent reports that growth in the Permian could outpace that of just about every country in the world.
The National Hurricane Center is monitoring a system in the Western Caribbean this week, and giving 30% odds this morning of development. While we’re still 3 months away from the peak of the season, and usually storms this time of year don’t pose as much of a threat to the US Gulf Coast as they do in August and September, any potential system will need to be monitored closely this year given how tight the refinery network is already.
Click here to download a PDF of today's TACenergy Market Talk.
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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.
Crude Oil Inventories Climbed Above Year-Ago Levels For The First Time In 2024
Sell by May then go away.
The old trading adage looked good for energy markets in 2024 as the new month started off with the biggest daily sell-off of the year so far. WTI and ULSD contracts are now in “rally or else” mode on the charts with sharply lower prices a strong possibility now that technical support layers have broken down. RBOB doesn’t look quite as bearish on the charts, but seasonal factors will now act as a headwind as we’re well into the spring peaking window for gasoline prices, and we’ve already seen a 27 cent drop from the highs. If RBOB can hold above $2.50 there’s a chance to avoid a larger selloff, but if not, a run towards $2.20 for both gasoline and diesel looks likely in the months ahead.
The selling picked up steam following the DOE’s weekly report Wednesday, even though the inventory changes were fairly small. Crude oil inventories continue their steady build and climbed above year-ago levels for the first time in 2024. Demand for refined products remains sluggish, even after accounting for the RD consumption that’s still not in the weekly reports, and most PADDs are following a typical seasonal inventory trend. The Gulf Coast saw a healthy build in diesel inventories last week as the export market slowed for a 3rd straight week. Refinery runs dipped modestly last week following a handful of upsets across the country, but overall rates remain near normal levels for this time of year.
The Transmountain pipeline expansion began operations yesterday, completing a 12-year saga that has the potential to materially change refining economics for plants in the US that relied heavily on discounted Canadian crude to turn profits over the past decade.
The P66 Borger refinery reported another operational upset Monday that lasted a full 24 hours impacting a sulfur recovery unit. Last week the company highlighted how the plant’s fire department helped the surrounding area when the largest wildfire in state history came within feet of the facility.
The EPA approved a new model to determine life cycle carbon intensity scores this week, which cracks open the door for things like ethanol to SAF, which were previously deemed to not reduce emissions enough to qualify for government subsidies. The new model would require improved farming techniques like no-till, cover crop planting and using higher efficiency nitrogen fertilizer to limit the damage done by farms that no longer rotate crops due to the ethanol mandates. Whether or not the theoretical ability to produce SAF comes to fruition in the coming years thanks to the increased tax credit potential will be a key pivot point for some markets that find themselves with too much RD today, but could see those supplies transition to aviation demand.
The FED continues to throw cold water on anyone hoping for a near term cut in interest rates. The FOMC held rates steady as expected Wednesday, but also highlighted the struggles with stubbornly high inflation. The CME’s Fedwatch tool gave 58% odds of at least one rate cut by September before the announcement, and those odds have slipped modestly to 54% this morning.