January 27, 2020 | By Denton Cinquegrana
2019 ended and 2020 began with five straight weeks of gains across crude oil and refined products, but now the market is in the midst of three-straight weeks of declines that has taken prices down to lows not seen in several months.
While losses were sharp across the board week on week, arguably ULSD had the worst week as prices dropped sharply, with one-year time spreads (February 2020 vs February 2021) moving from backwardation (front month more expensive than deferred month) to contango (front month cheaper than deferred month) last week.
The losses between NYMEX WTI, RBOB and ULSD and ICE Brent were roughly 6.5-7.5%.
It was just a few weeks ago where the trading strategy was "don't go into the weekend short" as the geopolitical tensions were high. That does not mean that geopolitics are no longer a factor, but the bearish weight on the market continues to mount and the coronavirus only tipped the scales further toward the bears. So much so that this past Friday traders probably did not want to go into the weekend long.
The conronavirus is putting a real scare into the market as the pandemic comparisons to severe acute respiratory syndrome (SARS) over the weekend is keeping the sell orders flowing through the market.
Friday's WTI settlement of $54.19/bbl is the lowest since Halloween as was the Brent settlement at $60.69/bbl. Brent was flirting with a sub $60/bbl trade.
With the current bearish trend in place and March Brent futures expiring at week's end, some trades below the $60 level have a solid chance of happening.
There was chatter a few weeks ago where some believed WTI has put in its low for 2020 and while that is a bold statement so early in the year, the contract is already down more than $10/bbl from its high trades in early January.
There is little for market bulls to get excited about from a technical standpoint as WTI futures have moved below the short and longer term daily and weekly moving averages, while Brent prices are just barely above the 200-week moving average. One of the few potential reversal signals for the market is data shows WTI futures are moving into oversold territory.
The fundamental picture for crude oil does appear to be a bit more constructive than the technicals do. U.S. oil inventories have dropped in five of the past six weeks and while the most recent week saw a decline that was relatively light, total inventories have fallen to a multi-month low and the deficit to the five-year average has widened to double digits. However, that trend may start to reverse as build season for crude oil due to refinery maintenance starts to pick up steam.
Losses in RBOB futures were slightly more than ULSD, losing 12.54cts versus 12.52cts, but it may appear that ULSD has the worst outlook over the coming week. Prices on Friday settled at $1.734/gal a low not seen in more than a year, compared to the first trading day of 2019.
Even though distillate inventories were down in the most recent week, the recent string of builds and lack of demand is likely to keep pressure on ULSD futures. Weather has also been a factor as eastern markets that sometimes see natural gas curtailments have been non-existent as degree days are running below normal.
The technical picture for ULSD futures is not particularly encouraging for market bulls either. The market last week crashed through several key technical support levels and on Sunday evening the February contract even spent a bit of time below the $1.70/gal level. Granted most of the activity is in the March ULSD futures contract, but that too spent some time below $1.70/gal and remains 20-30 points above the February contract.
The ULSD contract continues to trade near lows not seen in over a year. As of January 21st there was still a speculative net long position, though that may no longer be the case. Open interest is slumping so that could mean some of the speculative length has since exited as the latter part of last week saw total ULSD open interest at summer-like levels.
RBOB futures last week posted the bigger loss of the two products contracts and quite possibly has even more downside potential as the transition to low RVP gasoline is still several weeks away, leaving a potential blowout of the March-April RBOB spread which has been trading greater than 18cts/gal during much of last week.
One area that may ultimately prove bullish for market bulls is the upcoming maintenance schedule for refineries as well as refiners choosing to bypass the FCC units and moving low sulfur VGO to the blending market where there are currently better margins.
On the other side of the coin and once again the Commodity Futures Trading Commission data was only through January 21st so it is significantly different now, but large speculative outright length was at some of the highest levels since late May 2018. The CFTC data though does not indicate where the length resides so most of the long positions could be in 2nd quarter contracts.The streak of gasoline supply builds stands at 11 weeks and there is little reason to believe that another build would take place this week. Demand in January is notoriously weak and supplies continue to run at more than double digits when compared to the five-year average.
Other elements to watch:
- Money managers in WTI futures and options actually saw net length increase the week of January 21st. However, the figures are likely much different now considering the downward pressure on the market.
- Among some of the longer-term spreads, ULSD (February 2020 versus February 2021) recently flipped from backwardation to contango. The change in structure is likely due to the current soft price environment for ULSD.
- Crude oil exports were above 3 million b/d in the latest EIA statistics and that is with some weather delays in and out of the Houston Ship Channel. Exports are probably going to have to remain higher than 3 million b/d to keep supplies from growing too much when refinery maintenance starts to ramp up.
- The dollar may need to be watched closely this week. If the coronavirus scare puts a significant amount of pressure on equities, there could be a flight to safety in the U.S. dollar and other commodities like gold. Pressure on equities and a firming dollar is bearish for oil prices.
- Retail gasoline prices continue to slowly dip. Prices begin the week at $2.52/gal, according to AAA. The U.S. average is down about 3cts week on week. While there is a wide swath of prices throughout the country there are seven states (mostly in the Southeast) where sub $2/gal gasoline can be found.
--Denton Cinquegrana, email@example.com
--Editing by Tom Galatola, firstname.lastname@example.org
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