How Long Will This Crude Chaos Last?
May WTI is up $34/barrel this morning, the biggest rally in the 37 year history of the NYMEX contract. May WTI futures are up $34 this morning, and yet are still trading at a negative $3.50/barrel.
This ultimate lesson in the realities of futures contracts tied to physical delivery was provided in Monday’s epic 350% percent price drop, when the May WTI contract (which expires today) not only traded negative for the first time ever shortly after 1 p.m. central, but then traded at negative $40/barrel less than 20 minutes later.
Storage tanks at Cushing, OK – the delivery hub for the WTI contract - are on pace to reach maximum capacity in about a month – right when the May WTI contract would be due to deliver – meaning buyers became scarce as their ability to hold any additional barrels ran out and sellers were forced to pay in order to find someone to take those contracts off their hands. I’m sure there are plenty who will disagree with this point, but it seems that the negative value are a sign of free markets behaving as they should, and the physical delivery tied to futures contracts the ultimate tool to keep a market from being easily manipulated.
It’s likely we may never know who was caught in that unenviable position of paying nearly $1/gallon to sell crude oil futures, but it is certainly possible that the move may have caused, or perhaps was caused by, bankrupt companies being forced to liquidate positions. Perhaps a former FBI director will be hired to tell the tale someday like we saw in the aftermath of the 2008 debacle.
If you’re wondering how long this crude chaos may last, take a look at the forward curve chart below, and see the relative lack of reaction in values six months and more in the future, which also helps explain the minimal reaction in major oil company stock prices during Monday’s meltdown.
Today’s heavy selling in RBOB and ULSD seems to be at least in part the aftershocks of the WTI crash, with market players waking up to the reality that negative values can and do happen, and with U.S. gasoline inventories at record highs, there is a chance we could see a lack of storage options continuing to wreak havoc on both physical and futures prices until the country reopens.
Diesel prices meanwhile have reached a 17-year low overnight, caught up in the larger petroleum price swoon, even though U.S. diesel stocks are near the low end of their seasonal range. In some U.S. markets, we've already seen the lack of gasoline space creating diesel shortages due to pipeline and tankage constraints, and it appears that trend is likely to continue.
Click here to download a PDF of today's TACenergy Market Talk.
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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.