Oil Production Cuts Fall Short Of Demand Drop
The Oil Price War officially ended last week as Saudi Arabia, Russia, and the other members of the OPEC & Friends alliance agreed on the framework for the largest production cuts ever. Markets have not been impressed so far however as those cuts still fall short of the drop in demand we’ve seen in the past month, and as compliance is still in doubt, even though Mexico finally agreed to the pact over the weekend.
Friday’s meeting of G20 oil ministers won a Captain Obvious award when the group agreed that stabilization in the market is needed. Beyond that, the group was unable to come up with any sort of detailed plan, which may not matter since producers will be forced to cut on their own as they run out of places to store their product.
Baker Hughes reported 58 more oil rigs taken offline last week, marking a drop of 179 rigs in the past four weeks, 26 percent of the national total. That’s how capitalism deals with low prices.
An explosion and fire at one Gulf Coast refinery, and storm-related power outages that knocked another offline over the holiday weekend would ordinarily be enough to get markets stirred up, but in the current world where most – if not all – refiners are forced to cut production due to the rapid and record setting drop in demand, those two events seem to barely make a blip on the radar.
With basis values in several regional markets running near all-time lows, this week’s action looks like it could be pivotal in that we may see if the signals the physical market is sending on extreme oversupply create another wave of selling in futures.
Money managers increased their net length in Brent crude contracts last week for the first time in six weeks signaling that the large speculative class of trader thinks the floor may be in for prices. WTI and ULSD both saw minor increases in managed money positions while RBOB continued to see its mass liquidation event from the record number of bets that gasoline prices would move higher, when prices were actually more than one dollar/gallon higher than they are now.
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.