October 15, 2018 | By Denton Cinquegrana
Whether it was just a bull market correction or a trend change, oil and refined product futures were down significantly last week, reversing what had been an uptrend that had been taking place for several weeks.
A few bearish data points did not help market bulls, but the roots of last week's sell-off appear to stem back to the equities market sell-off. The midweek sell-off was met with a small recovery on Friday in oil and refined products as well as the stock market. Should the downtrend in the equities market resume this week, it may be difficult for oil and refined product futures to gather any kind of upward momentum.
The market realized across-the-board losses and in the case of RBOB, some of the lowest settlements since mid-March. WTI losses came in at $3/bbl week on week, while Brent ended the week down $3.73/bbl.
The market still appears to be concerned about supplies, but the worries of high prices having an impact on demand, particularly in emerging markets, may be starting to outweigh the supply concerns. The International Energy Agency in its most recent report pulled its forecast demand growth for 2018 and 2019 by 110,000 b/d to 1.3 million and 1.4 million b/d, respectively. The IEA said it was narrowing its demand growth due to a weaker economic outlook, trade concerns, higher prices and a revision to Chinese data.
Another factor easing traders' minds last week was another build in U.S. crude inventories where supplies increased by 6 million bbl and over the course of the past two EIA reports crude oil supplies in the U.S. were up by some 14 million bbl. Refinery maintenance was one of the key factors behind the crude oil builds. The IEA also noted swift supply growth recently.
Another function of refinery maintenance is lighter U.S. imports of crude oil. Imports were down marginally in the latest EIA data, but exports snapped back to almost 2.6 million b/d. As a result, the net import weekly figure from the government was the lowest on record for data that goes back toward the beginning of this century.
Oil market losses were larger in the Brent contract, and as a result the spread between the two benchmarks narrowed to $9.25/bbl based on Friday's December settlements. The discount was at a roughly three-week low on Friday.
There are some that believe the recent four-year highs for WTI and Brent may represent at the very least a seasonal peak.
The biggest losses last week, though, were in the RBOB contract where prices dropped more than 14cts over the course of the last week with nearly all of the price damage done on Wednesday and Thursday. In fact, the closing price for RBOB on Thursday at $1.9327/gal is the lowest settlement for front-month RBOB
since March 19.
Gasoline is considered the out-of-season product, so it will have difficulties leading a charge, but it also becomes more susceptible to prices sliding without participation from other segments of the petroleum complex.
The struggles for the gasoline market have become evident in looking at crack spreads.
While the WTI-RBOB crack spread looks palatable at best in the $10.20-10.25/bbl area at the end of the week, it is other markers that are cause for much greater concern. Brent-RBOB crack spreads at time last week were inside of $1/bbl. Meanwhile, OPIS on Friday reported that Eurobob at the Amsterdam-Rotterdam-Antwerp (ARA) hub was just 25cts/bbl over Brent. Meanwhile, prompt Gulf Coast CBOB is worth $79.99/bbl, but Gulf Coast refiners in Texas and Louisiana are paying just over $78/bbl for WTI at terminals in Houston and roughly $79/bbl for Light Louisiana Sweet crude oil.
The weaker gasoline crack spreads are a function of growing supplies. U.S. gasoline storage levels were up 1 million bbl even as refinery utilization rates were below 90% and total gasoline output dropped below the 10 million b/d level. Gasoline inventories in the U.S. are running well ahead of last year as well as the five-year average, and reports indicate the gasoline supplies in Europe in the ARA area are well ahead of last year as well.
Most U.S. regions see gasoline at a year-on-year surplus, but the East Coast sees total storage levels are more than 70 million bbl, a roughly 18-month high.
Gasoline supplies may be even more unwieldy if not for strong exports. According to the EIA, gasoline exports were above 1 million b/d in the most recent week, one of the highest rates of the year, but leaving the rolling four-week average at around 875,000 b/d.
While gasoline crack spreads are at some of the weakest levels in recent memory, distillate margins are still on pretty solid footing, even as ULSD prices dropped week on week.
The decline in ULSD futures last week were only about half of the RBOB losses with the contract down 7.1cts. While gasoline traditionally has trouble generating a complex-wide rally, the potential upside for the market may rest in the hands of the ULSD market.
As it currently stands, the fundamentals for diesel in general are a bit more bullish.
Distillate supplies in the U.S. remain several million bbl behind the five-year average, but the most recent EIA data shows distillate slipping to a small deficit to last year after being flat to a bit higher in recent weeks.
Demand for diesel also remains on solid ground at least in North America with the IEA citing distribution of goods and industrial production as key support points. Diesel is also considered a barometer for economic activity and with the global economy still appearing to be strong even though concerns are starting to emerge, diesel demand should continue at a solid pace.
Refiners appear to still be producing diesel at a fairly strong clip, with output of distillate remaining north of 5 million b/d even as runs slow during the maintenance season.
Other elements to watch:
--Oil jumped by more than $1 initially Sunday evening after more geopolitical tensions as President Trump warned of consequences if Saudi Arabia was responsible for a missing journalist. Saudi Arabia denies it was involved in the disappearance and warns of retaliatory action.
--While the monthly figures always have more clarity, weekly crude oil production according to EIA hit 11.2 million b/d. With supportive prices there is potential for that number to creep higher in the next few weeks.
--Pacific Northwest gasoline markets spiked after natural gas supplies were curtailed to refineries after a ruptured pipeline in Canada. Premiums for prompt gasoline are still very strong, but utilities have said they are receiving natural gas supplies. Premiums should start to drop quickly when refineries return to pre-disruption levels.
--Some of the big macroeconomic factors this week that could shape oil prices is Chinese GDP data. A slowing of China's economy could create some demand fears. Additionally, third-quarter earnings start to ramp up and could have an impact on equities and in turn oil.
--The steep drop in gasoline markets is starting to manifest itself in retail gasoline prices. The U.S. average starts the week at $2.893/gal, according to AAA. The average price is down a little over 2cts from a week ago.
Copyright, Oil Price Information Service