Energy Futures Starting 2nd Quarter On Strong Note
Energy futures are starting the 2nd quarter of 2019 on a strong note, aided by reports that OPEC production dropped to its lowest level in more than 3 years last month, and by US equity markets that are pointing to a strong open on the back of positive news from China. WTI is leading the charge, touching a fresh 4.5 month high at $60.92 overnight, while Brent and refined products are still holding below the highs set last week.
While global concerns on oil supply and economic activity may continue to dominate the headlines and price action in the new quarter, a pair of legal battles may have longer term impacts on US oil supplies. Over the weekend, a federal judge ruled the President’s order to open drilling in the Arctic was unlawful, following a new order issued to allow for the Keystone XL to be built after more than a decade of wrangling.
Saudi Aramco published its income for the first time ahead of a bond offering, listing net income last year north of $111 billion, and free cash flow of $86 Billion, dwarfing the world’s largest publicly held oil companies, although trailing many on a per-barrel basis given its heavy tax burden.
Baker Hughes reported a 6th straight week of declines for oil rigs in the US, making Q1 2019 the largest quarterly decline in 3 years for the rig count. Texas continues to lead the move lower, marking a 12th consecutive week of declines for the state’s rig count. The Dallas FED published its quarterly energy activity survey last week and noted that activity ticked up slightly in Q1, after dropping sharply during the price plunge of Q4, 2018. West Texas is rapidly transitioning from a shortage to an excess of pipeline takeaway capacity for oil, which combined with the recent price recovery could be enough to see the trend of lower rig counts come to an end in the next few weeks.
Money managers continued to jump on the spring break bandwagon, adding to net-long positions in WTI, Brent and RBOB contracts last week, while ULSD dropped to a net short position for the large speculative category of trader. Perhaps most notable in the changes was that RBOB net length broke above its 5-year seasonal range as of the data reported Friday, which is compiled as of last Tuesday, which means a large number of energy speculators got to experience the spring gasoline rollercoaster with a 15 cent drop in RBOB prices over the next 2 days. The funds’ reaction to those price swings in this week’s report may give a good indication of the staying power of this year’s spring rally as retail prices in several parts of the country approach or surpass $3/gallon.
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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.