Wild Week Comes To A Close
It’s a mixed bag to start for energy futures as a wild week comes to a close. At this point, it looks like this may be looked back on as a pivotal week of trading as the bulls managed to find a floor and hold onto the longer-term bullish trend lines that looked to be broken just a few days ago. Then again, the day is just starting.
So far there’s no new news of attacks or sabotage in the Middle East today, a welcome reprieve after a flurry of action earlier in the week. Some reports suggest that the potential for a war with Iran (or it’s proxies) is still looming large, while the WSJ is reporting that perhaps the whole thing is just a big misunderstanding.
Unfortunately for stock holders, the calm seems to have ended as futures point to another heavy sell-off at the open, which seems to have sapped some of the upward momentum in energy prices as well. It’s worth noting that the correlation between energy and equity futures has turned negative this week, as oil rallies while stocks are dropping. We saw a similar decline last May, and the correlations stayed weak all summer, before the two linked back up in the fall. With trade-war and demand concerns driving stocks, while Middle East war and supply concerns appear to be driving energy, a similar pattern looks possible this year.
Diesel prices reached a new 6 month high in Thursday’s session, and were moving higher again overnight but have since pulled back and are trading slightly down on the day. From a technical perspective, if ULSD futures can break and hold above $2.13, there’s an argument that they can make a run towards last fall’s highs in the $2.30 range. Fundamentally that type of a move is harder to see near term as lackluster demand and increasing refinery diesel production both appear to be headwinds, but the closer we get to year end, the more likely it seems we’ll see a rally when the IMO 2020 diesel scramble begins.
The forward curve charts below seem to reflect a market that’s nervous short term about supply, and longer term about demand, as the recent price increases are all stacked up in the front month contracts, while further forward values stagnate.
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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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