Trade Fears Trump Output Cuts
Trade fears are trumping output cuts to start the week, as oil prices retreat following a strong Friday rally. Customs data showing Chinese exports declined for a 4th straight month is getting credit for the early sell-off, erasing much of the post-OPEC gains that pushed prices near 2 month highs.
After OPEC uncertainty had oil prices selling off to start Friday’s session, a much more precise proclamation on output cuts in the official press release spurred on a buying spree mid-morning. By noting that the Saudi’s would continue their own voluntary output reductions, in addition to the group’s agreed-upon output cuts, should mean that around ½ million barrels/day (roughly ½ of 1% of total global supply) will be taken offline to start 2020. One thing the official announcement did not mention was if condensate would get different treatment than traditional crude grades, which could potentially leave a loop hole for Russia to export more barrels.
It’s a big week for markets globally as both the FOMC and ECB will hold their last meetings of the year, and another tariff deadline with China comes on Sunday. After Friday’s strong jobs report helped propel US stocks back near all-time highs, equities seem to be taking a wait-and-see approach to start this week with these major issues looming.
The CME’s Fedwatch tool shows a 99% probability of no interest rate action by the FED at this meeting and low odds of any action in the front half of 2020.
5 more oil rigs were taken off-line last week, according to Baker Hughes’ latest report. That’s the 7th consecutive weekly decline, and marks a 25% reduction in the total US count so far in 2019.
Money managers do not appear to have enjoyed the Black Friday selloff in energy contracts, and reduced their net-long holdings (bets on higher prices) across the board last week. Since that report’s data is compiled as of Tuesday, those that bailed out look like they missed the recovery rally in the back half of the week. RBOB contracts saw the largest reductions, perhaps an acknowledgement of the upcoming winter doldrums for gasoline demand.
From the OPEC Press Release Friday:
“The 7th OPEC and non-OPEC Ministerial Meeting, hereby decided for an additional adjustment of 500 tb/d to the adjustment levels as agreed at the 175th Meeting of the OPEC Conference and 5th OPEC and non-OPEC Ministerial Meeting. These would lead to total adjustments of 1.7 mb/d. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 mb. This additional adjustment would be effective as of 1 January 2020 and is subject to full conformity by every country participating in the DoC.”
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The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.