Energy Futures Knocked Backwards
The latest rally attempt in energy futures was knocked backwards sharply in Tuesday’s session, but the bulls dusted themselves off overnight and are giving it another shot this morning. Equity markets around the world continue to celebrate signals that the China-US trade war may be cooling, which seems to be aiding the early optimism in energy contracts.
As it often does when we approach an RVP transition, RBOB gasoline is leading the volatility, rallying by 5 cents mid-morning Tuesday, only to drop back 4.5 cents in the afternoon. Overnight, the swings have continued with 2.5 cent gains largely evaporating as of this writing. Reports of unplanned refinery maintenance around the country continue to create volatility in refined products.
It’s alphabet soup time: In just two days we’re getting monthly reports from the EIA, IEA & OPEC, along with the normal weekly reports from the API and DOE.
The API reportedly showed crude oil stocks declining by just under 1 million barrels last week, distillates dropped by around 2.5 million barrels, while gasoline stocks rose 750,000. The DOE/EIA’s weekly estimate will be out at its normal time this morning.
The IEA released its monthly oil market report this morning, holding its demand estimates for 2019 steady, while increasing its global supply forecast) as US oil production continues to swell to record highs. The theme of US oil production growth in 2019 being enough to offset OPEC’s intentional and unintentional production cuts was consistent in all 3 of the OPEC, IEA and EIA monthly reports. Of course, since everyone agrees, that sets the stage for a big move in the market if it doesn’t pan out.
The EIA and IEA reports also focused on the growing issue of quality vs quantity of oil driven by decreasing heavy oil supplies and their potential impact on US Gulf Coast Refiners.
From the IEA
Crude oil quality is another issue, and, in the wider context of supply in the early part of 2019, it is even more important. Sanctions against Iran, a fall in OPEC supply of 930 kb/d in January, sanctions against PDVSA and Alberta supply cuts all impact directly on the supply of heavy, sour oil. In the case of PDVSA, its oil is typically of the heaviest quality and requires the addition of significant quantities of imported diluents or domestic blending. With the import of diluents now sanctioned by the US, and problems in producing its own lighter crudes, PDVSA will have a tough job to make enough on spec barrels available for export. This is before it gets to the issue of who will buy them.
Long before the US shale revolution took off, Gulf Coast refiners had invested in equipment to process barrels expected to get heavier and sourer.
The EIA’s Short Term Energy Outlook also noted the record-setting weakness in gasoline margins over the past 3 months:
From November through January, the RBOB–Brent crack spread was negative for 43 of the 62 trading days, a record amount of time the crack spread was negative for any three-month period since RBOB began trading in 2005. The low cracks spreads reflect relatively flat gasoline demand growth relative to strong supply globally, resulting in elevated inventory levels.
Gasoline inventories are high in every major storage hub globally and are likely contributing to low crack spreads. As of the first week of February, inventories were 15% and 24% higher than their five-year (2014–18) averages in Singapore and the Amsterdam, Rotterdam, and Antwerp (ARA) hubs, respectively. In the United States, gasoline inventories reached an all-time high of nearly 260 million barrels for the week ending January 18.
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Energy Markets Are Holding Steady To Start Tuesday’s Session
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Energy Markets Are Holding Steady To Start Tuesday’s Session
Energy markets are holding steady to start Tuesday’s session after oil prices had their biggest rally of the year Monday.
Reports that Iraq had halted shipments on the Ceyhan pipeline through Turkey, which removed 400,000 barrels/day of exports from the world market temporarily were given much of the credit for the big move higher. The rally in oil came just a week after large speculators reduced their bets on higher prices to the lowest level in 7 years, providing yet another reminder of why the moves made by hedge funds is often seen as a contrary indicator of market direction.
Refined products touched a 2-week high overnight before pulling back to modest losses this morning but remain in the middle of their March trading range, which sets the stage for more choppy back and forth action as markets around the world search for direction and worry about what’s coming next.
California approved the bill that will create a new committee within the state’s energy commission that will oversee oil refiners and potentially levy penalties on them if they’re deemed to be making too much money on consumers. The state has already had a handful of refineries close down in the past 6 years, with another scheduled to close and convert to an RD facility in early 2024, and there’s no doubt that this new law may be yet another reason for the remaining facilities to consider closing their doors as well, which many will see as a victory.
The Dallas FED’s manufacturing Survey showed a small increase in production in March, after February showed a contraction for the first time since the COVID lockdowns. The business outlook remains mixed however as many noted uncertainties around the banking situation, along with continued supply chain and labor challenges as factors hindering growth.
New competitor for feedstocks? A moose breached the security gates at the refinery in Sinclair Wyoming Monday. No word if the animal was just lost, or searching for the soybeans that are now being used to make renewable diesel at that facility.
Click here to download a PDF of today's TACenergy Market Talk.
Energy Futures Rebound to Start the Week
Energy futures are bouncing to start the week, following through on a recovery rally that saw Friday’s early losses wiped out and salvaged weekly gains.
Money managers have been bailing out of their bets on higher energy prices in recent weeks, and as the CFTC’s data is finally catching up after 2 months of delays, we can finally see those figures the same week they’re compiled. The past two weeks alone have seen a reduction of more than 100,000 WTI contracts held by large speculators, bringing the total net length to the lowest level since January 2016.
The COT data also shows large reductions in producer hedging during this latest selloff in a sign that the industry may believe that prices won’t stay this low for long.
A WSJ article over the weekend highlighted how the options traders may have exacerbated the push lower over the past two months and could help spark a recovery rally later in the year.
Baker Hughes reported an increase of 4 oil rigs drilling in the US last week, snapping a 5-week slide that had pushed drilling activity to a 9-month low. The Permian basin accounted for 3 of the 4 rigs added last week.
Iraq won a 9-year lawsuit against Kurdish oil shipments, and that result has temporarily halted shipments of oil from the autonomous Kurdish region via the Turkish Ceyhan pipeline system.
Saudi Arabia announced an expansion of its partnership with China, increasing its multi-billion investment in new refining infrastructure in the world’s largest oil buyer. We’ve already seen multiple new refinery projects come online in both countries over the past two years, and this new agreement will continue the trend of additional capacity in the eastern hemisphere while the west continues to see declines.
Click here to download a PDF of today's TACenergy Market Talk.
Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
Oil prices are leading a slide lower to end the week after the US government walked back plans to buy oil since it’s dropped below $70, and the latest ripples in the banking crisis push stocks lower and the dollar sharply higher after it touched a 2-month low Thursday.
Even though the correlation between energy prices and stocks or currencies has been weak lately, or even opposite of normal in the case of the dollar, there still seems to be more influence lately as the fear trade has funds flowing back and forth between markets depending on whether or not risk-taking is in style that day.
The US Energy Secretary told congress that the agency won’t be refilling the SPR this year, despite previous pledges by the White House to buy oil when it dropped to $70, since the agency is still working through congressionally mandates sales of oil from the reserve. That news seems to be contributing to the downside in WTI and Brent prices as traders hoping to front run the DOE are now going to have to wait a while longer to do so.
Even though ULSD prices are up 17 cents from the lows set last week, they’re still on the verge of their lowest weekly settlement since January of 2022 should prices end the day near current levels. Given that this week’s recovery rally failed to take out the highs seen in previous weeks, charts continue to look bearish for distillates. Another run at $2.50 looks more likely and a break below that level, when the May contract takes the prompt position in another week, may be a foregone conclusion.
As has been the case for most of March, RBOB look as bad as ULSD on the charts, although that certainly isn’t helping so far today with gasoline futures outpacing the losses in diesel. Unless we see RBOB end the day down a dime or more (it’s down a nickel currently) the weekly trend will still be higher, and the charts will still be giving favor to another push towards $2.80-$3 this spring.
The LA spot market saw a healthy bounce in gasoline basis values Thursday following multiple refinery upsets in the area reported to local regulators. Meanwhile, the California Governors new plan to create an oversight committee to prevent price gouging – a major change from earlier proposals to levy a new tax on oil producers and refiners – passed through the Senate on Thursday. If this new bill is fully passed, it will allow the Governor to appoint that committee himself. A 1,000-page prediction of how that plan will work is available for less than $10 on Amazon.
Click here to download a PDF of today's TACenergy Market Talk.