DOE Report for February 6, 2013

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Despite Today’s Early Selling, Overall Trend Remains Bullish

The Euro Yo Yo is taking another spin to the downside this morning, leading energy and equity prices into the red, although they haven’t yet erased Tuesday’s gains.  With the correlation between the EUR/USD, equity and energy prices returning, we’re subject to riding this rollercoaster for a bit longer.  Despite today’s early selling, the trend in all of these markets remains bullish for now.

WTI Crude is leading the selloff, down more than 1.5% and testing support at the $95 level, while refined products are relatively stronger, continuing to follow the lead of Brent crude which is only down .5%.   The spread between the world’s 2 leading grades of crude oil stands at nearly $21/barrel this morning, its widest in 2 months, as Enterprise struggles to unclog a bottleneck along its reversed Seaway pipeline which allows the distressed north American barrels to reach the market.  One the other hand, Magellan just announced yesterday that startup has begun on its reversed Longhorn pipeline which now will bring crude from west Texas to the Houston market, after years of taking refined products in the opposite direction.  This is one more example of how the  struggle to bring landlocked crude to the coasts will create logistical issues for refined product markets, as refiners clearly worry more about what they feed their dog, than how they dispose of its waste.

If WTI does break and hold below $95 today, expect a quick test at $93 which should set up a drop in RBOB to the $2.90-2.95 range, and to $3.10 for HO.  A bullish flag formation may be created if RBOB holds support at $3 and breaks out above $3.05, which would ultimately target the $3.40 level, right in line with a typical spring rally in gasoline.

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The Rally Is Back

After a strong day of “risk off” selling across most global equity and commodity markets Monday, it appears that we have returned to the rally this morning. European stocks are leading the way, after some of the political concerns raised yesterday were allayed by Prime Minister Mariano Rajoy’s claims that the reports of an alleged slush fund of public dollars being held by his party were “untrue – except for some things.” While that may not entirely explain the 1.5% rally in European stocks today, it does point out what a complex situation is being faced in the region. US stock futures are following the EUR/USD higher, taking back roughly half of yesterday’s losses overnight.

RBOB is leading the energy complex higher, boosted by reports that the Come by Chance refinery in Newfoundland was shut due to a power outage. The plant is a major exporter of gasoline to the US East coast, and while reports of a restart have slowed the gains in the past hour, this is another clear example of how sensitive the Nymex delivery hub is to any perceived supply disruptions. The Nymex futures contracts failed to seriously threaten nearby support levels during yesterday’s selling, and today’s bounce seems to confirm that it was in fact simply a short term pull back rather than the end of the 2013 rally. WTI is still poised to test $100, with RBOB set to test $3.065 and HO $3.20. Above those levels there is at least another dime to the upside on the charts.

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What goes up…

A fresh bout of concern over the political and financial future of Spain and Italy, has spooked global markets today, sending equity and commodity prices lower across the globe. After rallying 1% Friday, and leaving themselves one strong day from all-time highs, both the S&P 500 and DJIA appear poised to give back all of those gains today, and energy prices are selling off in sympathy. After a respite of nearly 6 months, today’s action may hint at a return to the action of 2010-2011 when “risk assets” moved in lockstep on seemingly every European financial headline. Several global central banks are announcing policy decisions this week, so expect the debate over the proper use of intervention into financial markets to remain in the forefront.

RBOB and WTI are leading energy prices lower this morning, with support at $3.00 and $95 respectively giving us the first opportunity to determine if today’s sell off is the beginning of a new trend lower, or simply a correction of the overbought condition the contracts have been facing for the past two weeks.

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The Rallys in Energy and Equitites Continue

Thursday provided a very brief respite from the relentless RBOB rally, but an attempt to make a meaningful push lower in the morning failed, and the losses were cut by 2/3rds in the afternoon. Another selloff attempt was rejected overnight, and $3.05 appears to be the only level of resistance preventing a move to $3.20 in the March contract, which would push the April (low RVP) contract into the mid $3.30s and fulfill a typical spring rally target. HO meanwhile continues its slow and steady march higher, on the heels of European products. $3.15 appears to be a small resistance point with a target of $3.25 if that level fails.

January’s jobs report was close to expectations, and US equities are responding positively to the news, with DJIA and S&P futures pointing to a higher open that will wipe out the past two days of losses, which should set up a test of their record high levels, and continue to add to the bullish momentum for energy prices.

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THE EMPLOYMENT SITUATION — JANUARY 2013

Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent, the U.S. Bureau of Labor Statistics reported today. Retail trade, construction, health care, and wholesale trade added jobs over the month.

 CLICK HERE to link to the US Department of Labor’s complete release

Household Survey Data

The number of unemployed persons, at 12.3 million, was little changed in January. The unemployment rate was 7.9 percent and has been at or near that level since September 2012.

Table A-15. Alternative measures of labor underutilization

HOUSEHOLD DATA CHART

Charts Continue To Favor Higher Energy Prices

RBOB capped off its 10th straight day of gains in style Wednesday with a 6.5 cent increase. While the 36 cent rise over the stretch is impressive, we only have to look back to 2011 – when the average monthly range for RBOB was 34 cents – to realize how the lack of volatility over the past year had lulled many into a false sense of calm. With 4 months to go until we would normally expect a spring peak in gasoline prices, expect RBOB to continue to make the most noise. The entire complex is pulling back modestly this morning, but so far this looks more like just a “Reversal Thursday” pause rather than a change in our bull trend. Charts continue to favor higher prices, although all 3 major US contracts are in overbought territory and susceptible to some selling near term.

US Stock indices did see some modest selling Wednesday, after a disappointing drop in Q4 GDP and the FOMC announced nothing new in its January statement, but the move lacked conviction – especially after 3 straight months of strong rallies have pushed values near all-time highs, suggesting that the rally may have more room to run. The correlation between equity and energy prices is returning after a month-long hiatus, so this should help keep refined product prices supported.

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This Week’s DOE Report

DOE Weekly Report

Market Reaction to Negative Economic Data May Indicate Sustainability of Energy and Commodities Rally

A major RBOB rally is in full effect after the contract earned its 9^th straight trading session with gains Tuesday, and is already breaking the $3 mark this morning, a full 30 cents above where we were just 2 weeks ago.  The stretch is the longest consecutive win streak for the contract since the 2^nd quarter of 2009 when it rallied from $1.36 to $2.11.  Coincidentally, the 2^nd quarter of 2009 was also the last time the US reported a negative quarterly GDP, until this morning’s report showing that US economic activity slipped by .3% in the 4^th quarter, sending a cautionary shot across the stock market’s bow as it too has continued a strong rally and is just a few points below record highs on several major indices.

For those looking for relief from the relentless run up in gasoline prices, it may be found in the stochastic indicator which shows the RBOB contract is in its most “overbought” state since the spring of 2010, which ultimately ended in a 30+ cent drop in prices once the May 6^th flash crash sent shock waves through markets.  Meanwhile, HO continues its steady climb higher, casually breaking through resistance at $3.10, and now targeting its fall highs in the $3.25 range, while WTI appears poised to test $100.  Today’s price action, specifically the market’s reaction to some surprisingly negative economic data, will tell us a lot about the sustainability of the 2013 rally.

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Potential for Price Spikes Is Strong

Yesterday’s headline that Hess was planning to shut its Port Reading NJ refinery sent RBOB prices up nearly 6 cents, marking their 8th consecutive day of gains. The breakout above technical resistance makes a strong case that gasoline prices bottomed out in December and are now in the midst of their spring rally. 2 years ago, RBOB rallied from a December Low in the $2.20 range, to a high in May of $3.48. Last year, the contract bottomed near $2.48 in December, and rallied to a high in April of $3.44. While it may be hard to fathom another 55 cent increase on top of the 35 cent gains we’ve seen the past 6 weeks, history – and the move to lower RVP product – do support the theory. Meanwhile, WTI is also breaking out and setting up a test of $100, while HO continues to lag, unwilling to break the pivotal $3.10 level.

Already in the past hour, an attempt to sell-off in RBOB has been reversed suggesting that the conviction to step in front of a runaway gasoline train is lacking. While the country has plenty of gasoline in inventory, we’re still struggling to figure out how to get the excess from the Gulf Coast to fill the hole along the eastern seaboard. As long as this condition remains, and gasoline futures are still delivered in New York Harbor, the potential for price spikes is strong.

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A Tale of Two Refineries

Reports that Hess plans to shut its Port Reading NJ refinery sent RBOB values 5 cents higher in just 5 minutes, ending what had been another quiet overnight trading session.  The plant’s closure is another great example of the dichotomy between refiners in the US – those with access to distressed Canadian and inland US crude are making huge profits, while those without are struggling just to break even.  With today’s move, RBOB is clearly in a technical breakout, and it looks like a test of $3.00 is in the cards.  WTI, after 7 straight weeks of gains, also looks like it is due for a test of $100, while only HO is showing reluctance to rally, with $3.10 remaining the pivotal value this week.

US Equities look poised to continue pushing to new 5 year highs, and potentially all-time highs for both the DJIA and S&P 500 after US Durable goods orders for December also came in nearly 2 times as strong as estimated this morning.  All the elements appear to be in place for the start of a strong rally in energy prices, but some caution is warranted after such a sustained buying spree since early December that at some point, the current overbought condition in equities and commodities will have to be corrected.

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