The 200-day Moving Average Is Back In Play This Week With ULSD Breaking Above That Resistance After It Repelled Friday’s Rally
After moving lower through the overnight session, energy futures jumped alongside equities following the October CPI reading that came in below most estimates, adding hope that the FED is done raising rates to combat inflation. The recovery rally of the past 2-days has put charts back in a more neutral footing, easing the oversold condition that had developed during the drop to multi-month lows.
Of course, that drop in energy prices was a key contributor to the flat CPI reading for the month, with fuel oil prices leading the slide down 21%, while gasoline prices were down 5.3%. Excluding food and energy, the total reading was up .2% on the month and 4% on the year.
The 200-day moving average is back in play this week with ULSD breaking above that resistance after it repelled Friday’s rally, while WTI is currently stuck right on it. If the contracts can hold above that level there’s a good chance, they could soon break above the bearish trend they’ve been in since Mid-October, while a failure here suggests we’ll see new lows before year-end.
The IEA’s monthly oil market report echoed the bullish demand outlook OPEC reported yesterday, with the agency revising its global consumption estimates higher, primarily due to record oil demand in China. The IEA suggests that China accounts for 75% of the total world demand growth this year, which is estimated at 2.4 million barrels/day, and despite headwinds in developed nations, the agency believes total global oil demand will hit a record in 2024. That increase in demand isn’t great news for everyone however, as the agency notes China’s surge in petrochemical production is putting pressure on other refiners in Europe and Asia.
The good news for consumers is that oil supplies are also poised to hit a record next year, with gains in the US, Brazil and Guyana leading the increases. While Guyana is benefitting from off-shore gushers, its next-door neighbor Venezuela is not expected to see dramatic increases in its output despite the recent easing of sanctions, as it will take years of investment to get that country’s production infrastructure rebuilt.
While the IEA is bullish on US oil output, the EIA is predicting lower US shale production for a 2nd straight month in its monthly drilling report. The Permian Basin, which accounts for nearly half of all US oil output, continues to see modest gains, while gas-heavy shale basins like the Appalachia and Anadarko are dragging oil output lower according to these estimates. While drilling activity has slowed onshore, US Off-shore production continues to increase this year and is approaching record highs set prior to the pandemic, as the larger-project-producers are acting more confident in the long-term viability of those wells, even as the viability of the Federal lease program is very much in doubt.
Big speculators were adding new bets on lower energy prices last week, once again showing their tendency to jump on the bandwagon a couple of weeks late. WTI, Brent, ULSD and Gasoil all saw a large influx of new short positions, just in time for prices to hit a 3-month low Wednesday and then bounce. RBOB futures were once again moving opposite of the rest of the complex with heavy short covering as the funds (who appear much smarter in retrospect) took profits after prices hit their lows for the year.
Click here to download a PDF of today's TACenergy Market Talk.
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View All“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.