Markets Due For Technical Correction
After reaching their highest levels in nearly a year overnight, the energy complex has pulled back sharply in the early going this morning. As has been the case during any selloff recently, COVID case counts and drama in Washington DC are both getting some of the blame. There’s also a case to be made that after a euphoric rally, both energy and equity markets had reached overbought territory and were due for a technical correction.
You might remember we saw a similar large reversal lower last Monday, but buyers stepped in before the upward-sloping trend lines were breached and the bulls took over the rest of the week. It looks like 50 will be a big number to watch this week, with WTI needing to hold above $50 to keep the huge rally intact, and refined products needing to stay above $1.50 to keep the upward momentum going.
Baker Hughes reported eight more oil rigs were put to work last week in the U.S., bringing the total rig count to a new eight-month high, that would still be a record low prior to 2020. The Permian basin accounts for 179 of the 275 total oil rigs active in the country, and made up half of last week’s gain.
The CFTC’s COT report was a mixed bag last week with Money managers adding to net length in RBOB and Brent contracts, but reducing ULSD and WTI positions. Perhaps most notable is that RBOB length held by large speculators is now at its highest level since the start of COVID, even though gasoline demand has dropped sharply in recent weeks. That flow of funds could prove pivotal in the weeks to come, because if the big funds see RBOB as a long term bet and are willing to ride out the bumps until the vaccine rollout gets business back to “normal” then any dip like today might be a good buying opportunity. On the other hand, once those funds decide the party is over, the liquidation of that length could create a snowball effect to the downside.
RIN values pulled back for the first time in a couple weeks Friday after the Supreme Court agreed to review last year’s ruling by a circuit court that limited the ability of the EPA to grant small refinery exemptions. The hearing won’t be until April, and a ruling may not come until the summer by which point it’s possible the entire RFS could be changed depending on how the new congress prioritizes its agenda for the year. Another interesting note on this case, the Plaintiffs (HollyFrontier & Wynnewood Refining Co) have both announced plans to convert units to Renewable Diesel production, which means if the supreme court rules in their favor, it may end up helping their competitors more than themselves.
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Gasoline Futures Are Leading The Way Lower This Morning
It was a volatile night for markets around the world as Israel reportedly launched a direct strike against Iran. Many global markets, from equities to currencies to commodities saw big swings as traders initially braced for the worst, then reversed course rapidly once Iran indicated that it was not planning to retaliate. Refined products spiked following the initial reports, with ULSD futures up 11 cents and RBOB up 7 at their highest, only to reverse to losses this morning. Equities saw similar moves in reverse overnight as a flight to safety trade soon gave way to a sigh of relief recovery.
Gasoline futures are leading the way lower this morning, adding to the argument that we may have seen the spring peak in prices a week ago, unless some actual disruption pops up in the coming weeks. The longer term up-trend is still intact and sets a near-term target to the downside roughly 9 cents below current values. ULSD meanwhile is just a nickel away from setting new lows for the year, which would open up a technical trap door for prices to slide another 30 cents as we move towards summer.
A Reuters report this morning suggests that the EPA is ready to announce another temporary waiver of smog-prevention rules that will allow E15 sales this summer as political winds continue to prove stronger than any legitimate environmental agenda. RIN prices had stabilized around 45 cents/RIN for D4 and D6 credits this week and are already trading a penny lower following this report.
Delek’s Big Spring refinery reported maintenance on an FCC unit that would require 3 days of work. That facility, along with several others across TX, have had numerous issues ever since the deep freeze events in 2021 and 2024 did widespread damage. Meanwhile, overnight storms across the Midwest caused at least one terminal to be knocked offline in the St. Louis area, but so far no refinery upsets have been reported.
Meanwhile, in Russia: Refiners are apparently installing anti-drone nets to protect their facilities since apparently their sling shots stopped working.
Click here to download a PDF of today's TACenergy Market Talk.
The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.