Energy Prices Moving Higher For 3rd Day
Energy prices are moving higher for a 3rd day to start Thursday’s session, with momentum from some bullish data points in the DOE report, and a market-friendly FOMC statement carrying through from Wednesday’s session. Prices are once again within striking distance of their December highs, which capped the last rally attempt, and look to be the difference between this rally lasting a few days, and it lasting a few weeks.
A little Patience from the FED went a long way in financial markets, with US equity markets surging after the central bank sent a strong signal that it would not rush further monetary tightening. Monday the CME’s FEDWATCH tool showed roughly a 20% chance of at least 1 more interest rate hike in 2019, and a 10% probability of a decrease. This morning, after the “patience statement”, there’s a 5% chance of an increase, and a 20% chance of a decrease in the next 12 months. You can argue whether or not this is good for the economy as a whole, but it’s hard to argue that more accommodative monetary policy is anything but good news for stock markets.
Reports (also known as rumors) that the White House was considering a release of the US Strategic Petroleum Reserve to counter any negative effects from the Venezuelan sanctions suggest the administration has a much better handle on how to work the media than they do an oil refinery. In reality, if the rumors manage to take the steam out of the rally in oil & products futures, that would seem to be a mission accomplished, even if there is a negative impact to Gulf Coast refiners.
Speaking of which, while much of the focus is on potential fall-out with Citgo and its 2 Gulf Coast refineries due to sanctions, it was Citgo’s Chicago-area headline that had the most market impact Wednesday, when reports of a reduction in processing rates due to extreme cold sent Chicago gasoline prices up nearly 10 cents on the day.
Speaking of refinery run cuts: The headline drop of 586,000 barrels/day of refinery throughput seemed to catch some traders off-guard based on the strong reaction in refined product prices after the report. Then again, even after the 3.4% drop during the week, refinery runs are still 450,000 barrels/day higher than they were this time last year…and last year’s figure was a record high for the 4th week in January.
Unbelievable? The weekly gasoline demand estimate from the DOE surged nearly 8% last week, and at 9.56 million barrels/day is ½ million bpd higher than this time last year, and is at a level historically only witnessed during the summer driving season. Considering the numerous anecdotes about gasoline consumption slowing last week on the heels of 2 winter storms. Read the methodology notes from the EIA if you need a reminder why the weekly estimates are not reliable as a true indicator of actual consumption. If the theory that implied demand spiked as secondary fuel inventories were stockpiled ahead of the storm, we should see a large correction in the estimate in the next 2 weeks.
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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.