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 AllRefined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.