Markets Guess What Will Come Next
Stocks are trading lower and oil prices are trading higher as the markets try to guess what will come next in the U.S./Iran conflict. The most remarkable news so far is that energy prices are up less than five percent from where they were prior to last week’s attacks, compared to a few years ago when this type of tension could have easily pushed prices up 20 percent or more.
Perhaps the most significant development of the past decade for oil markets is we changed from fears of “Peak Oil,” where lack of supply led to routine spikes over $100/barrel to fears of “Peak Oil Demand,” as OPEC and other producers are now having to voluntarily reduce their production to keep prices from collapsing and even after extreme violence in the Middle East, prices are still in the $60s as that excess supply has cushioned the impact of these events.
Prices did briefly spike overnight, with products trading up more than four cents and Brent trading north of $70 for a few hours. Most of those gains have been erased in the morning hours however, with ULSD actually trading negative on the day.
ULSD’s relative weakness appears to be at least partially a sympathetic trade with Natural Gas as warmer-than-average temperatures across the eastern half of the country limit demand for home heat. In addition, the annual holiday demand slump for diesel is in full force, with consumption down 27 percent across the U.S. last week according to the DOE’s weekly estimate. Based on prior years, we expect that slump to last another week, and then we should (hopefully) see a return to normal levels in the second week of the year.
The gasoline demand slump so far is not as bad as it has been this time over the past two years, but history suggests the worst is still ahead of us, and we probably won’t see consumption bottom out for another two weeks. This annual tradition of demand falling to its lowest levels of the year also coincides with refiners reaching their winter peak for output, which tends to create some sloppiness in spot and rack markets for the next several weeks. 2020 looks to be set to follow that trend, although the loss of PES is holding total refinery runs below the all-time highs set a year ago.
The Commitment of Traders report from the CFTC was delayed again due to the holiday, but Brent crude (reported by ICE) saw speculative length reach its highest levels in more than a year last week. No doubt money managers holding those bets on higher prices are enjoying the price spike of the past few days, and it seems likely we may see an influx of additional speculative length in the coming weeks as long as the potential for more violence in the region remains elevated.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.