Equity And Energy Markets Sent Sharply Lower
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.
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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.