Shooting War Vs Trade War Tug-Of-War Continues
The shooting war vs trade war tug-of-war continues.
For the 2nd day in a row, attacks on Saudi oil infrastructure have energy futures rallying overnight. Monday saw the early gains wiped out and most contracts finish the day lower as tumbling stock markets over-rode concerns of a military conflict near the world’s most important choke-point for oil deliveries after 2 Saudi oil tankers were sabotaged Sunday. The new reports are that explosive-laden drones attacked 2 pipeline pumping stations in Saudi Arabia, forcing a temporary closure of the East-West pipeline system to assess damage. That pipeline system has a capacity of roughly 5 million barrels/day, and was built to offer an export alternative to shipping through the Strait of Hormuz.
Speaking of which, there are many more questions than answers surrounding Sunday’s sabotage attacks. It’s still unclear what exactly happened or how the ships were damaged, let alone who committed the acts. A Bloomberg note suggests that whatever it was, it’s minor compared to issues in the past that failed to stop shipping in the Strait of Hormuz, so we shouldn’t get too worked up by this somewhat mysterious event. Based on the 8 cent reversal we saw in refined products Monday, it seems the market tended to agree with that sentiment.
As for the trade-war, the tit-for-tat tariff cycle seems to be continuing for now, with the US preparing a new list of taxes to impose following China’s list released Monday. US Stock markets had their worst day since January following the announcement, but seem to have stabilized overnight as there are still plans for the US & Chinese presidents to meet at the upcoming G20 conference. Speaking of January, the chart below shows that there has been a clear increase in volatility over the past few trading sessions for both equity & energy prices, but we are still well-below the swings that we saw from November-January. The big question for May now seems to be if cooler heads will prevail in the two “wars” or if we’re destined to see another real spike in volatility soon.
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The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
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Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.