Energy And Equity Markets Are Both Starting The Week In The Red

Energy and equity markets are both starting the week in the red as fears of FED’s inflation fighting and the fallout over China’s COVID lockdown are both getting credit for the latest round of selling after Friday’s big price bounce. 

The heavy wave of selling puts the energy complex at the low end of its recent trading range, and threatens the weekly bullish trend line, but there’s still more room to fall before chart support is actually broken. Peg last Thursday’s low trades as the first test near term for refined products. RBOB came within ½ cent of that low this morning before bouncing by 3 cents, while ULSD futures are still trading 6 cents higher than the lows we saw just a few days ago. 

The housing market is already seeing the plan for higher rates having a cooling effect on prices, and that same phenomenon is probably influencing other commodity markets as well, which really is exactly what the FED is trying to have happen. 

While China is reporting no new COVID deaths during the Shanghai lockdown, there are reports that refineries will be forced to cut runs and/or increase export volumes to manage the rapid decline in regional demand. 

Money managers continued to trim their net length in most energy contracts last week, with only ULSD seeing a net increase. Open interest for ULSD continues to plummet as the surge in volatility we saw in March was apparently too much to handle for many participants. 

A financial times article notes how the chaotic markets, and the increased margin calls that come with them, may explain why we’re seeing the reduction in liquidity and more volume flowing to the major commodity trading houses. This phenomenon hasn’t gone unnoticed in Ukraine, whose President reached out to the 4 largest trading houses at the end of March to ask they stop facilitating the flows of Russian exports.

“There’s a general concern across the marketplace that we’re losing participation,” he said.

Baker Hughes reported an increase of 11 oil rigs and 3 natural gas rigs drilling in the US last week. The record amount of workers hired reported in the Texas oil patch in February seems to be hitting the ground as the Permian added 9 rigs, and the state accounted for 12 of the 14 total rigs added last week. Still, despite the big weekly increase, the Permian has about 90 fewer active rigs now than it did pre-COVID, and the total US count is still down about 140.

Read this Rystad Energy report on why the SPR releases announced last week will only have a temporary impact on prices. 

Click here to download a PDF of today's TACenergy Market Talk.