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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View AllEnergy 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.