Four Month-Old Bullish Trend Alive And Well
Energy futures were bouncing back early Tuesday morning after their first day of selling in a week wiped out the new year + highs set Sunday night. The upward momentum seems to have stalled out however, as product gains have been slashed and WTI has ticked into the red in the past few minutes.
The four month old bullish trend is alive and well, and the bulls will argue that OPEC’s decision to hold output cuts even though prices are higher now than they were pre-COVID, coupled with the vaccine allowing economies to restart should keep prices moving higher. Bears will argue that after nearly doubling prices since November 1, this rally has outkicked its coverage, consumption will need years to return to pre-COVID levels, and rising fuel prices will not help economic activity recover.
If we see yesterday’s overnight highs broken later this week, the bulls look to have clear sailing on the charts for another 5-10% of upside, while the risk for a real correction remains as long as we stay below those levels.
Stocks are pointing higher and the U.S. dollar is trading lower, both of which will typically help encourage higher energy prices, even though the correlations between those asset classes has weakened in recent weeks.
It’s two steps forward, one step back in the great refinery restart races with new units coming online daily, while others are failing in their restart attempts and having to push back their forecasted resupply dates.
While the bumpy recovery continues, a new problem has started to emerge: oversupply of regular gasoline grades in several markets are blocking shipments of diesel and premium gasoline in the pipelines, and exacerbating those shortages. This phenomenon was also prevalent for a few weeks last spring when COVID shutdowns hammered gasoline demand while distillate consumption held relatively strong, and will continue to give suppliers headaches for at least another week or two. Since Colonial pipeline operates separate mainlines for gasoline and distillates, this phenomenon “should” not spread to the East Coast, and the push stock needed to get those lines back on schedule are expected in the next week or two.
The EIA this morning highlighted the record decline in U.S. Oil output in 2020, with the Gulf of Mexico and North Dakota leading the production declines. New Mexico was one of the few states that saw an increase in oil output as production in the western half of the Permian heated up pre-COVID. While most production is expected to increase this year thanks to the rapid recovery in prices, New Mexico is expected to see declines soon due to the expected restrictions on Federal Lands.
Two interesting reads from Reuters, both of which suggest the food vs. fuel debate is destined to be back in the headlines this year.
The coming feedstock wars as refiners race to make more renewable diesel.
The boom in U.S. Ethanol Exports heading to China. This surge in exports could help explain some of the recent rally in D6 RIN prices, as exporters are required to retire RINs within one month of the export event.
Click here to download a comprehensive PDF of today's TACenergy Market Talk graphs.
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The 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.