Energy Futures Tread Water To Start Last Week Of July
Energy futures are treading water to start the last week of July, and US equity markets are seeing small losses after reaching fresh record highs Friday.
Although volatility has dropped in both energy and equity markets since spiking a week ago, things aren’t as calm as they seem based on current prices, as we did have refined products trading over nearly a nickel range overnight. The last week of July will bring a key test for the energy bulls, that have already passed two big tests so far in July. If prices do not break to fresh highs before month end, there will be an argument that the weekly charts are forming a rounding top pattern that could end up meaning sharply lower prices as we get closer to fall.
Ethanol prices appear to be on the verge of a technical breakdown, along with corn futures which traded below their 200 day moving average for the first time in nearly a year on Friday. That selling in grains didn’t prevent a jump of more than 3 cents in RIN values Friday, although some stronger offers did appear in the afternoon, which could create some downward pressure to start the week, especially with futures flashing red.
Hedge funds look like they may have thrown in the towel after last Monday’s brutal sell-off (and likely missing out on the subsequent rally) with managed money net length seeing sharp reductions across the energy board last week. WTI and RBOB net length plunged to the lowest levels since last October as long positions were cut, and new short positions were added. Those new shorts may help explain the strong rallies in WTI and RBOB Wednesday and Thursday if those new speculative shorts were getting squeezed out. Brent and Gasoil contracts also saw large declines in the large speculator books, while ULSD was the only contract to see a single digit percentage drop on the week, which could end up being a sign of hedge funds struggling to figure this market out as there’s a case that the ULSD contract looks the weakest currently on the charts.
The EIA last week took a closer look at the spike in renewable diesel production expected over the next 3 years, which is forecast to bring US capacity from less than 1 billion gallons/year currently, to nearly 5 billion gallons by 2024. The report notes that even with this surge in production, RD will only account for roughly 20% of West Coast diesel refining capacity, and 4% of USGC capacity after these upgrades are made. The report also highlights the challenges the consequences of higher feedstock and RIN prices caused by this race to take advantage of California’s credits go green.
Baker Hughes reported 7 more oil rigs were put to work last week, continuing the steady increase in drilling activity as producers enjoy the highest prices in nearly 7 years. Unlike the past month, the Permian led the increases this week, with 4 more rigs operating in the country’s largest basin.
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View AllThe 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.