Energy And Equity Markets Around The World Are Seeing Another Wave Of Heavy Selling To Start The Week

Market TalkMonday, Jun 13 2022
Pivotal Week For Price Action

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.

Market Talk Update 6.13.22

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action