Tough Start To August Trading Turned Ugly
A tough start to August trading turned downright ugly for energy markets Thursday, with refined products wiping out two weeks of gains in what was the biggest day of selling in more than a year. The big news of the day was when President trump announced a new round of tariffs on Chinese goods, that moved the trade war from the back burner to the front as China has already warned of retaliatory moves.
Before the tweet stock markets had been rallying, taking back most of the post-FOMC losses, but quickly joined energy prices in a heavy wave of selling, highlighted by a 600 point intraday drop in the DJIA. In other words, equity and energy traders seem to have voted quite strongly that the only thing Trump’s trade twitter tirades are good for is alliteration.
The good news for those wanting higher energy prices is that a recovery bounce is underway, taking back about 1/3 of Thursday’s losses. There’s an interesting pivot point on the chart right around current levels that acted as resistance during June’s rally, and as support during July’s early selloff, and seems like a natural landing spot for prices to consolidate while they wait for the next shots to be fired in the trade or tanker wars.
The longer term charts meanwhile are showing triangle formations in most of the petroleum futures contracts that suggest there’s going to be a much larger price move coming this fall once one of those converging trend lines breaks, although which direction that breakout will take is unclear although product charts seem to be giving slight favor to lower prices, while crude charts are mixed.
The July non-farm payroll report showed 164,000 jobs added during July, with the official unemployment rate holding steady at 3.7 percent, while the unofficial “U-6” rate dropped to 7%. This report was about average for 2019, and the market reaction has been muted so far. Equities dipped briefly after the report which pulled energy prices back from their highs of the day, but both asset classes have since stabilized.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.