In Like A Lion And Out Like A Lamb
The phrase “In like a lion and out like a lamb” that’s been used for many years to describe March weather seems a good fit for 2019 as multiple winter storms stretch across large swaths of the US. The opposite seems to be holding true for energy trading, as an often volatile month has begun with a very quiet start. WTI did manage to reach a fresh 3.5 month high overnight before giving up those gains and trading near flat this morning, so there is still a decent chance of another technical breakout that could kick off a little March madness.
News of a sale of oil from the Strategic Petroleum Reserve is making its way through the headlines, with writers stretching to find potential implications as possibly being signals to the world oil market. In reality, the sale was part of a budget bill passed in 2015 that is intended to fund upgrades to the facilities that house the US’s emergency oil stockpiles.
The spread between March and April RBOB continued its strong rally to end February, with the March contract (the last winter-grade contract of the season) expiring just 11 cents below the April (summer-grade rvp) contract. It’s been nearly a decade since the winter/summer spread has been that small to end February (no coincidence that it’s been nearly a decade since PADD 1 refinery runs were this low) and that small spread is likely to disappoint those market players along the East Coast who have become used to capitalizing on wider discounts during the RVP transition.
The forward curve charts below show that while the rally in front month futures has been dramatic over the past month, prices 2-3 years from now have not followed suit. This suggests that the market expects supply & demand to be relatively more balanced down the road, and is likely a sign that oil producers have been taking advantage of the recent run-up in prices to hedge their production in 2020 and beyond.
RIN values for both ethanol and biodiesel dipped Thursday after the Senate narrowly approved the EPA’s interim director promotion to full time chief of the agency. While the political football known as the RFS still seems unlikely to be changed with a split congress, it seems the small market reaction is acknowledgement that the bio-lobby had failed in their efforts to prevent this move.
The EIA meanwhile is predicting a stable market for biofuels over the next 2 years with steady production and consumption in a new note released this morning.
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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.
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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.