August 13, 2018 | By Denton Cinquegrana
Futures markets finished the week lower, but a rally on Friday helped keep weekly losses to a minimum.
WTI has dropped in each of the past six weeks, and during that time prices have dropped by $6.52. Brent and RBOB were also down last week and have fallen now in consecutive weeks. The ULSD contract was the only one to post a week-to-week gain.
During the most recent week, September WTI futures were off by 86cts. Prices dropped to a roughly seven-week low last week, bottoming at $66.14/bbl before bouncing back to end the week at $67.63/bbl. It is hard, however, to tell if the WTI contract is truly the weakest segment of the complex after falling in each of the past six weeks or if it is a function of just low summer volume and general lack of interest. According to CME data, 14 of the past 15 sessions have seen total WTI volume of less than 1 million contracts. It is likely to become 15 of 16 sessions when CME data is released later today.
An argument can probably be made that WTI should actually be stronger and may be where some of the disconnects start to emerge. In fact, oil inventories are moving higher in just about every place except the Cushing storage hub, and storage levels should once again be watched very closely. Inventories have dropped sharply there over the past 12 weeks, and the most recent draw has storage levels falling toward the lowest levels possible to continue operations.
The most recent draw at Cushing was the smallest of all the previous draws and may be part of the bottoming process. While draws at Cushing may continue, the dynamics should start to change sometime in the next 30 or so days as September contracts expire and the turnaround season gets underway. Between mid-September and November, builds at Cushing should become more common.
There is one segment that could get influenced by recent price moves. The WTI-Brent spread for the past couple of weeks has nestled into a $5.50-6.00/bbl range for the October contract and a continuation of the Cushing draws as inventories elsewhere grow leaves the spread susceptible to narrowing.
Trade war concerns eased a bit in the latter part of the week as China decided not to put sanctions on U.S. oil. This could, however, hang over the market until the situation is resolved and few analysts believe a resolution is close.
Over the course of the past week, Brent futures fell by just 40cts. The contract is struggling to get to and maintain any momentum near the $75/bbl level with sellers emerging when prices close in on those levels. At the same time, the contract has threatened to slip below the $71/bbl level a couple of times over the past three and a half weeks, but when approaching $71 buying support tends to boost Brent back up.
Two days of losses that topped 10cts/gal was too much for RBOB futures to overcome as the market took back a chunk of the losses on Friday. September RBOB futures settled below the $2/gal level last week for the first time since early April and bottomed at $1.9934/gal on Friday before rallying to close the week at $2.0392/gal. Overall, front-month RBOB dropped a little more than 2.5cts week on week.
Friday's rally in RBOB was attributed to power problems at the Phillips 66 Bayway refinery in New Jersey. Sources said the issue was in an FCC, but Phillips 66 in a response to OPIS said it does not comment on day-to-day refinery operations, adding that there is no planned maintenance happening at the refinery. Sources added that Phillips 66 did cut off unbranded open rack sales and allocated volumes to 70% of daily supplies to its contracted customers.
Last week's midweek slide for RBOB stemmed from a weak gasoline demand number and growing supplies. The demand figure will be closely watched in this week's data to see if gasoline demand rebounds.
Some strength had emerged recently for RBOB in the physical New York Harbor markets on tightening summer-grade barrels. However, the premium there has narrowed as some of the backwardation in the market has caught up with premiums inside of 6cts late Friday afternoon and late August barrels are just a few pennies over the screen.
The opposite is happening on the West Coast, where L.A. CARBOB went out at a 6.5ct discount versus the futures market with prices in the $1.98/gal area. A flirtation with discounts for L.A. CARBOB happens from time to time in the summer, but the current discounts are at some rare levels. In fact, gasoline markets on the West Coast are so weak, OPIS reported that a cargo of alkylate was diverted to the New York Harbor.
The only futures contract to post a week-on-week gain was the ULSD as the Friday rally helped secure a small gain of about 1.3cts over the course of the week.
Distillate inventories remain tight, but have started to build over the past few weeks. Exports of distillate remain on solid footing, hovering just above the 1.2-million-b/d level over the past couple of weeks. However, exports could see a dent put into them especially if some emerging market currencies take a hit from a strengthening dollar.
Cash ULSD is particularly strong in the Midwest as some planned and unplanned maintenance has boosted the differentials to roughly 3cts in the Group 3 and Chicago markets.
Other elements to watch:
- The midweek plunge in futures and cash gasoline markets alongside very steady retail prices has given jobbers a bit of breathing room as rack-to-retail margins were on the rise last week. Late Friday afternoon showed average rack-to-retail margins near 25cts/gal, according to OPIS data. The rally for margins is not likely to last much longer, though, as retail prices start to react to the market downdrafts.
- WTI discounts in Midland are starting to narrow. Recently discounts were quickly approaching $20/bbl, but by late Friday afternoon were close to dropping inside of $10/bbl. Market sources were not quite sure what was behind the rally in differentials, but traders will be keeping an eye on movements of the WTI-Midland discount.
- The latest CFTC data saw managed money net length narrow in data released late Friday afternoon. But perhaps the more interesting figure was outright short exposure sliding below 4,000 contracts. If RBOB has another rally in it, it does not appear that it will come from money managers covering excessive shorts.
- Currencies should be watched closely this week. The dollar index hit the highest level in some 14 months and the Turkish Lira collapsed. The concern is not only a strong dollar and its impact on oil prices, but also -- should other emerging market currencies get hammered -- what impact it could have on demand.
- RIN values have been steady over the past couple of weeks and toward the end of this week were below 20cts. As a result, year-to-date prices for the compliance instruments are well inside of 25cts.
Copyright, Oil Price Information Service