Another Strong Performance for Energy Futures

On July 22, 2013 by TradingDesk
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Energy futures had another strong performance last week, rallying along with most commodity and equity markets as the FED appeared to soften its stance towards reducing quantitative easing. Then Friday afternoon, the FED released a somewhat cryptic 1-line headline saying they would review their 2003 ruling that allowed deposit-taking banks to begin playing in physical commodity markets. With JP Morgan apparently on the verge of a record fine for manipulating electricity markets, the CFTC putting metal Warehouses on notice of an investigation, it seems that suddenly the “too-big-to-fail” banks are coming under attack from lawmakers growing weary of high prices in the face of weak fundamentals.

While these latest headlines may not materialize, the potential impact to energy markets cannot be overstated. Wall-Street banks have taken over many physical commodity markets in the past decade, becoming in several cases the dominant player in regional storage and transportation hubs. Many are suggesting that the removal of these players should reduce volatility and prices for energy and other commodities, although until it happens, this is impossible to prove.

Meanwhile, as of Tuesday when CFTC data is compiled, large speculators continued to pour into RBOB and Crude futures, and cut back on their short positions in ULSD. This adds to an extremely overbought condition on charts leaving us susceptible to a short-term correction, although the longer-term trend continues to favor higher prices.

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Refined Products Following Crude Higher

On July 19, 2013 by TradingDesk
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WTI surged overnight, breaking through $109/barrel for the first time in a year, and reaching a premium to Brent crude for the first time in 3 years. As the chart below shows, while the WTI/Brent spread has collapsed from $23+ in February, some other grades – such as WCS – have not followed suit, leaving incentive for rail and other alternative means of relieving the increase in north American crude production.

Refined products are following crude higher, having hit their highest levels in 3-4 months overnight, and more headlines about east coast refinery issues are keeping the momentum clearly in the bulls favor. It appears that the next target for both ULSD and RBOB markets is the mid $3.20 range, despite refineries running at nearly 95% capacity in the face of weak demand. Some caution is warranted, as the last time prices reached these levels, they soon dropped by more than 10% in the next two months.

In financial markets, US equities hit record highs on the same day that Detroit filed for bankruptcy, the largest city filing in history, a great example of the dichotomy between easy money pushing risk assets higher while fundamentals still struggle.

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Refinery Runs in the US Surge

On July 18, 2013 by TradingDesk
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Refinery runs in the US surged to their highest level since 2005 according to yesterday’s DOE report, which put the brakes on the runaway RBOB contract, which has now pulled back 7 cents from its highs earlier this week. ULSD futures continued their march higher however, shrugging off an increase in domestic supplies and a drop in exports. The export market has been pivotal in the past couple of years particularly for diesel, but it faces a new challenge in the back half of 2013 as Japan is expected to restart up to 10 of its nuclear reactors, which have been shuttered since the Fukushima disaster in 2011, which should dramatically reduce the country’s need for diesel fuel.

Perhaps the best way to sum up the reports of the past few weeks, which have seen a record draw down in crude stocks of over 25 million barrels, is simply that US refiners have figured out how to ease the glut of inland crude, through increased refining and export capacity. With the spread between Brent and WTI now less than $2 however, it appears that they’ve achieved this goal just in time for their record refining margins to vanish.

Meanwhile, for consumers, unfortunately it still appears that refined product prices have higher to run. RBOB futures are forming a bullish flag pattern, and if $3.15 breaks, a run into the $3.40 range is targeted. For ULSD futures, $3.26 looks like the next major target on the charts, although breaking through $3.10 may not be easy.

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DOE Weekly Report

On July 17, 2013 by TradingDesk
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DOE Weekly Report

RBOB Gasoline Surges Again

On July 17, 2013 by TradingDesk
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RBOB gasoline surged again Tuesday, marking their highest levels since March after Irving Oil – who’s refinery issues have been often cited as a cause of the recent run up in gasoline prices – was seen buying prompt cargoes of refined products in the NY Harbor, adding to rumors that they will face extended downtime at their plant. Ethanol RINs also continued their climb, trading as high as $1.35 on the day, increasing the incentive for US refiners to export more product. ULSD futures went along for the ride, and reached their highest levels since April. Both contracts are pulling back modestly today, but charts suggest that the near-term path continues to lead higher.

The long-awaited speech from FED Chairman Ben Bernanke has come and gone, and like most recent testimony used many words to say very little. The bottom line is the FED may or may not change its policy depending on many factors, and market reaction to the announcement has been mixed. A press conference later this morning could cause more significant price swings – as the last FOMC press conference proved – and we’ll be closely following the DOE report to see how domestic inventories changed last week, following the largest 2 week drop in oil stocks on record.

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Market Update

Energy Prices Continue to Climb Higher

On July 16, 2013 by TradingDesk
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Energy prices are continuing their climb higher this morning, after taking a brief rest Monday. Headlines point to dropping US stocks as the reason for the rise, but there have been no new data points to support this theory and it’s been a quiet overnight session, so it may simply be that since we have returned to a bull market, the path of least resistance is to move higher. Global stock markets are taking a pause from their recent rally, after German investor sentiment was much lower than predicted, and car sales across the Euro-zone slipped to a 20-year low. With US stocks sitting at record highs yet again, in the face of more weak economic news, a period of consolidation is certainly possible, although all eyes are turning once again to the FED, as Chairman Bernanke testifies before congress tomorrow and analysts will be dissecting every word. If he mentions tapering, as he did in the FOMC news conference a few weeks ago, expect stock and commodity markets to see a near-term sell-off. If he pulls back from that discussion, this rally is likely to continue.

Also in congress this week, oil industry representatives are testifying against the EPA’s Renewable Fuel Standard (RFS), arguing that the ethanol blend wall – and the $1.30 ethanol RIN values it has created – is harming the US consumer. With a 13 cent per gallon influence on any gasoline produced, refiners are now exporting record amounts of refined products to avoid as much of their obligation under the RFS as possible, which has sent the price for “clean” vessels soaring past that of “dirty” crude vessels for the first time in many years. While it is unlikely that a decision is coming soon, expect this debate to heat up as long as ethanol RINs remain north of $1.

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Market Update

RBOB Gasoline Futures Cap Off Rally in Style

On July 15, 2013 by TradingDesk
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RBOB gasoline futures capped off their best two-week rally in over two years Friday in style, rising nearly a dime on the day, and now stand 14% higher than they did to begin the month. While WTI had been leading the rally for most of the month, Friday was all about the gasoline contract as news of more refinery issues along the East Coast of the US and Canada suggested that in all there may be nearly 400,000 barrels per day of production off-line for maintenance. Time-spreads for gasoline have exploded, with prompt month values worth nearly 8 cents more than next month as traders in the New York harbor try to cover an unexpected physical shortfall, and suggesting that this price spike is expected to be short lived.

Meanwhile, ULSD futures have quietly broken through and held above the pivotal $3 mark, which sets them up for a late summer rally targeting the $3.20 range, with a test of the 2011 & 2012 highs in the low $3.30s certainly possible.

Prices are slipping today as the latest round of economic data from China showed that the world’s second biggest energy consumer was continuing to slow down. While all of the energy contracts are overbought, and susceptible for a sharp sell-off sometime soon, the overall trend appears to be pointing higher for now. Managed positions grew again last week, with WTI net longs for the speculative category surging to a record high. There is no doubt that this influx of fund money has played a part in the 2013 summer rally, the only question is will there be a dramatic sell-off once the hot money heads for the exits?

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Market Update

On July 12, 2013 by TradingDesk
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Market Update

Futures Poised for a Strong Summer Rally

On July 11, 2013 by TradingDesk
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If you judged by the market’s action over the past 2 weeks, you might be led to believe that the US was facing a shortage of crude oil and gasoline, while diesel supplies were ample. Yesterday’s DOE report showed the opposite however as crude – despite the largest 2 week drawdown in 30 years – and RBOB stocks remain well above their 5-year average levels, and diesel stocks remain near the bottom of their 5-year range. Perhaps the movements are best explained by the refining situation across the country, as gulf coast refining levels and diesel outputs hit record highs last week, while issues along the east coast of the US and Canada have helped RBOB to climb more than 30 cents in the past 8 sessions.

Perhaps the most important story is the continued collapse of Brent crude premiums to domestic grades, which has cut refining margins in the US drastically, and could shift supply dynamics back to a more traditional model. Whatever happens, futures are now clearly through technical resistance, and poised to make a strong summer rally, although a short term correction remains necessary to cure overbought conditions across the complex.

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DOE Weekly Report

On July 10, 2013 by TradingDesk
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DOE Weekly Report

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