Equity And Energy Markets Sent Sharply Lower

Market TalkMonday, Jul 19 2021
Pivotal Week For Price Action

Surging COVID case counts, a new OPEC deal, and the risks of a cyber - war between the world’s two largest economies all seem to be combining to send equity and energy markets sharply lower to start the week, putting the bullish trend that’s pushed prices higher for 8 months at risk.

All of the big 4 petroleum contracts are currently trading below the weekly trend-lines that have pushed prices higher since November. ULSD is looking the worst from a technical perspective, already moving below the lows we saw during the short-lived sell-off two weeks ago, and coming within a penny of taking out its June lows. If these trend lines break, there’s a strong argument based on the charts that we could see a $10/barrel drop in crude and $.25/gallon drop in products before the end of summer. Don’t bank on it just yet however, we still need to see prices settle and hold at these lower levels before we can call an end to the trend.

OPEC & Friends ratified their agreement to add 400,000 barrels/day of held back production starting in August, and are planning to continue increasing at that level until output returns to pre-COVID levels sometime late next year. While the market is moving lower following that news, this is actually less than the 500,000 barrels/day many expected to see added monthly, and should leave global inventories on a drawdown path for the rest of this year, so it would seem that the selling today has more to do with concerns over the spread of COVID and Chinese Computer viruses and less with a sudden surge in oil output.

While the news will focus on the accusations of state-sponsored hacking, China is steadily waging war on global refiners, ramping up run rates and seeing record diesel exports which is contributing to refiners in other parts of the world contemplate permanent shut downs. They aren’t just expanding operations at home either, as reports announce a new $3 billion refinery will be funded and built by China’s national engineering firm in Iraq.

Baker Hughes reported 2 more oil rigs were put to work in the US last week, matching the average weekly change that we’ve seen over the past 2.5 months. Notable this week is that the “other” non-specified basins saw an increase of 6 rigs (10% of their total) while the Permian stayed flat for a 4th week, and the Eagle Ford and Woodford basins both declined by two. The increases in relatively unknown basins is consistent with a WSJ article last week that highlighted how speculative grade oil companies are (not surprisingly) raising large amounts of capital through low-rate bond issuances. 

If you’re feeling whiplashed by the recent market swings, don’t beat yourself up, the people who bet with other people’s money for a living don’t appear to be doing very well lately.  The weekly Commitments of Traders report showed that Money Managers (aka hedge funds) jumped back off the energy bandwagon 2 weeks ago just before prices bounced sharply off of the 8 month old trend-lines, and then added to their positions last week, just in time for another sell-off.  The weekly moves continue to be relatively small – particularly in crude oil contracts – but products are seeing larger moves. 

Click here to download a PDF of today's TACenergy Market Talk.

MT 7.19.21

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Pivotal Week For Price Action
Market TalkFriday, Dec 2 2022

The Energy Complex Is Trading Mostly Lower So Far This Morning

The energy complex is trading mostly lower so far this morning, with prompt month RBOB futures leading the way. Brent crude oil is struggling to hold on to overnight gains and it is exchanging hands on the green side of even, if only just.

The easing of quarantine protocols in China is taking partial credit for the weekly gain in WTI futures this morning, despite the emergence of reports and images showing provisional camps set up to enforce isolation and curb the latest spread of the pandemic.

The “ban” on Russian crude oil, set to take effect on Monday, has yet to reach final approval in Europe. Poland seems to be one of the last holdouts and has not been shy about wanting the price cap to be as low as possible.

Sunday’s OPEC+ meeting, which will reportedly be held virtually, is also getting some play in the headlines this morning. While some consider the setting of the meeting to telegraph no change in the cartel’s production policy, others posit the group is considering cuts ahead of next week’s oil ban.

The Bureau of Labor Statistics published the November jobs report this morning, an increase in nonfarm payrolls of 263,000 while unemployment rate held pat at 3.7%. The stock market did not like that: S&P 500 futures dropped 1.4% on the news as traders expect higher-than-expected job growth to buttress the Fed’s intent on continuing to raise interest rates.

The EPA published their proposed volume obligations under the Renewable Fuel Standard for the next three years and is now seeking public opinion on their target levels. Their report also estimates that the RIN obligations will reduce US oil imports by ~170,000 barrels per year. Is that a typo? We imported 6 million barrels per day last week, for reference.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
Market TalkWednesday, Nov 30 2022

Energy Markets Are Seeing A Strong Rally For A 2nd Day

Energy markets are seeing a strong rally for a 2nd day as uncertainty about the upcoming OPEC meeting and about the looming Russian oil embargo seem to have markets focusing on supply fears again, after weeks of demand-fears driving prices lower. Diesel prices are up more than 22 cents from yesterday’s low trade, while gasoline prices are up 12. The bounce puts the complex back in neutral technical territory after surviving a trip to the edge of a breakdown that could have sent prices sharply lower. 

Concerns about a pending recession continue to plague equity markets as the US Treasury yield curve is inverted to a degree we’ve only seen a couple of times in the past 25 years. As the chart below shows, these inversions have been a good indicator of a pending economic slowdown. Energy markets seem to already have gotten that selling out of their system in the short term, but this could once again become a factor if this latest rally runs out of steam. 

The European Union still can’t unite on a price cap agreement for Russian oil, less than a week before an embargo on Russian oil is set to begin. Both WTI and Brent crude have slipped into a Contango price curve near term as current supplies are proving ample as traders have had months to prepare for this change, and demand has softened globally. 

Meanwhile, Italian officials continue to race to find a way to keep their Sicilian refinery in operation after the embargo begins, asking the US to provide banks assurance that they won’t face fines for breaching sanctions given the Russian-owned status of that plant. Since the US is a consistent buyer of products from that facility, and the East Coast continues to struggle to find enough supply, perhaps it’s an offer they can’t refuse. 

OPEC and friends have decided to hold their upcoming meeting virtually, which some are taking as a sign that they will roll over their output cut agreement from October. 

The tornado outbreak in the southern US looks like it stayed far enough away from the Gulf Coast to spare the refineries in the area. The Alon refinery in Big Spring TX reported an operational issue that lasted more than 16 hours Monday, that ENT is reporting could end up causing extended downtime at that facility. While that plant is far from the Gulf Coast trading hub, downtime could add to the supply challenges to West Texas and surrounding markets.

Click here to download a PDF of today's TACenergy Market Talk.