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. 

Click here to download a PDF of today's TACenergy Market Talk.

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Pivotal Week For Price Action
Market TalkMonday, Dec 5 2022

The Officially Imposed Sanctions Against Russian Oil Exports Are Taking Credit For This Morning’s Gains In Energy Prices

The officially imposed sanctions against Russian oil exports are taking credit for this morning’s gains in energy prices. Brent futures, the benchmark for European crude oil, are leading the pack higher so far today, trading up nearly 3%. West Texas Intermediate futures, along with both American refined product contracts, are tagging along with 1.5-2.5% gains.

OPEC’n’friends decided to stay pat on their Production Reduction™ policy through the end of the year, which aims to remove about 2 million barrels per day from global oil inventories. The relatively muted response in energy futures action suggests the ban on Russian crude and the continued reduction in cartel oil supply were both largely priced in.

It seems we have averted disaster last Friday as Washington passed legislation to prevent rail workers from going on strike. While the vast majority of refined products are transported to market hubs via pipeline, the required ethanol component of retail gasoline is by-and-large supplied via railcars.

Heating Oil futures stand out as the lone contract of the ‘big five’ that saw increased bullish bets from money managers last week, mostly due to the trimming of short positions rather than the addition of long positions. It seems fewer and fewer traders are willing to bet on lower diesel prices heading into the winter, where distillates act as backup supply for heating homes.

Market participants in crude oil futures fell to lows not seen since 2016 last week. It seems the global uncertainty surrounding energy supply and infrastructure has some potential players taking a wait-and-see approach rather than betting on price direction.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkFriday, Dec 2 2022

The Energy Complex Is Trading Mostly Lower So Far This Morning

The energy complex is trading mostly lower so far this morning, with prompt month RBOB futures leading the way. Brent crude oil is struggling to hold on to overnight gains and it is exchanging hands on the green side of even, if only just.

The easing of quarantine protocols in China is taking partial credit for the weekly gain in WTI futures this morning, despite the emergence of reports and images showing provisional camps set up to enforce isolation and curb the latest spread of the pandemic.

The “ban” on Russian crude oil, set to take effect on Monday, has yet to reach final approval in Europe. Poland seems to be one of the last holdouts and has not been shy about wanting the price cap to be as low as possible.

Sunday’s OPEC+ meeting, which will reportedly be held virtually, is also getting some play in the headlines this morning. While some consider the setting of the meeting to telegraph no change in the cartel’s production policy, others posit the group is considering cuts ahead of next week’s oil ban.

The Bureau of Labor Statistics published the November jobs report this morning, an increase in nonfarm payrolls of 263,000 while unemployment rate held pat at 3.7%. The stock market did not like that: S&P 500 futures dropped 1.4% on the news as traders expect higher-than-expected job growth to buttress the Fed’s intent on continuing to raise interest rates.

The EPA published their proposed volume obligations under the Renewable Fuel Standard for the next three years and is now seeking public opinion on their target levels. Their report also estimates that the RIN obligations will reduce US oil imports by ~170,000 barrels per year. Is that a typo? We imported 6 million barrels per day last week, for reference.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.