Rising Fuel Stockpiles Outweighing Rising Stock Markets
Rising fuel stockpiles are outweighing rising stock markets as RBOB gasoline futures trade lower for a 6th straight session and the rest of the energy complex continues to hover near multi-month lows.
US equities had a huge rally Tuesday, which seemed to help energy prices pull back from the multi-month lows, after the FED Chairman Jerome Powell suggested that an interest rate cut may be coming to help offset potential impacts of the trade wars. The CME’s fedwatch tool is showing a nearly 70% probability that the FED will cut rates by at least 25 points by the end of July following those statements, up from less than a 30% probability just a week ago. With expectations changing that rapidly, it seems like the market may be setting itself up for disappointment if that rate cut doesn’t come soon.
Unfortunately for the beleaguered bulls in energy contracts, the equity-induced bounce didn’t hold up after the API was said to report across-the-board builds in inventory last week. Diesel stocks were estimated to have the largest increase of 6.3 million barrels, while crude stocks were up 3.6 million and gasoline supplies increased by 2.7 million barrels. The DOE/EIA’s weekly report is due out at its normal time of 9:30 central.
The storms moving across the Gulf of Mexico are not expected to develop into a tropical system, but they are expected to bring flooding rains to refinery country. The majority of gulf coast refineries, and more than 1/3 of the country’s total, and are covered by the flood alerts through the end of the week. While major refinery damage from a disorganized system like this seems unlikely, it is certainly possible that it could further disrupt pipeline and/or marine vessel traffic and perhaps back up barrels destined for export, leading to more inventory builds in next week’s reports.
The additional rains are even less welcome in the Midwest, as it looks like a record amount of farm land will go unplanted this year. The charts below show how that continues to put a bid under ethanol prices, while diesel differentials in the region are collapsing.
A Wall Street journal survey of 10 investment banks suggests the latest price plunge hasn’t changed their outlooks for oil prices in the back half of the year, with most still targeting Brent around $70. The bulls will find solace in their predictions that fundamental supply tightness will eventually outweigh trade fears in sending prices higher, while the bears will find solace that these predictions come from the same institutions that made up credit default swaps on mortgage backed securities.
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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.