Rally Runs Out Of Steam
The rally seems to have run out of steam as energy prices pull back for a third straight day after threatening eight month highs earlier in the week. Futures are still set to have strong gains on the week despite the pullback, thanks to the big gains during the vaccine euphoria Monday and Tuesday. Cash markets meanwhile are flashing more warning signs as basis values have pulled back sharply in several regions, adding to the downward pressure from the futures selling the past few days.
The build in crude stocks reported by the DOE is getting credit for the pullback, especially compared to the API’s estimate that crude stocks had a large drawdown earlier in the week. The timing of the selling didn’t match however as prices barely flinched following the DOE report, but melted down in the minutes leading up to the close, and continued through the overnight hours. In addition, the demand estimates reported by the DOE were all higher on the week and product inventories continued to draw, suggesting the move lower in prices has more to do with technical and lost momentum than it does with a change in any fundamentals.
The NHC gives 90% odds that Iota will form over the weekend in the Caribbean. Once the storm system gets organized we will then get to see which direction the models suggest it may head. The U.S. Gulf Coast has been a storm magnet this year, so don’t be surprised if we’re looking at yet another landfall sometime before this record setting Atlantic Hurricane season officially closes 11/30.
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The Energy Complex Is Trading Modestly Lower So Far This Morning With WTI Crude Oil Futures Leading The Way
Energy Futures Are Drifting Quietly Higher This Morning
Refined Products Holding Close To Break Even While Oil Prices Are Losing Just Under 1%
Markets Rallying To End The Week, Diesel Prices Lead The Way For Energy
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The Energy Complex Is Trading Modestly Lower So Far This Morning With WTI Crude Oil Futures Leading The Way
The energy complex is trading modestly lower so far this morning with WTI crude oil futures leading the way, exchanging hands $1.50 per barrel lower (-1.9%) than Tuesday’s settlement price. Gasoline and diesel futures are following suit, dropping .0390 and .0280 per gallon, respectively.
A surprise crude oil build (one that doesn’t include any changes to the SPR) as reported by the American Petroleum Institute late Tuesday is taking credit for the bearish trading seen this morning. The Institute estimated an increase in crude inventories of ~5 million barrels and drop in both refined product stocks of 1.5-2.2 million barrels for the week ending April 26. The Department of Energy’s official report is due out at it’s regular time (9:30 CDT) this morning.
The Senate Budget Committee is scheduled to hold a hearing at 9:00 AM EST this morning regarding a years-long probe into climate change messaging from big oil companies. Following a 3-year investigation, Senate and House Democrats released their final report yesterday alleging major oil companies have internally recognized the impacts of fossil fuels on the climate since as far back as the 1960s, while privately lobbying against climate legislation and publicly presenting a narrative that undermines a connection between the two. Whether this will have a tangible effect on policy or is just the latest announcement in an election-yeardeluge is yet to be seen.
Speaking of deluge, another drone attack was launched against Russian infrastructure earlier this morning, causing an explosion and subsequent fire at Rosneft’s Ryazan refinery. While likely a response to the five killed from Russian missile strikes in Odesa and Kharkiv, Kyiv has yet to officially claim responsibility for the attack that successfully struck state infrastructure just 130 miles from Moscow.
The crude oil bears are on a tear this past week, blowing past WTI’s 5 and 10 day moving averages on Monday and opening below it’s 50-day MA this morning. The $80 level is likely a key resistance level, below which the path is open for the American oil benchmark to drop to the $75 level in short order.
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Energy Futures Are Drifting Quietly Higher This Morning
Energy futures are drifting quietly higher this morning as a new round of hostage negotiations between Israel and Hamas seem to show relative promise. It seems the market is focusing on the prospect of cooler heads prevailing, rather than the pervasive rocket/drone exchanges, the latest of which took place over Israel’s northern border.
A warmer-than-expected winter depressed diesel demand and, likewise, distillate refinery margins, which has dropped to its lowest level since the beginning of 2022. The ULSD forward curve has shifted into contango (carry) over the past month as traders seek to store their diesel inventories and hope for a pickup in demand, domestic or otherwise.
The DOE announced it had continued rebuilding it’s Strategic Petroleum Reserve this month, noting the addition of 2.3 million barrels of crude so far in April. Depending on what the private sector reported for last week, Wednesday’s DOE report may put current national crude oil inventories (include those of the SPR) above the year’s previous levels, something we haven’t seen since April of 2022, two months after Ukraine war began.
The latest in the Dangote Refinery Saga: Credit stall-out, rising oil prices, and currency exchange.
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Refined Products Holding Close To Break Even While Oil Prices Are Losing Just Under 1%
Energy markets are vacillating this morning with refined products holding close to break even while oil prices are losing just under 1%.
Negotiators are meeting in Egypt this week to try and hammer out a truce in Gaza, even as Israeli airstrikes intensify. The Red Sea has continued to be active after a few weeks of relative calm, with multiple strikes reported over the weekend and another this morning.
Ukrainian drones targeted two more Russian oil refineries over the weekend, and at least one facility was reportedly taken offline as a result which means two things: Ukraine isn’t listening to US requests to stop targeting refineries, using nets to protect refineries isn’t working yet.
The CFTC’s weekly Commitments of Traders report gave a glimpse into the speculative liquidation (AKA clowns exiting the Volkswagen) that occurred in energy contracts after the direct conflict between Iran and Israel fizzled. Money managers saw heavy long liquidation, with both Brent and WTI dropping nearly 10% on the week. The only contract to see an increase in net length in last week’s report was ULSD, which had been the weak link in the complex for most of the year. ULSD did see a healthy amount of length liquidated, but that was offset by short covering as prices reached 5-month lows to create a very small net increase.
Baker Hughes reported a drop of 5 oil rigs and 1 natural gas rig drilling in the US last week, with Louisiana accounting for the majority of the decline. Pipeline capacity continues to be a limiting factor for many producers, and an RBN energy blog this morning suggests that things are about to get worse in the Permian when major pipeline maintenance occurs in June.
A fire was reported at CVR’s Wynnewood Oklahoma refinery over the weekend, although it’s unclear if the deadly storms that swept through the region played a role in that event.
Marathon’s Galveston Bay refinery reported an upset Friday that knocked a coking unit offline, but said operations were already resuming. That facility was the most-frequent TCEQ reporter last year but has been relatively quiet over the past couple of months.
Today’s interesting read courtesy of the Financial Times: How Europe solved its Russian gas crisis.
Click here to download a PDF of today's TACenergy Market Talk.