Market bulls went into the weekend licking their wounds after a massive sell-off on Friday that should bring into question the resolve of the RBOB market early this week.
Over the course of the week, front-month RBOB futures dropped 9.21cts; the Friday settlement of $2.0232/gal is the lowest since April 9, and the Friday low of $2.0161/gal (post-settlement) goes back to April 10. Since peaking at
$2.2855/gal on May 22, front-month RBOB futures have dropped by about 13%. The typical seasonal sell-off from the peak averages 23%, leaving another potential 10% of downside for RBOB futures.
A look at the latest CFTC data points to a distinct possibility of the sell-off continuing. Large speculators are working off record length, and through the week ending June 12, money managers shed more than 17,000 long futures and options contracts. With the sell-off in the latter part of the week there is probably even more length taken off the books. The move away from record net length in managed-money RBOB futures and options has almost been exclusively to long liquidation. Short exposure did inch up, according to the latest CFTC
data, but since late February managed-money futures and options short positions have been inside of 10,000 contracts.
The late week selling in RBOB also brings technical ramifications with it as well. Traders will be keeping an eye on levels around $2/gal this week, and if market bulls have enough left in the tank to prevent a drop below $2/gal.
Weaker RBOB futures permeated through the spot markets as all the east of the Rockies CBOB markets dropped below the $2/gal level on Friday afternoon, with Gulf Coast barrels under $1.90/gal. This should give marketers some short-term margin relief.
After the sell-off in oil last week, expectations are for mostly sideways movement this week leading up to the OPEC and non-OPEC meeting in Vienna on Friday. Aggressive selling at the end of last week was tied to expectations of
a production increase, with only the amount and timing to be determined by the group.
Production increases are being led by the largest producers Saudi Arabia and Russia, while Iran, Iraq and Venezuela have made their preference known for keeping production as is. The major issue for many within the pact that want to see production levels held is little to no spare capacity to be tapped.
While Venezuelan production has struggled due to the ongoing economic crisis, ship broker Charles R. Weber Company Inc. said in a report last week that crude oil export flows have not necessarily experienced large delay issues, based on vessels booked and satellite tracking of Aframax crude oil tankers.
The OPEC+ meeting on Friday will certainly grab all the oil headlines this week, but growing concern over the trade tussle between the U.S. and China has created concern in the market. U.S. tariffs on Chinese products were approved by President Trump on Friday morning, but retaliatory tariffs from China on U.S. products, namely chemicals and energy products, spooked the market.
The Chinese tariffs on U.S. energy products could threaten exports of crude oil. Exports of crude oil in recent weeks have been at either side of 2 million b/d, and a slowdown in exports could potentially cause barrels to back up and
lift inventories on the Gulf Coast and at Cushing.
During the most recent week, Brent took on the bigger losses as the August contract dropped by $3.02. The settlement price on Friday of $73.44/bbl represents the lowest settlement price since May 2. Meanwhile, losses in WTI were a bit more modest at just 68cts, with the price dropping in each of the past four weeks.
The more modest decline in WTI futures helped narrow the spread between the two benchmarks to $8.59 based on Friday's settlements. The slide in the WTI-Brent spread is the lowest since just before the Memorial Day holiday and represents a nearly $3/bbl dive since peaking near the $11.50/bbl level earlier this month.
Most of the WTI attention this week will turn to the August contract as the July contract expires toward the end of next week. As of Thursday afternoon, total open interest in July was just below 150,000 contracts, a level that is a
tad lighter than at this point in each of the past two months. The looming expiration for July WTI may be a factor in the July-August WTI backwardation growing from just a few pennies to around 20cts.
The fundamentals for ULSD paint a bullish picture, but the market's performance on Friday was among the worst of the petroleum complex.
ULSD futures fell by roughly 7.75cts and the Friday closing price of $2.087/gal is the weakest closing price since April 17. The drop in price has put bears in control of the market and some of the more significant technical support levels are not far off.
Total distillate inventories, according to the latest EIA data, are now more than 20 million bbl below the five-year average. While paper crack spreads remain in strong territory, the recent drop should not deter refiners from
focusing on making distillate as recent production levels are within striking distance of all-time highs.
Other elements to watch:
- As mentioned earlier, the OPEC+ meeting on Friday should keep markets from big moves for most of this week. U.S. production levels are also closing in on 11 million b/d. Any boost in output and supply gains could lead oil prices down further.
- Over the past several weeks, gasoline imports have outpaced exports. That trend is likely to continue as low RIN prices become less of an impediment to imports and does not promote a rush to export.
- RIN prices remain stuck in the mid-20cts area and on Friday, OPIS reported that the EPA suggested that it would take an act of Congress to reallocate lost RIN obligations from small-refiner exemptions. The comments from the EPA could keep a lid on RIN prices this week.
- After a strong rally last week, the dollar has cooled a bit coming into this week. Trade war fears, though, could pump the dollar's value back and pressure oil.
- Retail gasoline prices begin the week at $2.895/gal, according to AAA. Prices have dropped consistently but slowly over the past three weeks. The current average represents a roughly 2.5ct drop from a week ago. Currently, 13 states have a retail average of $3/gal or more.