US Facing Ample Product Supply and Slow Demand

On June 28, 2013 by TradingDesk
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As we begin the last trading day of the first half of 2013, ULSD futures are down 15 cents for the year, and RBOB futures are down 7 cents. Meanwhile, WTI crude is up more than $5.5 per barrel, as its spread vs. Brent crude has shrunk by $13 in the past 6 months. WTI was pushed higher again on Thursday following another spill on a Canadian crude pipeline, the 2nd of the week, while refined products managed modest gains after failing to break through technical support once again.

The back half of the year shapes up much like the start of the year did. The US is facing a period of ample product supply, and slow demand for refined fuels. Exports, Middle East Tensions, and Central Bank stimulus are the primary bullish factors in the markets, while a slowing global economy (Europe remains deep in a recession and BRIC countries are not growing) increased production from US Shale formations, and expanded refineries are all pointing to lower prices ahead.

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DOE Shows Builds Across the Board

On June 27, 2013 by TradingDesk
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Yesterday’s DOE report showed builds across the board for crude and refined products, as sluggish demand continued across the country, refiners ramped up run rates, and domestic crude production grew. The initial market reaction was swift, with heavy selling for all contracts immediately after the report, but sellers were unable to break through technical support, and by the end of the day, most of those losses were erased. RBOB most notably briefly ticked at its lowest level of the year, $2.6870, only to rebound off the same area that sparked a 20 cent bounce in May. ULSD futures touched $2.82 for the third time in 4 sessions, only to rally from that level once again.

As the charts below show, the US is facing a glut of Crude and Gasoline stocks, while exports and average demand have helped diesel inventories remain on the lower end of their 5-year range. With these fundamental factors weighing on prices, and technical studies turning more bearish, expect the bottom end of our trading ranges to be tested again in the near future. If these support levels finally break, both refined product contracts appear to have another 15-20 cents to fall.

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DOE Weekly Report for June 26, 2013

On June 26, 2013 by TradingDesk
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DOE Weekly Report

Energy Futures Selling Off Modestly This Morning

On June 26, 2013 by TradingDesk
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Energy futures are selling off modestly this morning, after US GDP in the first quarter was revised down to 1.8% growth, after previous readings showed 2.4% growth in the quarter. The cut reinforces other data suggesting that US consumers continue to struggle through a period of weak growth, despite the trillions of dollars injected into the economy over the past 4 years. Meanwhile, global stocks have stabilized over the past two days after pledges from Chinese, European, and US central banks that they were still ready to act to prevent any disruptions to credit markets. So, once again, the debate comes down to which matters more, actual economic activity or anticipated central bank action. With the banking quivers running low, the back half of 2013 may witness an interesting showdown between the two.

The story of the week for energy markets has been pipelines. Enbridge was able to restart one of its 3 shuttered Canadian lines yesterday, and anticipated that flood waters would recede enough to restart the other two later this week. That news sent WTI lower early in Tuesday’s session, only to see a comeback later in the day after the President suggested that the long-awaited Keystone XL Pipeline project (considered to be the most significant long-term answer to the glut of North American inland crude) would only be approved if it was proven that it would not increase carbon emissions. With the WTI/Brent spread holding near its recent lows, it seems that many market participants believe this wording suggests the pipeline is finally ready to be approved.

Technical studies remain mixed, with a slightly bearish bias in Crude and ULSD futures, while RBOB remains on the cusp of a major sell-off if it can finally drop below $2.70, just a few cents away from current values.

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    Energy Futures Remain Stuck in Neutral

    On June 25, 2013 by TradingDesk
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    WTI crude rallied Monday, in the face of a stronger dollar and heavy stock market selling as 3 Canadian crude pipelines were shut due to flooding in country’s oil hub region, with one having a small spill. While the Nymex benchmark was moving higher, Brent crude took the lead of stocks, and by the end of the day, the spread between the two contracts was at its lowest since January 2011, as is shown in the chart below. The spread between these contracts was arguably the most important story in physical energy markets over the past two years, as record high Brent premiums encouraged more alternative crude transportation, setting off a shortage of Jones Act qualified vessels, driving major expansions in US mid-continent refining, and even the reversal of several major pipelines across the country. Now that this spread has shrunk we’ll have to see if the industry returns to its more traditional movements of crude and refined products.

    RBOB and ULSD futures are moving modestly higher this morning after durable goods orders in the US beat expectations, and stock futures are pointing to a higher open. Yesterday losses in both contract were pared, as they were in stocks, as 2 FED governors made speeches suggesting that last week’s discussion about ending quantitative easing were misinterpreted. The question as we move forward is if the market is reacting to the FED, or if the FED is now reacting to the market. Either way, energy futures remain stuck in their neutral trading pattern for a 10th week, with charts giving slight favor to lower prices ahead.

    Monday, June 24, 2013 11:27:47 AM RTRS – FED’S KOCHERLAKOTA SAYS SPEAKING OUT TO CLARIFY WHAT HE VIEWS AS A MIS-PERCEPTION IN MARKETS THAT THE FED HAS BECOME MORE HAWKISH, BASED ON REACTION TO LAST WEEK’S MEETING

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    Global Equity Markets Falling Sharply Again

    On June 24, 2013 by TradingDesk
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    Global equity markets are falling sharply again this morning, as the Chinese central bank held back on any further easing – suggesting the novel concept that large banks should be in charge of liquidity – which combined with their recent slowdown in manufacturing has doesn’t bode well for the country that accounted for one third of global growth last year. This is the 2nd hint in a week by a major central bank that the days of easy and cheap liquidity injections may be coming to an end. If the market reaction is anywhere near as severe as it was to last week’s FED discussion, more selling may be coming soon.

    Energy prices are mixed in the face of the wide-spread selling in stocks, with ULSD managing slight gains, WTI flat and RBOB just fractionally lower. The drop in the back half of the week has pushed technical studies into a bearish stance, with a test of the lower end of our trading range appearing likely. The Commitment of Traders report showed that speculative money, as of Tuesday night, added to long bets in WTI and RBOB, and cut their net-short positions in ULSD, just in time for the real selling to begin. If they reverse course this week, that could easily add to the bearish sentiment. $2.70 remains the major pivot point for refined products.

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    Biggest Sell-Off of the Year

    On June 21, 2013 by TradingDesk
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    The FED Chairman’s discussion of the potential end to Quantitative Easing, and another contraction in Chinese manufacturing data were the 1-2 punch that created the biggest sell-off of the year for most global equity and commodity markets yesterday. Most major stock indices finished the day down 2-5%, while commodity losses ranged from 3-7%, with metals taking the largest hit. While yesterday’s drop was severe, 2013 has actually had the lowest average volatility in the past 5 years as the chart below shows. The question now that the FED is signaling an end to its money printing is if the wild swings of the past few years will return, or could prices and price swings actually drop if commodities return to trading based on fundamental supply & demand rather than financial supply & demand.

    That question may take years to answer, and in the mean-time, energy prices are right back into the middle of their 9+ week trading range, with a neutral technical outlook. $2.70 remains the key pivot point to the downside for both RBOB and ULSD futures, with a strong ceiling set in the high $2.90s.

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    Selling Picks Up Overnight

    On June 20, 2013 by TradingDesk
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    The much awaited and debated FOMC announcement yesterday had no policy change whatsoever, and no material changes in the committee’s language. Markets were flat following the release, only to sell off sharply once FED Chairman Ben Bernanke laid out the groundwork for the end of their 4 year-old quantitative easing programs during a follow-up press conference. The selling has picked up overnight, and spread across global equity and commodity markets (European stocks are down 2% and Gold is down 5%) as traders begin to deal with the potential for the free money punchbowl to be taken away over the next year.

    Adding further concern to the markets are discussions that the Chairman will be stepping down in the near future, which leaves the guarantee of FED intervention to prop up financial markets (“The Bernanke Put”) in limbo.

    Energy futures are joining in on the selling, although they are holding up relatively well, only dropping 1.5% so far. The pull-back after early week gains may just be typical “reversal Thursday” action, but for now, both RBOB and ULSD contracts appear to be heading back to their trading ranges after failing to break out to the upside. Yesterday’s DOE report showed only fractional changes in the supply & demand equation across the US, with the major themes of weak demand and increasing refinery output holding for another week. The real action, again, came from cash markets, where Chicago pipeline gasoline prices plunged again, marking a 99 cent decline over the past two weeks (2nd chart below). While Chicago is typically one of the most volatile markets in the country, the weakness is felt in every market east of the Rockies as summer gasoline demand this year is not even reaching the 5-year average for December.

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    DOE Weekly Report

    On June 19, 2013 by TradingDesk
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    DOE Weekly Report

    A Busy Day for Trading

    On June 19, 2013 by TradingDesk
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    WTI Crude moved to a fresh 9-month high overnight, following another large drawdown of 4.3 million barrels in domestic stocks reported by the API yesterday. Refined products are following crude’s lead and are once again on the cusp of a major technical breakout that could send prices another 20 cents higher over the next few weeks. Today will be a busy day for trading, with the DOE report release at 9:30 central, then the FED’s announcement a couple of hours later. Our pattern over the past year has been to rally ahead of FED meetings (just as we’ve done so far this week) only to sell off the day following the announcement. If that trend holds, it’s likely that energy futures will return to the middle of the trading range that has held prices since March. If the FOMC is more dovish than anticipated however, expect our 2013 highs around $3.26 for both RBOB and ULSD to be tested this summer.

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