Spring Breakout Rally Recovering From Hangover
The Spring Breakout rally is on again after recovering from a bit of a 2-day hangover. RBOB gasoline futures are leading the way higher once again, reaching fresh highs for the year, after turning early losses into afternoon gains for a 7th straight trading session Monday. A rally in US equities seems to be helping the early buying spree in energy contracts as we await the weekly inventory reports.
The rash of refinery issues continues to help RBOB spreads push much higher than they typically are this time of year, pushing spot prices in several US markets up by more than 70 cents in the past two months. The Houston ship channel is partially reopened, suggesting that any refinery impacts from the disastrous tank fire and subsequent spill last week will be short lived. USGC basis values dipped Monday on the news.
Note how the Equity/Energy correlation chart below shows the S&P 500 and WTI have been moving in lockstep for several months, but during the past couple of weeks, ULSD has decoupled from both and seems content to move sideways.
Bad news is good news: Once again, US Stocks seem to be reacting positively to bad economic data – in today’s case a low housing starts figure – as it makes it more likely that the FED will lower interest rates again. Already, FED funds futures are showing that traders expect a rate cut later this year.
Plenty of concerns of an economic slowdown continue despite today’s optimism, as bond markets continue to flash warning signs. If you’re wondering what all the hype is about with the treasury yield curve, take a look at the chart below. The last two times we’ve seen an inverted curve preceded little things known as the dot-com bubble, and the great recession.
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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.