Fourth Day Of Recovery Rally In Energy Kicks Off Last Full Week Of 2023 Trading

The recovery rally in energy contracts continues for a 4th straight day, kicking off the last full week of trading for 2023. RBOB gasoline futures have bounced 21 cents/gallon since reaching a 2-year low last week, while ULSD futures are up 20. While the recent rally has taken the chance of a technical breakdown off the table for now, there’s still a bit more work to be done for products to break out of the bear market that knocked $1/gallon off of prices since September. 

Reports that BP was suspending all shipments through the Red Sea due to Houthi rebel attacks on ships seem to be a big contributor to the early price rally, in what would be the first notable disruption to the global supply network since the Israel/Hamas war broke out in October. It’s not clear how much oil or refined products BP sends through the Red Sea regularly, but the risk that others might follow suit is certainly evident in the early buying. Also, now that there is a clear and present danger to oil shipments, don’t be surprised to see the U.S. military take a more offensive posture with the Houthi rebels in Yemen after months of playing defense.

Speaking of boats, there’s a trading adage that when everyone is on the same side of the boat, that’s when it tips over. We may have just seen more evidence of that phenomenon last week: Money managers’ momentum chasing once again proved their value as contrary market indicators last week, slashing long positions and adding new shorts just as most energy contracts touched 6-month lows and rallied in the back half of the week. Just as we saw back in June, the last time big funds had this much money bet on prices moving lower, the stage is now set for a short covering rally if the speculative class of trader starts to rethink their position.

Meanwhile, the producer/merchant category of trader saw the most net length in WTI of the past decade. Producers are typically net short futures and options to hedge their physical output, so this change to net length may well be a reflection of the new type of hedging needed by physical players in the rapidly expanding export market. It’s also possible the ongoing consolidation of producers in the Permian could mean less hedging as the larger integrated firms may be more likely to “self-insure” than an independent.

Baker Hughes reported the US oil rig count dropped by 2 last week, with the Permian basin seeing a net decline of 3 rigs. Some repositioning of equipment was also evident as the Granite Wash basin in the Texas panhandle saw a decrease of 5 rigs while neighboring Cana Woodford in Oklahoma increased by 3. 

More trouble in Texas City: Local officials issued a shelter-in-place order for residents after yet another operational upset at Marathon’s Galveston Bay refinery. A filing with the TCEQ noting upsets in Sulfur Recovery and Hydro treating units. 

Meanwhile, a 2nd upset in 3 days was reported at the P66 Borger refinery in the TX Panhandle, and ENT is reporting that Suncor’s Denver-area facility shut down due to a power outage over the weekend, just days after a lawsuit was filed against the EPA attempting to close that facility for good.

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