Panic Has Crept In To Global Equity Markets
For the first time since April a bit of panic has crept in to global equity markets and the ripple effects are being felt in the energy arena. The DJIA had its 3rd worst point drop in history Wednesday, wiping out nearly 2 months of gains, and several other indices have fallen below their 200 day moving averages for the first time in 6 months. Stock markets around the world caught the selling bug overnight and now US futures suggest the cycle may begin again today.
Energy markets have not been immune to the selling– as is often the case in a fear-driven market, correlations between asset-classes increases – setting up a pivotal test for oil prices to end the week. At this moment, both Brent and WTI are trading below the trend line that began almost 8 weeks ago, and if they can settle below it that would leave the door open to a test of the longer term trend some $5/barrel below current levels. If prices manage to bounce however, the past 2 days of selling will look more like an overdue correction for an overheated market, rather than a change in the trend.
The API did not offer any relief for energy bulls as it was reported to show a build of 9.7 million barrels in US oil inventories last week, along with a 3.3 million barrel build in gasoline stocks. If confirmed in today’s Columbus day-delayed DOE report, that would be the largest weekly increase in more than 1.5 years. Then again, last week’s DOE report showed a build that was 7 million barrels larger than the API’s report, so yesterday’s report could simply be the industry group’s data catching up to the government’s, and we may not see much of an increase at all today. We’ll find out at 11am Eastern.
Looking for a silver lining in the midst of the selling? The big declines have brought back the “Face-in-hand trader” one of the more beloved characters in modern headline literature.
It’s been a rough week for Canada Eh? With the country’s largest refinery closed due to an explosion and fire, Western Canadian Crude prices reaching 2 year lows at $27/barrel, then a major natural gas pipeline explosion that may cause power outages and refinery closures around the Pacific North West.
Those PNW refinery closures have sent prices in the region soaring, with RBOB values around Portland trading some 50 cents above NYMEX futures, which is dragging up gasoline values in California by 20-30 cents as replacement barrels will be needed from the south.
The damage assessments are beginning after the record-setting landfall of Hurricane Michael. While the damage is sure to be devastating in many ways, at this point it appears that the impacts to energy infrastructure are minimal.
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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
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