Energy Futures Are Slipping Back Into The Red To Start The Week After A Furious Friday
Energy futures are slipping back into the red to start the week after a furious Friday rally sent prices to a fresh round of 7 year highs. Reports that an invasion of Ukraine was imminent Friday afternoon sparked another big rally, while weekend diplomacy is getting credit for the pullback this morning.
The backwardation in diesel prices is holding near its highest level in 19 years and more terminal outages and tight allocations are being reported as physical supplies remain well below average for this time of year.
Baker Hughes reported a net increase of 17 oil rigs last week, the largest single week increase in 4 years. 13 of those rigs were added in Texas, with the Permian adding 7 and the Eagle Ford adding 5. It’s worth noting that the last time we saw an increase this large was the 2nd week of February 2018, which suggests perhaps the company does a reconciliation that may account for the large increase more than drilling companies suddenly breaking the labor log jam. If that theory is incorrect, then maybe this week’s data is the start of an accelerated pace of drilling with producers racing to take advantage of higher prices.
Money managers reduced their net length in the latest CFTC report releases Friday. That report was made from Tuesday’s trading data, suggesting that the big funds we selling modestly during the big move lower early last week, and that the huge rally later in the week may cause us to see a large increase in speculative positions in the next report.
Perhaps the most notable change in the CFTC reports over the past few weeks has been a spike in WTI open interest, which overtook Brent for open contracts for the first time in almost 2 years. WTI had been losing interest over the past several years as its delivery point in Cushing OK became less relevant as the US became a net exporter, and new competing contracts in the Houston area took market share. A rush of options activity seems to be bringing interest back to WTI, and now that football season is over, perhaps we’ll see even more big oil bets as the gamblers look for a new outlet.
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Energy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
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WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.