The End-Of-Year Trading Week Is Kicking Off With Healthy Gains For Energy Contracts
The end-of-year trading week is kicking off with healthy gains for energy contracts, wiping out Friday’s losses with tensions over shipping lanes seeming to drive the stronger price action with little other news to focus on so far.
Iran appears to have opened a new front in the drone wars, reportedly targeting a tanker ship in the Indian Ocean over the weekend. The location of that attack and Iran’s direct involvement (compared to its indirect support of Hamas and Yemen’s Houthi rebels) suggests it’s possible that the Strait of Hormuz, which is the oil market’s most important shipping lane and a frequent Iranian target, could soon see more disruptive activity. Despite the new geographical escalation, the world’s 2nd largest shipping company is preparing to return ships to the Red Sea thanks to the US Navy and its coalition’s protection.
Can we have a do-over? After compiling large short positions in oil contracts at the end of a multi-month sell-off, money managers were forced to cover a huge amount of those positions as prices bounced. The 25-30% reduction in shorts in just 1 week drove a 50% increase in speculative length and the snowball effect of short covering may still be in play this morning. ULSD was the only contract to see a decrease in the net length held by money managers last week as a reduction in long positions was big enough to offset the short covering.
Baker Hughes announced a decline of 3 oil rigs drilling in the US last week, marking a 3rd straight week of declines for oil drilling, while natural gas rigs increased by 1 on the week. US producers reached record high output last week, even though the number of active oil rigs is down more than 120 (roughly 20%) in the past year as ongoing efficiency gains and a change in the EIA’s accounting methods both seem to be driving stronger-than-expected figures.
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News & Views
View AllWeek 18 - US DOE Inventory Recap
Crude Oil, Gasoline, And Diesel Benchmarks Are All Trading >1% Lower To Start The Day
Energy prices are sinking again this morning, albeit with a little more conviction than yesterday’s lackadaisical wilting. Crude oil, gasoline, and diesel benchmarks are all trading >1% lower to start the day with headlines pointing to an across-the-board build in national inventories as the source for this morning’s bearish sentiment. The Department of Energy’s official report is due out at its regular time this morning (9:30am CDT).
WTI has broken below its 100-day moving average this morning as it fleshed out the downward trend that began early last month. While crossing this technical threshold may not be significant in and of itself (it happened multiple times back in February), the fact that it coincides with the weekly and monthly charts also breaking below a handful of their respective moving averages paints a pretty bearish picture in the short term. The door is open for prices to drop down to $75 per barrel in the next couple weeks.
Shortly after the EIA’s weekly data showed U.S. commercial crude inventories surpassing 2023 levels for the first time this year, their monthly short-term energy outlook is forecasting a fall back to the bottom end of the 5-year range by August due to increasing refinery runs over the period. However, afterward the administration expects a rise in inventories into 2025, citing continued production increases and loosening global markets hindering the incentive to send those excess barrels overseas. The agency also cut back their average gas and diesel price forecasts for the first time since February with the biggest reductions in the second and third quarter of this year.
The STEO also featured their famed price prediction for WTI, stating with 95% confidence that the price for crude oil will be between $40 and $140 through 2026.
Need a general indication of the global crude oil supply? Most headlines seem to be covering a shortage of a different type of oil, one that we haven’t turned into fuel (yet).
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The Perceived Cooling Of Regional Tensions In The Middle East Area Attributing To The Quiet Start To Today’s Trading Session
The energy complex is drifting lower this morning with RBOB futures outpacing its counterparts, trading -.9% lower so far to start the day. The oils (WTI, Brent, heating) are down only .2%-.3% so far this morning.
The perceived cooling of regional tensions in the Middle East area attributing to the quiet start to today’s trading session, despite Israel’s seizure of an important border crossing. A ceasefire/hostage-release agreement was proposed Monday, and accepted by Hamas, but rejected by Israel as they seemingly pushed ahead with their Rafah offensive.
U.S. oil and natural gas production both hit record highs in 2023 and continue to rise in 2024, with oil output currently standing at 13.12 million barrels per day and January 2024 natural gas production slightly exceeding the previous year. With WTI currently changing hands at higher than year-ago levels, this increased production trend is expected to continue despite a decrease in rigs drilling for these resources.
Less than a week after the Senate Budget Committee’s hearing centered on the credibility of big oil’s climate preservation efforts, a major oil company was reported to have sold millions of carbon capture credits, without capturing any carbon. Fraud surrounding government subsidies to push climate-conscious fuel initiatives is nothing new, on a small scale, but it will be interesting to see how much (if any) of the book is thrown at a major refiner.
Today’s interesting read: sourcing hydrogen for refining.
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