Energy Futures Continue Slow March
Energy futures continue their slow march through the winter doldrums without much sense of direction, starting the week chopping back and forth between gains and losses.
Rumors of a refinery issue in New Jersey Friday helped RBOB gasoline futures end last week on a strong note, but a lack of reaction in New York cash markets suggests that won’t be enough of a catalyst to push prices through the top end of their month-old trading range. We are approaching the seasonal window where we expect gasoline prices to rally as the transition to summer-grades begins, so there’s a good chance we could see that break-out before February comes to an end.
Another winter-storm-related refinery fire over the weekend, this time at the plant outside of St. Louis operated by P66. As is often the case, there are conflicting reports on the operational status of the plant following the fire, with some claiming a crude distillation unit has been shut as a result, while others suggest normal operations continue. Given the location of the facility, if there is an extended downtime, expect the Chicago spot market to react first as barrels coming north on the Explorer pipeline may be diverted to meet demand in area. The silver lining of PADD 2 gasoline inventories reaching all-time highs in the past few weeks are that – so far – the rash of refinery issues is having a relatively minor impact on prices.
Money managers added to their net long holdings in Brent crude oil contracts for a 5th straight week, but the rate of increase dropped sharply with only about 12 hundred net contracts added to the long side of the ledger vs 12 thousand the week prior.
The CFTC is still playing catch-up with its Commitments of Traders reports, releasing data from the first week of January on Friday. That report showed sharp reductions in NYMEX holdings by money managers, with WTI net-length dropping to the bottom of its 5 year range, while ULSD contracts fell to a net-short position for the first time since July 2017.
Based on where the large funds started the year, it appears that they largely missed out on the early 2019 rally in energy futures, adding insult to injury after they were caught on the wrong side of the 2018 sell-off.
Baker Hughes reported a net increase of 7 drilling rigs across the US last week, with the 2019 pattern continuing to look much different than a the past few years as the count in Texas dropped for a 5th straight week to a total of 511 rigs, while California and Alaska, with a combined 13 rigs between them a week ago, added 4 rigs each last week.
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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
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