TAC Market Talk – TAC Energy

Just as last week’s large build in crude inventories was driven by a surge in oil imports, this week’s inventory draw is owing to 10 million less barrels of imports, which offset a drop in exports which reached their lowest level since the first week of the year. US Crude production made it back to the 11 million barrel/day mark last week, tying the record it set earlier this year.

Refinery runs pulled back from last week’s record high, with the rumored issues at the Bayway NJ refinery manifesting as a 48mb/day drop in PADD 1 rates. The uncertainty surrounding that refinery – which happens to be the closest plant to the NY Harbor hub – has kept basis values and time spreads for RBOB strong as we approach the fall RVP transition.

Did they or didn’t they?


There are conflicting reports over whether or not Saudi Arabia has scrapped plans for an IPO for shares in its Aramco oil company. There are also conflicting theories as to why this might happen, some see it as a sign that healthy prices eliminate the need for the Kingdom to raise funds, while others see it as a sign of unrest in the monarchy.

Petroleum futures are on the move for a 5 th straight day, finding strength from a weaker dollar, and a large decline in US oil inventories. The early rally in crude has already made up most of the gap left behind by the expiring September WTI contract, giving the contract some breathing room after bouncing off of the 200 day moving average last week.

The US dollar is falling for a 6 th straight day – its longest losing streak of the year – amidst Presidential criticism and hints from the Dallas Fed President that interest rate hikes may end earlier in 2019 than previously thought. After taking a break from each other for most of the year, energy prices have been reacting to moves in the dollar on an hour by hour basis the past few weeks, so we can go back to becoming amateur currency traders as we did for much of the early part of this decade.

The S&P 500 reached an intraday record high Tuesday before pulling back modestly, and also set the record for the longest bull market in history. Similar to the currency/commodity hiatus, energy and equity markets have been moving independently of each-other most of the year, after being attached at the hip for the back half of 2017, so the move in stocks may not be driving the rally, but it certainly doesn’t seem to hurt.

A pullback in the greenback from 1 year highs over the past few days has tied out almost by the hour with the bounce in energy futures off of key technical support layers. The president’s criticism of the FED’s policies is getting credit for the currency move today, but it’s also worth mentioning the numerous stories lately of how the combination of a stronger dollar and stronger energy prices is squeezing emerging economies around the world.

Speaking of which, Venezuela is undergoing one of the largest currency devaluations in history as the battle for the country’s assets – and really its entire society – rages on. PDVSA has reportedly worked out payment plans with 3 energy companies for billions owed, which should allow for some exports to start flowing again, as long as the check really is in the mail. Meanwhile, Citgo is attempting to delay an auction that would sell off its assets to pay off more of the country’s creditors.

The September WTI contract expires today, which explains why it’s up $1/barrel already, while forward months and Brent contracts are up less than half that amount. There is also about a $1.60/barrel worth of backwardation between September & October WTI, so once the new contract takes the prompt position tomorrow, the distance to those technical support levels will be much smaller than it is today.

Energy futures are bouncing to start Friday’s trade, but WTI is still on pace for a 6 th consecutive weekly loss, something we haven’t seen since August 2015. Despite the steady selling, so far the complex has played a pretty good game of bend, don’t break, managing to find buyers whenever long-term support is tested. This sets up a pivotal test to end August that very well might set the stage for the rest of the year.

Oil bulls may be breathing a sigh of relief that China removed crude oil from its tariff list (for now anyway) but natural gas producers are not so lucky, as a 25% tax on LNG from the US is still on the table. Unfortunately for US producers, the oil & natural gas growth stories are not mutually exclusive, so the impacts of the trade war could still threaten the latest boom cycle.

Today marks the end of the open comment period for the 2019 Renewable Fuel Standard target levels, and both sides of the debate wasted no breath in making their points known to the new EPA administrator. Both the Big Oil and Big Ag lobbies seem to think the program is broken, but of course, they don’t see eye to eye on how. RIN values have moved off of their lows for the year set earlier in the month, but are still a long way from the lofty levels we were used to before the small refiner exemptions started becoming mainstream.

The gasoline demand estimate failed to make much of a recovery after last week’s plunge lower, and is currently hovering around the 5 year average level, well below the past couple of years. With “Back to school” upon us, there are only a couple of weeks left of the driving season, and then demand figures should begin their seasonal trend lower. That reality seems to be sinking in as gasoline prices hit a new summer low overnight.

Soft demand is bad news for US Refiners that set a new all-time high for run rates last week just shy of 18 million barrels/day. To put that feat into perspective, total refining capacity in the US just 5 years ago was below where plants are actually running today. PADD 3 (Gulf Coast) refinery runs accounted for the surge in run rates, topping 9.6 million barrels/day for the first time ever. The seasonal charts offer a cautionary tale however as last year we saw refinery runs hit a new record high in August, just before Hurricane Harvey hit.

Right on cue, a new tropical disturbance is making its way towards the Caribbean, as Tropical Storm Ernesto churns through the north Atlantic on a path towards Ireland. While odds are low that this latest wave will develop into a storm, it’s a reminder that we’re still a month away from the peak of the season, and despite the lower-than-average forecasts, all it takes is 1 storm to wreak havoc on energy supplies.

A rapid rise in the US dollar took blame for some of the heavy selling to start the week, as Turkey was added to the growing list of geopolitical uncertainty when its currency hit a record low. While a stronger dollar has often meant weaker energy prices (which are largely priced in dollars) in years past, the correlation between the asset classes has been relatively weak this year, and since most of the dollar’s big move happened Friday, the timing doesn’t quite match up with the swings in petroleum futures.

RBOB gasoline futures reached their lowest level since early April during Monday’s early selloff, trading down nearly 6 cents on the day to a low of $1.9800 before rallying sharply to finish the day. With the overnight strength RBOB is actually up for the week, and has survived a 3 rd trip below $2 in as many months. The unknown status of the P66 refinery in NJ – which was rumored to have operational problems last week – is a lingering issue that may be keeping the sellers at bay, although basis values continue to decline, suggesting the physical players aren’t betting on a shortage.

The EIA confirmed that US refiners are running at record rates in 2018, and predicted that trend would continue with new records set in 2019. 2020 looks to be a wildcard with the pending IMO diesel specs causing many to bet that some less-complex refiners will be forced to cut rates since they won’t have a home for their higher sulfur diesel products.