Trade Teeter Totter Continues To Dominate
The trade teeter totter continues to dominate the action in futures markets this week as US/China negotiations are set to begin again today.
After an early round of selling, both energy and US stock prices seemed to find a floor Thursday following reports of a letter and potential phone conversation between the US and Chinese presidents, providing optimism that a deal to avoid another round of retaliatory tariffs could be struck. So far this morning equity markets are less enthused about those prospects with futures pointing to losses of a little less than 1% when trading begins, while energy futures are clinging to modest gains.
After being the weakest link in the Energy chain during the heavy selling early in the week, RBOB gasoline futures have been leading the increases since the DOE report Wednesday, apparently reacting to strong domestic demand estimates, a large decline in East Coast refinery runs, and tighter than normal total inventories. While the recent strength for gasoline is welcome news for refiners, markets on the other side of the world are flashing warning signs that the good times for gasoline margins may soon come to an end.
Late this afternoon we’ll get to see how money managers are reacting to the rollercoaster ride when the COT report is released. So far the resilience of money managers betting on higher prices has been enough to stave off a technical breakdown, but when they decide to head for the exits, all bets (in some cases literally) are off.
Winners and losers: The EIA published a note this morning estimating that 2018 was the most profitable year for oil producers since 2013, and yet this week we’ve already seen one producer file for bankruptcy and another lay the groundwork to do the same. With the world’s largest oil companies all pledging dramatic increases to their operations in US shale plays, it seems there could be more small producers who get squeezed out of business even with prices holding at profitable levels.
Good luck with that: Mexico’s president was not satisfied with bids to build a new refinery, so announced that the government would partner with Pemex on the $8 billion project. Considering Mexico’s current refineries are operating at less than half of their capacity due to issue with Pemex and the government, that project now looks like a long shot at best.
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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.
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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.