May 20, 2019 | By Denton Cinquegrana

 

A solid if not wild week for price movements has Brent crude oil well above the $70/bbl mark, and WTI is well on its way back toward $64/bbl.

Meanwhile, RBOB does not appear ready to call the rally done for the spring.

While prices are still about a dime below the spring highs, some of the more-significant support levels are far away.

Sabotage on Saudi tankers and then a drone attack on a pipeline highlighted some early-week bullishness, and a recently completed meeting of the OPEC Joint Ministerial Monitoring Committee (JMMC) and saber rattling between the U.S. and Iran is likely to keep the market on edge.

The JMMC essentially punted on a production decision or recommendation until the group meets in Vienna next month. OPEC officials said that the goal remains a balanced market, and Saudi Arabia Energy Minister Khalid al-Falih said that he did not necessarily see an oil shortage, citing inventory growth in the United States.

With production well below its quota, Saudi Arabia has some wiggle room to increase output for domestic consumption during hot summer weather, but to also supply others that are no longer importing Iranian barrels.

Meanwhile, a rocket attack near the U.S. Embassy in Iraq over the weekend was said to not have any impact on oil production but is just another event that could spook the market this week. Issues in Libya continue to loom in the background, but as production and exports have seen no impact, there is quite a bit at risk there.

Arguably, the most significant geopolitical factor is the saber rattling between the U.S. and Iran. While neither side has said it is in favor of a war, the heat on the "war of words" was turned up Sunday afternoon when President Trump took to Twitter threatening to end Iran if it wants a fight with the U.S.

During the week, Brent picked up about $1.60, while WTI gains were at a $1.10.

Brent peaked at $73.36/bbl last week, the highest price since late April. The highs last week for WTI, $63.64/bbl, do not quite stretch back to April, but do go back a few weeks to the first couple of days of May.

On the opposite side of the spectrum, perhaps limiting the gains in the futures market, are ongoing concerns about demand growth with the International Energy Agency pulling in its demand growth forecast for this year.

The ongoing trade war between the U.S. and China has also increased concerns for the global economy and the ripple effects a trade war could possibly have.

A bit of an uncoupling between the equities and oil markets started to take shape this week, and traders will more than likely be keeping an eye on any developments there as well.

Volumes are likely to thin out over the course of the week for a couple of reasons. On Tuesday, June WTI futures expire and volumes are shifting to the July contract. Additionally, the Memorial Day holiday weekend in the U.S. may have some traders starting the holiday weekend near the end of this week. The Memorial Day holiday weekend also means the start of the summer driving season in the U.S. AAA is once again predicting record amounts of drivers during the three-day weekend and that should bode well for gasoline demand that pulled back significantly from the previous week, according to the EIA data. During the week ending May 10, EIA gasoline demand was down by more than 7%; however, the previous week's reading of 9.871 million b/d was met with skepticism and an average between the two most recent weeks is believed to be a bit closer to reality.

The strong gasoline and diesel markets should continue to motivate refiners to return units to service. Last week saw gross runs at U.S. refineries jump to 16.978 million b/d, leaving a 17-million-b/d-plus figure in this week's data very likely.

Falling gasoline supplies are a concern considering last week's total figures were a more-than six-month low. The West Coast supply situation remains tenuous at best and a look at East Coast RBOB supplies, key for NYMEX delivery, are running some 3 million-5 million bbl below where they have been at this time of year in each of the pasts two years.

Tightening gasoline supplies helped the front-month RBOB contract pick up about 5.75cts over the course of the week, and the $2.0854/gal high from Friday was the highest RBOB tick since the end of April. While the RBOB market remains backwardated, the spreads between June and July have not been as volatile as the past few months.

ULSD futures also had a solid week picking up about 4.5cts, and the Thursday settlement of $2.1232/gal was the strongest settle for a front-month contract since Nov. 12. That may cause some fear of heights among longs, especially if fears of an economic slowdown start to ramp up.

With ULSD futures at some of the highest levels in several months, refiners are likely to focus on the middle of the barrel. Total distillate output has topped 5 million b/d in each of the past four weeks, and the most recent reading of 5.264 million b/d represents a four-month high.

Other elements to watch:

--Although gasoline markets are tight, L.A. and Chicago gasoline have seen their premiums pull back significantly. L.A. CARBOB for May has seen its premium whittled down to less than 20cts/gal. Meanwhile, in Chicago a premium that was recently in the neighborhood of 40cts/gal has also dropped to less than 20cts.

--While futures upside was somewhat limited last week, cash sweet crude differentials were flexing some muscle. Light Louisiana Sweet late last week was trading at premiums of $8.75/bbl, while WTI at the Magellan East Houston terminal was collecting premiums in the $8.25/bbl area. Meanwhile, WTI at the source in Midland Texas was selling at a discount of around $3/bbl leaving a potential bonanza for those committed shippers with line space.

--The EPA last week said that one of the small refinery exemptions for 2018 has been either withdrawn or declared ineligible, OPIS reported last week. There is still a pending SRE for 2017. The change in SRE status did not do much to current year RIN values.

--CFTC data from late Friday showed a continued pullback in WTI futures and options managed-money length. However, the data only runs through May 14 and does not capture the late-week rally. Additionally, total WTI open interest through Thursday (Friday's data will be available later this morning) was at the highest levels since mid-October.

--Retail gasoline prices appear to be plateauing. To start the week, prices are around $2.85/gal, according to AAA, about a penny lower than the week prior and only about a penny higher than a month ago. Compared to a year ago, prices are some 7cts cheaper currently. California is inching back toward $4/gal with an average of $4.044/gal off some 3cts from a week ago.


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