Oil Prices Trade At Highest Values In Over A Year

Oil prices are trading at their highest values in more than a year this morning, and refined products are nearing one year highs of their own in what appears to be a technically driven rally after prices bounced hard off of the bullish trend lines Monday, and broke through chart resistance yesterday.
A decline in oil inventories reported by the API is getting some of the credit for the continued rally, with the industry group reporting a 4.3 million barrel draw in crude stocks. Gasoline and diesel stocks had smaller declines of 240,000 and 1.6 million barrels respectively. One thing to watch out for is that we saw a huge draw in last week’s DOE report largely driven by a surge in exports and decline in imports. If those trade flows normalize this week, we could see a large build in crude stocks that might throw a little cold water on the bulls.
One odd thing about this rally is that it’s happening despite a strong move higher in the U.S. Dollar, which typically would put downward pressure on commodities in general, and energy contracts in particular. The correlation between the currency and energy contracts has flipped to positive in recent weeks, another sign that the most recent runup may be more technical for energy than fundamental as buyers of U.S. dollar-denominated oil are now paying more for the product, and their exchange rate.
Another odd thing about this rally? It’s happening despite RIN values pulling back sharply, falling more than a dime from the multi-year highs they reached last week. RIN values and product prices often move in the same direction as the federal renewable fuel credits act like a tax to refiners who don’t have the capability to blend their own ethanol, bio and other renewable products, which means a rise in RIN prices requires a rise in crack spreads for the margins to stay even.
A third oddity about this rally is that it’s coming in the wake of a major winter storm that is hitting demand hard all along some of the country’s most populated areas on the east coast, while another major cold snap moves in right behind it that’s likely to further reduce consumption. Despite that, we’re seeing RBOB lead the move higher even as we could be in for the worst week of gasoline demand in some markets since Christmas.
The storm does not seem to have done any lasting damage to supply infrastructure in the North East, with no extended terminal or refinery downtime. In fact, it does not appear that there are any major refinery outages being reported that might cause the spike in RBOB outright prices and time spreads that we’re seeing this week. Actually, the only newsworthy refinery reports are that the refinery formerly known as Hovensa, is increasing its output, bringing a new competitor back to the Atlantic basin for the first time in years.
A strong recover rally in U.S. equity markets after some heavy selling last week seems to be adding to the bullish sentiment, but equities are pointing to a flat open so that doesn’t seem to explain the early strength in RBOB today.
Given the equity headlines over the past week, you might think that the RBOB rally could be a short squeeze, but since large speculators have actually been building their net long position to the highest level in a year over the past several weeks, that doesn’t seem to be a likely cause.
At this point, it doesn’t matter much what’s causing the rally to continue, until that bullish trend line is broken, it seems the path of least resistance is for energy prices to keep moving higher despite all the potential headwinds. The big test for RBOB and ULSD remains the February 2020 highs around $1.68 and $1.72. If the break there, we could see another 15-20 cents of upside, but a failure could mean a move back into the $1.40s based on nothing more than a natural technical correction of the three month old rally.
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.