Energy Market Updates
Coming off the Monday Holiday, prices surged higher Tuesday as OPEC+ heavyweights Russia and Saudi Arabia confirmed they would extend voluntary production cuts through the end of the year. Fueling the rise from the Cpt. Obvious department, big banks publish reports to expect $107 Crude if cuts maintain. Buy the rumor, sell the fact. Diesel had a nice sell off going, but remember, one day doesn’t reverse the trend. Wednesdays intraday action erased almost all of the gains only to settle down slightly. While we still sit almost $1 higher in pricing than the beginning of the Summer, you would have to think better days are to come. Current JUNE 24 Diesel future pricing is $.45 less than front month October 23.
For the here and now, we all know $1 a gallon increase cuts into your bottom line significantly, many large airlines have started to float it out there not to expect good earnings due to higher fuel costs. We can assist you in leveling out those spikes based on your specific needs. Inventory numbers due out later today, delayed from the holiday, should give short term direction of pricing. Even if modest drops are reported, I would expect to see the downward trend continue for diesel. Gasoline is still disjointed from Diesel as it is starting to go into it’s seasonal specification switch which tends to push pricing down. Timing is important in the fuel world, having an open line of communication with your supplier is vital. If you want to schedule a meeting to discuss your specific needs or questions, you can do so here: Schedule a Meeting
Starting off this week it appeared that we may have seen the top of the recent rally in the Commodity sector. That changed Tuesday morning as the EIA released a guidance report that they expect US crude production to increase an additional 200,000 barrels per day based on….. yep, higher prices. This fueled the indexes in a self-fulling prophecy sort of way and turned around what was a $.05 down day to a $.07 up day. The buying carried over to Wednesday as the inventory report showed a solid increase in crude stocks with the products showing losses. Key note on the crude gains is that it looks to be largely due to slashing exports. Something we have been saying might be a prudent step for a while now. Distillates are now $.80 higher than July 1st, erasing the steady 8 month decline that we have enjoyed. Sentiment is fixated on Saudi led OPEC cuts and appears to shrug off any fundamental data. It’s almost like mob mentality really. Crude builds, soft demand, economic uncertainty, should all push prices lower.
As someone once told me “high prices are the cure for high prices” and it is hard to see this rally continue. Backwardation remains with both gas and diesel, you could see end of month outages. A supplier dedicated to the Commercial End User is definitely someone to have in your foxhole during these times. Again, I always enjoy speaking specifically about your needs, please do not hesitate to schedule a quick talk below.
Oil was down today as the market weighed out OPEC speculation on one hand, and a drop in US Crude inventories on the other.
OPEC concerns seem to have won the day, given the drop in the face of an EIA report indicating a 3.4mmb drop (projections were 2.3mmb drop), some of which is presumably attributable to the Keystone pipeline leak & subsequent supply diversions.
Refined products showed builds of 2.7mmb on distillates, 3.6 mmb on gas. (projections were 230K and 1.3mmb, respectively).
OPEC is set to meet tommorow (Thursday) in Vienna to discuss extending production cuts through the end of 2018.
The current deal keeps 1.8mmb/day off the global markets via production cuts, and is set to expire in March but a new agreement would extend it through December. The running assumption was that it would be a no brainer to extend, but surprise, surprise, a few days out from the meeting and Russia had not yet agreed on anything. Thoughts are they may argue for a shorter agreement or push for renegotiation closer to the March expiration.
What does this all mean?
The assumption in the market currently has been that the OPEC deal extension is essentially "priced in" already. What that means is that failing a 9 month extension, we could see the recent gains evaporate rather quickly and see crude prices dip, with WTI falling back at or below the $50 benchmark, or even lower than that if there is no deal at all.
From OPEC/Russia's side of the aisle, an agreement on production cut extension to bolster pricing may be met with continued increase in US domestic production, which could both offset gains and damage their market share in the long view. That position is somewhat supported by rebounding US production levels & refinery utilization rates.
Last week we saw WTI close out at a high of $58.02, but it has receeded over the past few sessions, closing today out at $57.30. ULSD & RBOB tumbled today as well, with ULSD dropping .0286 to 1.9221 and RBOB dropping .0411 to 1.7309.
Today, the NYMEX continued it's winning streak - At the end of the day, we settled up across the board yet again, with Crude settling out at $48.75/bbl (+1.7%), ULSD climbed +.0268 to $1.5953 and RBOB edged up +.02111 to $1.6173.
Yesterday we talked about the OPEC production & export factors affecting the market, as well as projected slow downs in domestic oil & gas exploration. (For a refresher, you can peruse yesterdays article here: 2017s Largest One Day Rally Hits on OPEC & US Production Projections )
Today, while API projections called for a 10.23mmb draw in Crude, the EIA Inventory Report showed an actual draw of 7.2mmb. Current Crude levels are now around 483.4 mmb, or the upper end of average for this time of year. For finished products, distillates drew down 1.9mmb but are still on the upper end of what we normally see for average levels, while on gasoline, projections were calling for a build of 1.9mmb but actuals showed a draw of 1mmb.
In broader news that can potentially have huge ("YUGE!") market impacts, the Trump administration has floated the possibility of a ban on Venezuelan Crude as a U.S. response to Venezuelan President Nicolas Maduro, should he choose to go forward with rewriting the country's constitution, in what the United States sees as a move to clamp down on opposition. The vote on rewriting the country's constitution is expected Sunday, and Platts is reporting that the U.S. Treasury department is crafting sanctions currently.
At the same time however, even as the Treasury works out the details, it appears the Administration has already backed off of the idea after looking at its potential impacts. They are now hinting at more targeted sanctions than an overall ban, but that would still likely create some serious aftershocks in the market.
Venezuela is the third largest supplier of imported Crude oil to the United States (after Canada and Saudi Arabia), and supplies a huge percentage of the Crude refined in the Gulf Coast.
A ban could be devastating for US refiners and importers, and even simply not taking the option off the table could impact the markets in a drastic way over the next few days, particularly if the option remains even theoretically possible on Monday after the vote takes place (its expected to be a "show vote" with Maduro's desired outcome essentially 100% certain).
Definitely something to keep an eye on that could drastically change the supply and pricing picture as we know it.
Today saw oil prices have the biggest one day rally of 2017 thus far, with WTI Crude surging up 3.3% ($1.55) to settle out at $47.89/bbl. Likewise, refined products surged, with ULSD jumping over 5 cents (+.0516) to 1.5685, and gasoline jumped +.0394 to settle at 1.5962.
So whats going on?
On the global news front, at an OPEC gathering in Russia on Monday, Saudi Arabia pledged to cut Crude exports beginning in August, and Nigeria stated it will cap its production at 1.8 million barrels per day. (WTI closed out up 1.3% at $46.34 on the day Monday immediately following the news. ULSD settled up as well but by a mere 17 points to $1.5169, while gasoline dropped 65 points to close out at $1.5568.)
An important note pointed out by Market Watch regarding the OPEC news, however - its not unusual for the Saudis to drop exports this time of year, and the "cuts" promised by Nigeria are actually at levels higher than they are producing at the moment (they will cap at 1.8mmb and they are currently producing 1.6mmb) so its likely that this news was another somewhat nothing-to-it story out of OPEC that caused a (presumably temporary) jump on the NYMEX, as most OPEC meetings seem to do.
Today was likely impacted more from domestic news and forecasts than the OPEC news of yesterday. Cuts are looming in the Oil & Gas sector in the U.S., which signals an oncoming slow down in domestic output. Anadarko, one the nations leading oil & gas exploration companies cut investment guidance by $300 million for 2017 after posting losses for the second quarter of over $415 million, or roughly twice estimates. Add this to Halliburton's forecasts for flat to declining rig counts, and projected crude draws on this weeks EIA reporting and you had the perfect storm in place for todays rally.
Crude jumped on today’s inventory report after jumping up on the overnights last night as well. Post close yesterday, the API numbers were indicating significant draws and the EIA release backed that projection up.
The EIA report this morning indicated that Crude inventories dropped by 14.5 million barrels for last week, which is the biggest drop we’ve seen this millennium (since 1999).
Analysts are partly blaming the effects of Hermine on the Gulf Coast delaying production and explaining the draw down in stocks.
Gasoline stocks also dropped, by 4.5 million barrels, and also unexpectedly.
Today closed out up across the board, with diesel up .0557 to $1.4822, Gas up .0701 to $1.4165 and Crude closing out at $47.62. (significantly up from yesterday’s Crude settle of $45.50)
An interesting aside on gasoline’s jump today was that the lowest Labor Day retail gasoline prices in 12 years were seen this past weekend, and if you jump online there are literally dozens of articles projecting that the post summer driving season price levels for gasoline will drop below $2 per gallon. It’s more likely than not that these articles are correct versus today’s inventory and price rebound. Nothing has changed fundamentally with either Crude or gasoline in terms of long term supply and demand outlooks (despite some new rumblings about Russia and Saudi Arabia, as usual).
Yesterday traders across the globe were all but certain that Britain would never vote to leave the EU. As a result we saw confidence in the markets, including oil.
100% of those traders were apparently incorrect.
Today we saw Japan shut down trading, the pound lose over 15%, oil markets tumble and Wall Street get hammered. The Dow closed down 600 points today, the worst day since 2011 - all of this in the wake of Britain indeed voting to leave the European Union.
On the commodities side, while gold and the dollar went up, WTI slipped 4.9% (over $2/bbl) to close out at $47.64. Gasoline tumbled $.0785 to $1.5250, and ULSD dropped $.0653 to $1.4553.
So what now?
Many analysts think that oil prices will rebalance and stabilize given the UK is essentially irrelevant to global oil demand, and therefore pricing.
Others caution however that this move by Britain may signal rough waters ahead for the European Union and its economic growth - and therefore oil demand, which could increase supply versus demand.
With the British pound's slip comes a necessarily strengthening dollar, which would argue aginst a precipitous slide in oil prices, given the backdrop that production and demand issues aren't, at least in the near term, greatly impacted by the Brexit vote. (Backdrop being U.S. Rig counts are still by and large declining with the exception of a few pop ups, the new Saudi Oil minister is still seen by many as a step forward in market stability, etc etc...). However, its also likely the dollar is extra overpriced today simply because of its strength relative to the pound, which ought to also rebalance - at least in theory.
After one hell of a suprise Friday - Next week should be an interesting one on the markets, to say the least.
Enjoy the weekend, everyone. If you need us, give us a shout.
Crude closed out at $51.23 this afternoon, the highest it’s been since July 2015, up from yesterday and holding firm over the $50 benchmark.
Today’s climb can be pinned on the EIA’s inventory report, which again showed draws in Crude but also on supply disruptions from ongoing rebellion in Nigeria.
In Nigeria, the Delta Avenger group has continued militant action by not simply rejecting proposed settlement talks with the Nigerian government, but blowing up a refinery. The group has brought Nigeria’s oil production and export to 20 year lows according to CNBC – something the struggling and vastly oil-export-dependent country can ill afford, especially given the global price slide of the past two years.
Interestingly, despite the stockpile draws in today’s EIA report, it appears that US domestic Crude production actually edged up by 10,000bpd – this contrasts rather sharply with the beginning of the month where we saw US production languishing at its lowest levels since 2014.
Distillates and gasoline both built this past week, despite projected draws. They closed up alongside Crude – both edging over 2 cents – gas at .0327 and diesel up .0290. Gasoline’s build was a shocker considering “driving season” is officially in gear, but none the less today’s market moves did not reflect the builds… yet.
Last week, the May jobs report roiled markets temporarily after it came in abysmally low – the lowest since 2010. However, things settled out relatively quickly since the report all but guaranteed a rate hike would not be pushed through by the Fed yet, which was good news for Wall Street and also resulted in the 5 year low on the dollar we saw, as built in anticipation of a hike was shed.
The fact is with range bound jumps on inventory, economic data, world events, we may be seeing evidence that the market is hitting a point of stability. How long that lasts is anyone’s guess however. As they say “the trend is your friend” and we’ve been trending upward – but it’s important to remember the big picture and outstanding potential factors. For example, last month’s OPEC meeting in Vienna did literally ZERO in terms of addressing the supply glut. We also still have an Iran hell bent on juicing exports to the max. However, we also have a Venezuela on the verge of collapse, refinery sabotage in Nigeria, and a Chinese economy that may be covertly cooling down a lot quicker than they’ll admit.
Before todays across the board tumble, the markets had been rather stable this week, comparatively speaking, even in the wake of several major relevant news events and economic reports. Let's start it from the top:
Initially helping the markets, especially Wall Street - Fed Chair Janet Yellen's comments this Wednesday stated that the Fed would be cautious moving forward, particularly on the subject of inflation, as it keeps an eye on possible foreign market pressures and the extremely mixed-signals economic data that has come out over the past few months. Historically, March jobless numbers come in 40-50K below projections oftentimes, so her comments earlier this week were also seen as a possible hedge against concerns about Wall Street's reaction to Fed policy in the event of a less than stellar jobs report (which did not come to fruition - more on that later).
The Fed comments didn't help the Dollar on the day, however, which helped keep commodities flat after builds, albeit smaller than expected builds, in U.S. stockpiles.
Regarding those builds - Wednesday's weekly EIA Inventory report showed Crude built less than analysts had projected (2.3 mmb versus 3.3mmb projected). Initially Crude was up 2.5% on the reporting, with WTI hitting $39.30 and Brent cracking $40 at $40.17 shortly after.
However, at the close, WTI settled within a penny of the prior day's close at $38.32. ULSD and Gas also showed draws, 2.5mmb on gasoline (which was close to projections), and ULSD drew down 1.1mmb versus a projected 29K build. Both ended the day relatively flat alongside Crude, with ULSD closing at April $1.1597/May $1.1721, and gasoline April $1.4364/May $1.4661.
The major news is the continuing speculation over the OPEC/Non-OPEC meeting (supposedly) coming in April that could result in an agreement on a production freeze in order to stabilize global oil prices.
However, the lingering question has been whether or not Iran would agree to freezing production after the sanctions against the country have just been lifted. It appears more certain by the day that the answer to that question is "NO". The Saudi Oil Minister Thursday night stated that if Iran will not agree to the freeze, basically there will not be one. This of course came on the heels of Iran insisting earlier in the week that it can, and will, consider going back to pre-sanction production levels.
Personal opinion - there will most likely not be a freeze. In my humble opinion the markets got far too excited and bought too deeply into what, at least to this point, has essentially been rumor and wishful thinking. The ramp up in pricing we've seen over the past few weeks, with WTI breaking $40/bbl (very briefly) is largely a response to the hopes pinned on the OPEC meeting and a belief they will freeze production -a belief that is most likely not founded in reality, but time will tell. If nothing else, the rumors have temporarily "stemmed the bleeding" for major producers, not a terrible end in and of itself from their perspective.
Thursday was uneventful, with WTI settling 2 cents over prior at $38.34. It was the expiration of April trading, obviously, and May ULSD and Gasoline closed out at $1.1855 and $1.4467, respectively.
This morning we saw that the Friday Jobs report pessimism/conspiracy theorism discussed earlier turned out to be for naught. Analysts had projected gains of 205K jobs for March and the government data came out with a gain of 215K, leaving the unemployment rate at 4.9%.
The good news is, that's a great jobs number. The bad news for commodities is that number serves to further prop the dollar up, as it maintains the highest level its held versus the Euro in a little over 6 months. (This despite the dollar's slip on Wednesday).
Both the dollar and stock markets were up today on the strong Jobs report as well as encouraging data from the Manufacturing sector, indicating continuing economic strengthening in the U.S.
Oil however, took a 4% tumble on both a stronger dollar, and (as previously mentioned) increasing skepticism on the OPEC deal. Skepticism on the deal grew exponentially today, after the Saudi Crown Prince today echoed his Oil Minister's earlier sentiments about a needed consensus including Iran in order for a production freeze to become material.
Baker Hughes rig count today indicated Crude rigs dropped 10, and overall rig count dropped by 14 to a new record low of 450, but oil continued to trend downward.
At the Close, Crude settled out at $36.79 (-$1.55), ULSD tumbled .0538 to $1.1317 and gas fell .0451 to $1.4016