Fear Has Taken Hold Of Energy And Equity Markets
Fear has taken hold of energy and equity markets overnight as the Trade Truce between the US & China is threatened by the arrest of a Chinese CFO for violating US sanctions (allegedly) and the Saudi energy minister is suggesting that there may be no OPEC deal this week.
Also weighing on markets around the world is the yield curve on US treasuries has been tightening, which is an often cited early warning indicator of a pending economic slowdown. As the charts below show, the spread between 2 & 10 year treasury rates reached its smallest discounts in more than 11 years. If you don’t remember, ask a neighbor what the economy did after 2007 and that may help explain some of the fear trade we’re witnessing this morning.
US equity futures are trading down around 1.5% so far today, while oil & product futures are down 2-3% at the moment, after being down nearly twice that amount around 4:30am. RBOB gasoline future briefly dipped to fresh 2-year lows during the overnight sell-off, while the rest of the energy complex is still holding above the lows set last week.
This week’s price action of 3 early buying sprees that fizzled into the close, followed by a 4th session that’s started with a heavy sell-off leaves the potential for a bearish continuation pattern on daily & weekly charts. If the bottom end of the past week’s range (set by November’s low trades) breaks down, there’s a strong case that the bear market will continue, and could have another 15-20% of downside based on the reverse flag formation on the charts. It’s too soon to say this formation is going to happen, as we’ll need to see WTI break (and hold) below $49 and Brent drop below $57, some $2.5/barrel lower than current levels before it’s confirmed.
Of course, even if OPEC doesn’t come to a resolution today, there’s still a chance that there could be an agreement announced tomorrow, when cartel members meet with Russia to discuss their extended output cut arrangement. If you’re wondering just how much influence has on OPEC, given that it’s not a member of the cartel, take a look at the birthday letter the OPEC secretary general sent to the Russian president 2 months ago.
The weekly status report from the Department of Energy’s EIA is due out at 11am Eastern.
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Prices To Lease Space On Colonial’s Main Gasoline Line Continue To Rally This Week
Energy markets are sliding lower again to start Wednesday’s trading as demand concerns and weaker stock markets around the world seem to be outweighing any supply concerns for the time being.
Rumors continue to swirl about an “imminent” response by Israel to Iran’s attacks, but so far, no news seems to be taken as good news in the hopes that further escalation can be avoided, even as tensions near the Red Sea and Strait of Hormuz continue to simmer.
Prices to lease space on Colonial’s main gasoline line continue to rally this week, trading north of 11 cents/gallon as Gulf Coast producers still struggle to find outlets for their production, despite a healthy export market. Gulf Coast CBOB is trading at discounts of around 34 cents to futures, while Gulf Coast RBOB is trading around a 16-cent discount, which gives shippers room to pay up for the linespace and still deliver into the East Coast markets at a profit.
Back to reality, or just the start of more volatility? California CARBOB basis values have dropped back to “only” 40 cent premiums to RBOB futures this week, as multiple flaring events at California refineries don’t appear to have impacted supply. The state has been an island for fuel supplies for many years as its boutique grades prevent imports from neighboring states, and now add the conversion of the P66 Rodeo refinery to renewable diesel production and the pending changes to try and cap refinery profits, and it’s easier to understand why these markets are increasingly vulnerable to supply shocks and price spikes on gasoline.
RIN prices continue to fall this week, touching 44 cents/RIN for D4 and D6 values Tuesday, their lowest level in 6 weeks and just about a nickel above a 4-year low. While the sharp drop in RIN and LCFS values has caused several biodiesel and Renewable Diesel producers to either shut down or limit production, the growth in RIN generation continues thanks to projects like the Rodeo refinery conversion, making the supply in RINs still outpace the demand set by the Renewable Fuel Standard by a wide margin.
The API reported draws in refined products, 2.5 million barrels for gasoline and 427,000 barrels for distillates, while crude oil stocks had an estimated build of more than 4 million barrels. The DOE’s weekly report is due out at its normal time this morning.
Click here to download a PDF of today's TACenergy Market Talk.
Equity Markets Have Been Pulling Back Sharply In Recent Days As Inflation And Trade Concerns Inject A Sense Of Reality Into Stocks
It’s a mixed bag for energy markets to start Tuesday’s session with gasoline prices holding small gains, while oil and diesel prices show small losses as the world anxiously debates what comes next in the conflict, we’re still hoping we don’t have to call a war in the Middle East.
An early sell-off picked up steam Monday morning with refined products down more than a nickel for a few minutes, before reports that Israel was vowing to respond to Iran’s attack seemed to encourage buyers step back in an erase most of the losses for the day.
Equity markets have been pulling back sharply in recent days as inflation and trade concerns inject a sense of reality into stocks that had been flying high earlier in the year. The correlation between gasoline and crude oil prices had been fairly strong for the past couple of months but has since weakened as the weakness in stocks hasn’t yet trickled over into the energy arena. Both asset classes are seeing a tick higher in their volatility (aka Fear) indices this week however, and when fear starts driving the trade, we often see these prices move together.
Diesel has been underperforming the rest of the energy complex for most of the year so far, and those hoping for lower diesel prices got more good news when the Dangote refinery in Nigeria began loading diesel for domestic use Monday, in the latest milestone for the giant project that will have a major influence on Atlantic basin supply. Naturally, local lawmakers are already complaining that the refinery’s prices are too high.
The EIA this morning highlighted the record amount of crude oil China imported in 2023 after reopening the country post-COVID and after completing numerous new refinery builds in the past few years. Russia accounted for the largest increase in shipments to China last year, as China is one of the few countries that doesn’t mind ignoring sanctions. Speaking of which, the US House is expected to take up a new vote this week on sanctioning Chinese imports of Iranian crude, which the EIA notes are often hidden by relabeling the crude to make it appear as if it originated in Malaysia, Oman or the UAE.
We’re just 2 weeks away from the startup of Canada’s long-awaited Transmountain pipeline expansion that will bring roughly 600,000 barrels/day of capacity to the Pacific basin. That new outlet is great news for Canadian producers long restricted by takeaway capacity, and bad news for Midcontinent refiners who have grown accustomed to the discounted Canadian grades. A Bloomberg article Monday noted that Iraq’s Basrah Heavy crude is most likely to be displaced by West Coast US refiners who can now buy much closer to home.
Click here to download a PDF of today's TACenergy Market Talk.