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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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.