July 15, 2019 | By Denton Cinquegrana

The first named storm of the 2019 hurricane season brought plenty of mid-week buying into the market, but once traders had themselves positioned ahead of Tropical Storm/Hurricane Barry price movements were not overly eventful.

While the key petroleum contracts all moved higher on the week, the ULSD contract took the biggest strides, week on week gaining 7.51cts.

Barry was briefly a hurricane and from the initial market reaction critical infrastructure weathered the storm well. The one refinery that shut down, Phillips 66 Alliance, is in the restart process. Several other refineries that were in the line of the storm reports indicate that there was few if any impacts on operations.

RBOB and crude oil though were the focus as the storm boosted prices. Ahead of the storm nearly 60% of Gulf of Mexico production was shut in, according to the Bureau of Safety and Environmental Enforcement. While it is true that the lions' share of U.S. production is on land, the Gulf of Mexico production has seen solid growth over the course of this decade. April production, according to EIA, was just shy of 2 million b/d at 1.982 million b/d compared with output levels in the 1.5 million b/d area at the beginning of this decade.

In the short-term the shut ins, lack of significant refinery shut downs and overall increase in runs should keep crude oil draws a common theme over at least the next two to four weeks. Port closures and delayed deliveries are also expected to put downward pressure on crude oil supplies.

Last week's report saw a large crude oil draw and it would not be surprising if another significant draw took place in this week's report as well. Traders have jumped back into the WTI contract, at least in the last couple of days with total open interest figures moving sharply higher. On Wednesday and Thursday, total open interest in WTI futures increased by nearly 50,000 contracts with totals near a one-month high.

U.S. supply draws and production shut ins did help narrow the WTI-Brent spreads. Over the course of the week WTI futures climbed $2.70 ending the week at $60.21/bbl, while Brent posted gains for the September contract of $2.49 after closing at $66.72/bbl. The spread between the two benchmarks has been hovering between the $6-6.50/bbl area this month as U.S. exports have remained robust.

From a technical standpoint both WTI and Brent are on strong footing with recent buying pushing some of the upside momentum. Last week's high of $60.94/bbl for WTI would be the first for market bulls to clear in order to run further. Brent is in a similar situation with the $67.65/bbl high the first focus.  Additionally, both WTI and Brent are holding above the shorter and longer term daily moving averages.

There was some initial selling in RBOB futures Sunday evening even though there is a strong chance of a draw in this week's data. Gasoline supplies have been tightening, with the East Coast being one of the more profound spots with the PES refinery closing leaving the East Coast reliant on foreign and inter-PADD supply movements.

Gasoline demand from EIA measurements appear to be on solid footing. While some flooding and storm activity in the Southeast may see some regional demand slowdowns, overall gasoline demand for the summer is at least close to last year's pace.

During the week RBOB gained 4.75cts with some late week profit taking limiting the gains. RBOB bulls will need to push the contract back over the $2/gal mark as the $2.0378/gal level is likely a number to keep an eye on as it represents last week's high price. The contract is said to be in relatively neutral position so supply builds or disappointing demand figured could help bears gain control of the market.

Traders appeared to be getting back on the bullish gasoline bandwagon. Money managers in the CFTC data for the week ending July 9th, showed a net long bias that was the highest since just before Memorial Day. However, any more upward momentum may need to come from more speculative length as there are not as many shorts to cover amongst the managed money community.

The biggest move amongst petroleum futures was in the ULSD contract which moved up by some 7.5cts week on week. The contract did manage to spend a bit of time north of the $2/gal level, but was not able to sustain that level with last week's high of $2.0181/gal being a target for market bulls this week.

Last week saw distillate inventories grow, but with strength in the rest of the petroleum complex, ULSD futures did follow the market higher. Distillate supplies are still considered tight, as total inventories are running more than 6.1 million bbl behind the five-year average. Refiners have been concentrating on distillate output and a roughly two-week period where RBOB futures were strong than ULSD probably did not change that, especially now that ULSD futures are back to a premium versus RBOB.

Other elements to watch:

  • After a five-week run with a net short bias, money managers have turned a bit more bullish on ULSD futures and options. The latest CFTC data shows the net long skew running just shy of 5,000 contracts with market players potentially positioning themselves ahead of the ULSD pre-season rally.
  • RBOB interest has ramped up. Money managers are adding length to the books CFTC data shows. The market as a whole appears to be more compelled with RBOB as total open interest has jumped to almost 400,000 contracts a level not seen since just before Memorial Day.
  • The Gulf Coast market strengthened ahead of Tropical Storm/Hurricane Barry and as a result line space values have been under pressure. After moving to a tariff plus basis after the PES refinery fire Colonial line 1 values have slipped to a penny and a half under discounts. • China's GDP in the 2nd quarter was the lowest in 27 years, while that has not manifested itself in oil and refined product prices that economic data along with U.S. earnings releases could give clues to the remainder of the 3rd quarter direction.
  • The boost in cash and futures prices have lifted retail gasoline prices. According to AAA the national average stands at $2.792/gal up nearly 4cts week on week. Current prices are still running a little over 8cts less than a year ago.

Copyright, Oil Price Information Service