Markets Spike Following Reports of 90% Effective COVID Vaccine
Reports of a “90% effective” COVID vaccine have equity and energy markets spiking this morning, with the DJIA and S&P500 both poised to break all-time highs following the news. Energy futures were already moving 2-3 cents higher overnight as the market was considering the impacts a new U.S. president will have on prices, and then surged another 5-6 cents around 6 a.m. when the vaccine news broke.
The spike is breaking the downward sloping trend-lines on the weekly charts for WTI, ULSD and RBOB, with product prices now 22 cents higher than they were during the overnight selloff November 1. The dramatic reversal sets up a test of the top-end of the summer trading range, which looks like it will be a major technical pivot point to determine if prices continue their sideways action or if we see another 20-30% rally in the coming months.
At some point, it seems we’ll probably get a pullback once it sinks in that there is still a long hard winter ahead of us with COVID case counts soaring around the country and around the world, while this vaccine will still need months to develop and then even more time to produce and distribute.
The companies that have been putting oil rigs back to work over the past several weeks must be feeling better about their decision this morning as WTI has added more than 10% to its value so far today. Baker Hughes reported five more rigs were added last week, the seventh consecutive increase, with the Permian basin accounting for the entire move this week.
Money managers on the other hand are probably wishing they had a do-over as they slashed bets on higher prices across the board last week, just in time to miss out on the best rally in the past five months. Earlier this year, Saudi Arabia’s energy minister threatened oil price speculators, and already seems to be holding to that promise, suggesting tweaks to its output cut plans after the widespread selling by large speculative traders last week.
A few interesting reads on how the new President may impact energy markets:
Law360: Biden’s win puts clean energy center stage.
Bloomberg: How Biden’s win affects commodities hit by trade wars.
Reuters: Unresolved Biofuel Policy facing the next president.
Click here to download a PDF of today's TACenergy Market Talk.
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Refined Products Bounce Back And Forth Across The Break-Even Line To Start Friday’s Trading
The choppy action continues for energy markets with refined products bouncing back and forth across the break-even line to start Friday’s trading after some big swings Thursday.
RBOB futures led the rollercoaster ride Thursday, trading up 4 cents in the early morning hours, only to see those gains turn into 10 cent losses mid-morning, and then erasing most of those losses in the early afternoon following an ENT report of unplanned maintenance at the largest refinery on the East Coast.
The selling portion of the ride was blamed on a combination of an increase in jobless claims, and the disruptive impacts of the Canadian wildfires on the major population centers along the East Coast. While air traffic has been disrupted, so far there are not any reports of delays in ship traffic around the New York Harbor, and the strong basis and time spreads we’ve seen in NY have been easing this week, so it appears that this event is more concerning to the demand side of the equation than supply.
From a technical perspective, it’s not surprising to see this type of back-and-forth action as most petroleum contracts look to be stuck in neutral territory on the charts, which encourages trading programs to sell as prices get towards the top end of a range, and buy when it gets to the low end.
The Atlantic Hurricane season is off to a quiet start with no tropical development expected over the next week, but NOAA did issue an El Nino advisory Thursday that suggests the warm-water pattern in the Pacific could reach “supersized” levels and create all sorts of disruptive events. Perhaps most notable in the report is that forecasters don’t believe this year’s El Nino will have the same dampening impact on Atlantic hurricanes due to record warm temperatures in the water. Here’s a brief recap in case you missed the most memorable El Nino from 25 years ago.
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Gasoline Futures Rally Despite Inventory Builds, Increased Throughput
Gasoline futures led another strong rally in the energy complex Wednesday and continued marching higher overnight before pulling back to near break-even levels around 7:45am central.
The RBOB contract has now wiped out the post-Memorial Day selloff, and erased the losses from the contract roll to July, setting up another test of the May highs at $2.73. If that resistance breaks, there’s a good chance we see another run at the $2.90 level, but if it holds we are probably still stuck in a sideways pattern as we move through the summer months. West Coast gasoline prices meanwhile have reached a 3-month high as surging basis values compound the move in futures.
The rally came despite healthy inventory builds for refined products and strong refinery runs across all 5 PADDs reported last week, with traders (or their algorithms) appearing to focus instead on healthy demand estimates in the DOE’s weekly status report. Gasoline also saw healthy exports last week, while diesel shipments overseas continued their decline which has helped keep downward pressure on diesel prices, which is essentially the polar opposite of what we were experiencing a year ago.
Lies, damned Lies and statistics: PADD 3 refinery utilization hit 98.8% of the official capacity figure last week, which would mark a 5 year high, except the numbers are wrong. The DOE still isn’t including recent capacity additions of almost 300mb/day in those stats, so the actual figure is about 3% lower. Don’t worry though, the lack of accurate data probably isn’t intentional. The DOE recently announced it was suspending data collection for some of its monthly reports as the agency is still struggling to overcome the IT Systems failure they experienced a year ago. Add this to the realization that the official crude production and petroleum demand figures have been incorrect due to a lack of clarity surrounding condensate production that comes along with oil output.
Speaking of which, the official US Oil output figure surged to the highest levels since the COVID lockdowns began more than 3 years ago last week. No word from the EIA if this means actual production increased, or if they’ve just changed the way they’re reporting the molecules coming out of the ground.
Irving Oil released a statement highlighting a strategic review of the company, that could include selling the business that’s been held by the Irving family for nearly 100 years. The Irving Refinery in New Brunswick is Canada’s largest at 300mb/day and is the largest importer of fuels into the northeastern US. Critics are arguing that the review is an attempt to politicize Canada’s Clean Fuel Regulation that could weigh on the refinery’s profitability when it goes into full effect in July or could simply incentivize the facility to send more product to the US.
RIN values saw their first bounce in a couple of weeks, with both D6 and D4 values climbing back above the $1.40 mark after their recent slide from the mid $1.50s. We’re still 6 days away from the EPA’s deadline to issue the final RFS ruling for the next couple of years.
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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.