Energy Markets Starting August Trading With A Thud
Energy markets are starting August trading with a thud, with crude prices down a dollar or more and products down 3-4 cents, as disappointment in the FED seems to be outweighing inventory draws reported by the DOE.
The FED did announce its first interest rate cut in a decade Wednesday, but financial markets threw a small tantrum that it was only 25 points, and perhaps more importantly that the FED chairman said this was not the first of many. That late selling in equities carried over into the energy arena as product prices dropped 1-2 cents post settlement, and that weakness carried through the overnight session. One other reason for concern in the FED’s rate cut: Look at the chart below and note that more often than not, when the FED starts cutting rates, there’s a recession in the not-too-distant future.
Dramatic video of an explosion at the Exxon Baytown refinery – the 3rd largest refinery in the US – had futures and cash markets rallying briefly Wednesday morning. When it was discovered the fire was contained to the chemical plant section of the refinery and that gasoline and diesel production may not be affected however, prices quickly settled back down.
Notable items from the DOE weekly status report:
US crude production bounced back by 900,000 barrels/day last week as rigs shuttered by Hurricane Barry came back online. The total is now just 100,000 barrels from the all-time high.
US petroleum demand estimates dipped on the week, but are holding above their seasonal range. The EIA also announced that electricity demand had reached a two year high this week as a heat wave swept across the US, which could bring some much-needed incremental diesel demand to supplement traditional power generation sources.
A big deal was announced Wednesday when the UK’s EG Group announced its planned acquisition of Cumberland Farms’ C-Store Chain, after buying Kroger’s C-Stores last year. An interesting side note to this story, the British pound has been plunging recently, largely due to Brexit concerns, which means the actual purchase price for the acquirers may be rising rapidly even though the dollar amount isn’t changing.
Two storm systems continue to churn in the Atlantic. The first still looks like a non-event, but the second is now given a 70% chance of developing over the next 5 days. That system – known for now as 96-L – will need to be watched over the next week as there is a window in which it could be steered towards the US.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.