Top End Of Trading Range Tested

Market TalkWednesday, Nov 11 2020
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WTI and ULSD futures came close to reaching eight month highs overnight before sellers stepped in, cutting back the gains nearly in half for the day in the past couple of hours. This test of the top end of the trading range that’s held prices since June should be pivotal for price action through the end of year that can’t seem to end fast enough.  

Bullish supply data from the API and DOE are getting credit for the early strength, adding to the rally built earlier this week on hopes of a demand recovery once the new vaccine can put COVID economic destruction in the rear-view-mirror.  

If the top side of the trading range breaks, there’s an easy 10-20 cents of upside potential for refined products, and we could see WTI pushing towards $50/ barrel in short order. If the chart resistance can continue to repel this rally however, we may be due for another pullback and an extension of the sideways trading.

The API reported large inventory draws across the board last week with oil stocks down 5.1 million barrels, diesel down 5.6 million barrels and gasoline stocks down 3.3 million barrels.  The DOE weekly report will be released tomorrow since the U.S. is celebrating Veteran’s Day today. OPEC’s monthly report is due out later this morning, and the IEA’s monthly report will be released tomorrow. 

The DOE/EIA’s monthly Short Term Energy Outlook had much more of the same uncertainty surrounding COVID and its impact on fuel demand and prices. The government’s energy reporting agency (via the company it hires to provide forecasting, that also sells pricing subscription services) was forecasting that Brent crude prices will hover around $40 for the remainder of this year before averaging $47 next year, which suggests the report was written prior to Monday’s vaccine announcement which has Brent already close to $45. One interesting and unusual item noted in this month’s report was the extraordinary put-call ratio in RBOB gasoline for next spring, suggesting that perhaps…“market participants are hedging against a potential continuation of economic effects of COVID-19 into the 2021 summer driving season.”    

The report also highlights a big drawdown in distillate inventories, which had their largest monthly decline in nearly a decade. A combination of factors such as refinery downtime both planned for fall turnarounds and unplanned due to storms, along with a higher than normal starting balance and sharp recovery in demand all contributed to those inventory declines. While several regional markets in the Western half of the country are seeing tight rack supplies of diesel as a result of this, overall refinery margins have not yet recovered much and remain at about half of the levels we came to expect pre-COVID.   

Eta regained hurricane strength this morning, but its forecasted path has shifted back to the east, and it’s now expected to make landfall north of Tampa tomorrow afternoon. The shift keeps the storm away from oil production and refining assets in the gulf coast, and given its relative lack of strength, it should not be a major supply disrupter, although Tampa Bay port operations may be delayed for a couple of days. The new path also gives the storm yet another chance to reform over open water as it should reach the Atlantic sometime Friday.

Meanwhile, the 30th named storm of the season now has 80% odds of developing in the Caribbean in the next five days. 

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Pivotal Week For Price Action
Market TalkWednesday, May 29 2024

The Texas Power Grid Is Once Again In The Forefront After Another Round Of Storms Left Hundreds Of Thousands Without Power Tuesday

It’s a quiet start to Wednesday’s trading, with refined products up less than a penny in the early going, following a healthy bounce Tuesday that alleviated concerns of a technical price breakdown near term.

A container ship transiting the Red Sea was heavily damaged by a Houthi Missile attack Tuesday. While energy markets continue to shrug off the shipping disruptions caused by those attacks, container ports around the world are feeling its effects and emissions from shipping are increasing along with the longer routes taken to avoid the conflict.

Consolidation continues: Less than a day after Hess shareholders approved its sale to Chevron, Conoco Phillips is reportedly in advanced negotiations to buy Marathon Oil for $22 billion. To avoid confusion, this does not have anything to do with the refining operations at Phillips 66 or Marathon Petroleum, both of which were spun off from their upstream exploration and production companies more than a decade ago. Meanwhile, acquisition activity in the Permian basin remains hotter than drilling activity as Energy Transfer agreed to buy WTG for more than $3 billion.

The Texas power grid is once again in the forefront after another round of storms left hundreds of thousands without power Tuesday. A Reuters article this morning highlights the record setting growth of renewable energy in Texas along with the record use of fossil-based sources to meet the state’s rapid demand increases. This phenomenon isn’t unique to the Lonestar state, with many in the industry believing that electricity demand from AI, Crypto and EV’s will drive the next energy supply squeeze in coming years.

Slowdown coming? The Dallas Fed’s Texas Manufacturing survey showed negative readings on output, new orders and the business conditions outlook in May.

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Pivotal Week For Price Action
Market TalkTuesday, May 28 2024

ULSD Is Leading The Move Higher This Morning With Prices Up Nearly A Nickel In The Early Going

Energy futures are attempting another recovery rally, with products up more than 7 cents from Friday’s early lows, while crude oil contracts have taken back $3/barrel over that time. ULSD is leading the move higher this morning with prices up nearly a nickel in the early going, while RBOB futures are up around 2.5 cents.

Money managers were adding net length in WTI, ULSD and Gasoil contracts last week with both new long positions and heavy short covering. Brent crude was a different story however with speculative net length in the European crude contract slashed by nearly 1/3 with nearly 33,000 new short positions added during the prior week. The big reduction in WTI shorts while Brent shorts are being added suggests the big play by hedge funds may be the WTI/Brent spread rather than bets on outright price movements.

Baker Hughes reported no change in the total oil rig count drilling in the US last week, holding steady at 497 vs 570 a year ago. Natural Gas rigs dropped by 4 on the week, reaching a 2 year low at 99 rigs, down from 137 this time last year. Natural gas prices have staged a big recovery from around $1.50/MMCF a month ago to $2.50 today, but current values are still not high enough to encourage drillers to get more active, particularly with more gas being produced from oil wells.

Deadly storms hit large parts of the country over the Holiday weekend, and continue this morning, but so far no reports of refinery damage from those systems has been reported. Marathon did report an upset in a Residual Hydrotreating unit at its Galveston Bay refinery Friday, but that event doesn’t appear to have slowed down the rest of the facility.

More bad news for US Bio producers: The EIA this morning highlighted the growth in biodiesel imports into the US from Europe – primarily Germany – as changing appetites for renewables and disjointed policies incent more barrels to travel long distances on diesel burning ships to find the highest tax credit value.

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Market TalkFriday, May 24 2024

Selling Continues In Energy Markets After Thursday's Reversal Rally Ran Out Of Steam In The Afternoon

The selling continues in energy markets after Thursday’s reversal rally ran out of steam in the afternoon, following the lead of U.S. equity markets which had a big sell-off on the day. Prices haven’t yet fallen below the multi-month lows we saw early last week, but we’re just a couple of cents away from those levels, and the potential technical trapdoor that could lead to sharply lower values over the next couple of weeks.

We did see a brief spike in gasoline futures after the settlement Thursday following reports that Colonial had shut down Line 4 due to an IT issue, but those gains were short-lived as the pipeline was restarted without issue a few hours later. Those who remember the chaos of May 2021 after Colonial was hacked are breathing a sigh of relief, particularly on one of the busiest demand days of the year, while others are no doubt disappointed we won’t get to see the rash of fake photos of people filling up plastic bags with gasoline.

OPEC & Friends (AKA the DoC) announced they’re moving June’s policy meeting to a virtual-only affair, which the market is taking as a signal of the status quo being held on output cuts.

Chicago being Chicago: Tuesday’s 60-cent basis spike was officially wiped out by Thursday afternoon, suggesting the short-lived rally was just short covering in an illiquid market rather than a meaningful supply disruption.

RIN values continued their rally this week, touching a 4-month high at 59 cents/RIN for both D4 and D6 values Thursday. If you believe in technical analysis on something like RINs, you can see a “W” pattern formed on the charts, suggesting a run to the 80-cent range is coming if prices can get above 60. If you are more of a fundamentalist, then you’ll probably think this rally is probably more short-term short-covering by producers of RD who have changed their schedule buying back their RIN hedges for volume they’re no longer planning to produce.

NOAA issued its most aggressive Hurricane forecast ever Thursday, joining numerous other groups that think a La Nina pattern and record warm waters will create more and bigger storms this year. With the activity level seeming to be a foregone conclusion at this point, now it’s all about where those storms hit to know if this busy season will be a huge factor in energy supplies like we saw in 2005, 2008, 2012 and 2017. With the Houston area already being bombarded by floods and deadly wind this year, the refinery row across the U.S. Gulf Coast seems even more vulnerable than normal to the effects of a storm.

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