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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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.