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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Gasoline Futures Are Leading The Energy Complex Higher This Morning With 1.5% Gains So Far In Pre-Market Trading
Gasoline futures are leading the energy complex higher this morning with 1.5% gains so far in pre-market trading. Heating oil futures are following close behind, exchanging hands 4.5 cents higher than Friday’s settlement (↑1.3%) while American and European crude oil futures trade modestly higher in sympathy.
The world’s largest oil cartel is scheduled to meet this Wednesday but is unlikely they will alter their supply cuts regimen. The months-long rally in oil prices, however, has some thinking Saudi Arabia might being to ease their incremental, voluntary supply cuts.
Tropical storm Rina has dissolved over the weekend, leaving the relatively tenured Philippe the sole point of focus in the Atlantic storm basin. While he is expected to strengthen into a hurricane by the end of this week, most projections keep Philippe out to sea, with a non-zero percent chance he makes landfall in Nova Scotia or Maine.
Unsurprisingly the CFTC reported a 6.8% increase in money manager net positions in WTI futures last week as speculative bettors piled on their bullish bets. While $100 oil is being shoutedfromeveryrooftop, we’ve yet to see that conviction on the charts: open interest on WTI futures is far below that of the last ~7 years.
Click here to download a PDF of today's TACenergy Market Talk.

The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.

Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.