Energy Futures Lacking Conviction To Make Next Big Push

Energy futures continue to trade within striking distance of 5-month highs this morning, but seem to be lacking conviction to make the next big push. Gasoline prices are once again trying to pull the rest of the complex higher, and are currently less than a penny away from setting new highs for the year, and ending talks about the seasonal price peak being behind us.

Tomorrow is Good Friday, one of 3 holidays of the year in which futures trading will be shut completely so when trading halts at 4pm today it will not reopen until Sunday at 5pm. Spot markets will also not be assessed, so rack prices posted tonight will carry through the weekend.

Because the West Coast (PADD 5) is largely isolated from the rest of the country due to both product specifications and logistical constraints, its inventory levels tend to have little impact on futures trading (since physical delivery for RBOB and ULSD contracts is in New York). Looking at the PADD 5 stocks and output levels which are both at multi-year lows, it’s easy to see why gasoline prices along the left coast are trading 50-60 cents higher than in most other major hubs.

Ominous sign or bump in the road? Total diesel demand in the US dropped sharply for a 4th consecutive week according to the DOE’s estimate. At 3.3 million barrels/day, compared to a 5 year seasonal average of 4.1 million barrels, total consumption is at a level usually reserved for the Holiday season when many trucks are taken off the road. This could be the most telling sign yet of a pending economic slowdown in the US. It could also be a sign that planting activity has been delayed by weather this year, or just another sign of how challenging it is for anyone – even a government agency – to gauge consumption in real-time.

Excerpt from the FED’s “Beige Book” on economic activity in the energy sector:

Energy

Energy activity grew modestly, and outlooks improved. Production rose at a slow pace, but drilling activity continued to slide as firms reined in spending, including orders for new equipment. Oilfield services firms and equipment suppliers noted surplus capacity for fracking services and slim margins. Availability of additional pipeline capacity out of the Permian Basin has propped up crude oil priced in West Texas relative to the Gulf Coast. Firms responding to the first-quarter Dallas Fed Energy Survey, on average, expect the WTI oil price to be around $60 per barrel at yearend 2019--above the reported average breakeven price to profitably drill new wells. Uncertainty in price outlooks declined partly because contacts were more confident that OPEC would sustain production cuts in the second half of the year.

CLICK HERE for a PDF of today's charts