Energy Futures Stumble Out Of The Gate
Energy futures are stumbling out of the gate for another week after OPEC & Russia failed to agree on new output cuts, and concerns over the economic impact of the coronavirus continue to spread more than the disease itself.
RBOB futures, along with calendar spreads & NYH gasoline basis spreads all got a boost Friday from reports that the Bayway NJ refinery was forced to shut an FCC unit, and repairs may take two weeks. While total U.S. gasoline supplies remain at near all-time highs, this issue will provide some regional challenges as the East Coast is already having to work around the loss of the PES refinery last year. Premiums to ship gasoline along the Colonial pipeline’s main gasoline line reached a one-month high on the news.
Money managers continued to bail out of crude oil, with last week’s CFTC report showing more large reductions in speculative bets on higher prices for both Brent and WTI. WTI positions are now near the low end of their five year range, while Brent remains well above its average, and year-ago levels, meaning there still could be more liquidation coming. ULSD dropped further into net short territory, while RBOB contracts held near the top end of their seasonal range.
Baker Hughes reported one more oil rig was put to work last week, replacing the rig that was taken offline two weeks ago. So far for the year, six total rigs have been added. There is growing concern that the recent sell-off could be the nail in the coffin for some U.S. shale producers that had already been struggling, and that could start to show up in the weekly rig counts.
Other notable items:
Saudi Arabia and Kuwait are beginning production in the neutral zone this week for the first time in nearly five years, which could soon bring 500,000 bpd of oil production back online.
Mediators failed to reach a deal on a ceasefire in Libya, which is likely to continue reducing output by around one million barrels/day, as it has for the past month.
Click here to download a PDF of today's TACenergy Market Talk.
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Baker Hughes Reported A Net Increase Of 5 Operating Oil Production Rigs Last Week
NYMEX HO is the sole energy futures contract trading higher this morning, exchanging hands ~1.5 cents higher than Friday’s settlement. It’s refined product counterpart, along with both American and European crude oil benchmarks, are trading lower to start the week. Uncertainty surrounding the plausibility of further, voluntary supply cuts by OPEC+ members is taking credit for the weakness in WTI prices this morning.
Baker Hughes reported a net increase of 5 operating oil production rigs last week, bringing the total number of active platforms to 505. While this is good news for US energy security and for any producer that managed to hedge future production north of $100, others are viewing the increase in drilling as an incremental environmental hazard.
The fight over year-round access to E15 is raging on in the Midwest. Eight states in the breadbasket are pushing the EPA to reduce restrictions on the purchase of the increased ethanol ratio fuel. The Attorneys General from Iowa and Nebraska are asking a regional court to force the EPA’s ruling while the Agency claims it needs more time.
Money managers increased their net long position in both gasoline and diesel futures last week. Bets to the downing increased for WTI, however, as speculators bank on the latest round of supply cuts by OPEC+ being much ado about nothing.
Click here to download a PDF of today's TACenergy Market Talk.
“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.