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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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
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