The Relative Strength of WTI
Author: Brynne Kelly (w/Lee Taylor technical levels)
The petroleum complex got hammered this week with WTI crude oil prices ending the week almost 9% lower (left chart below). One-month calendar spreads in WTI also ended the week on their lows (right chart below). This was due largely in part due to renewed lockdown fears after it was announced that President Trump tested positive for covid-19 and weaker than expected ISM manufacturing numbers, but also due to continued weakness in product markets.
Calendar spreads are specifically weak in the front 5 months of the curve, which follow along with the expectation that the recovery we have seen since March has reached a plateau. This is not where the story ends however. Across the petroleum complex we have come to a point where WTI is displaying relative strength against other markets on a YTD basis.
To highlight this we will look at:
Key Gasoline Calendar Spreads
Jet Fuel Futures
WTI Spread to Brent
YTD WTI Curve Shift
Product markets relative to WTI we a mixed bag. NY ULSD crack spreads to WTI ended the week on their highs while RB gasoline cracks ended the week on their lows.
However, for the year NY ULSD crack spreads are down 65% on the year and closed solidly on their lows last Friday.
Taking it one step further, both crack spreads are at or below their 5-year range, with ULSD cracks sitting far below it's 5-year range (yellow line, left chart below).
This means that WTI prices have held more value than refined product prices. Even with refiners reducing capacity and running at between 70-75% of capacity, product prices have fallen more than WTI prices.
Key Gasoline Calendar Spreads
There was a lot of position taking in the two gasoline calendar spreads (March/April and September/October spreads) that are most affected by the EPA's Fuels Regulatory Streamlining rule currently scheduled to take effect in December of 2020
According to Law360, the proposed "Winter Gasoline Flexibility in RFG Areas means that the EPA is proposing to allow all winter gasoline to be used in RFG areas, without recertification as RFG. This change would increase gasoline fungibility without decreasing gasoline quality, as there is no functional difference between winter gasoline in RFG areas and non-RFG areas".
RFG areas require different RVP ( "Reid Vapor Pressure") standards for summer months and winter months. This is what typically separate "Summer" gasoline prices from "Winter" gasoline prices. This cost of the changeover from summer to winter 'spec' gasoline (and winter to summer) are reflected in the March/April and Sep/Oct spreads in gasoline markets, respectively. Different blends for summer vs winter RVP blends are required in RFG areas (cities with high smog levels and is optional elsewhere). According to the EIA, RVP/RFG standards are currently used in 17 states and the District of Columbia. About 30 percent of gasoline sold in the U.S. is reformulated.
This last week, traders appeared to come to the realization that this new rule might actually go in to effect as scheduled. As a result we saw a narrowing of both the March/April and September/October spreads (teal dots below).
We included the Mar/Apr and Sep/Oct spreads from 2019 & 2020 above for some perspective. What this shows is that while spreads may have narrowed in anticipation of the new ruling, they are not as 'tight' as they have been at expiration the prior two years.
With blending components trading at a significant discount to RB, and the "expectation" that those components could continue to be blended into 'summer' gasoline, we could see these spreads tightening further. In addition, the narrowing of the 2 key gasoline spreads is flattening out the calendar RB curve. This, in turn is reducing gasoline's premium to WTI on a calendar basis.
With all the action in gasoline this past week, we thought it would be a good time to dissect EIA gasoline inventories by PADD. Last week we saw our first build in gasoline inventories in quite some time. Below, we show US gasoline inventory levels by PADD for the last 10 years (dark purple line = 2020). Midwest inventories (PADD2) are now on 10 year lows. While the east and west coasts were able to rely on imports to meet any shortfalls, that isn't as easily the case for the Midwest.
Even with gasoline inventories retreating, in total, to within their 5-year range before it's counterpart WTI, gasoline prices have still lost more value this year than WTI.
One thing to watch out for in the upcoming week's EIA inventory number is any impact the Iranian tanker has on storage. According to Reuters, "the first of two tankers carrying cargoes of Iranian gasoline seized by the United States discharged in New York on Thursday, per Refinitiv vessel tracking data, ending a three-month journey. The U.S. Department of Justice in July seized 1.1 million barrels of Iranian fuel onboard four privately owned tankers bound for Venezuela, part of Washington’s efforts to disrupt trade between the two sanctioned nations. The Singapore-flagged Maersk Progress discharged 557,000 barrels of gasoline in New York after loading in Sri Lanka on July 4, vessel tracking data showed. A U.S. Department of Justice spokesman declined to comment. The Maersk Progress was due to arrive in Houston last month, but changed its route".
The lackluster return of airline travel continues to have an impact on jet fuel futures. Below we see that the first half of calendar 2021 strip closed on it's 10-day lows last Friday.
This strip has also been setting new lows since August, 2020. The optimism that airline travel would return to normal in the 4th quarter of this year is waning.
Looking even further back in history, month-1 jet fuel futures in the US Gulf Coast are way below 5-year lows (purple line, below).
Once again we see that refined products, in this case jet fuel, have lost more relative value the WTI crude oil.
WTI Spread to Brent
WTI has been gaining on Brent for several months. Last week we finally saw a slight weakening of the spread in the front of the curve.
However, for the year, the calendar 2021-2022 strip is the tightest it's been all year.
Looking at the WTI/Brent spread over the last 5 years, we have narrowed towards 2016 levels. This shows that while regional supply/demand balances have adjusted to a new lower normal, global demand is not enough to support an active import/export market. In addition, freight rates are being negatively impacted as tankers are exiting storage and add to available freight capacity.
Cheaper freight rates will help the arb stay open and keep spreads tight. Low ULSD prices also contribute to this effect. We don't see the WTI/Brent spread widening back out until ULSD prices stage a meaningful rally. Once again, we see that on a relative basis, WTI is holding more value than its counterpart Brent.
Finally we look at the total product being supplied by US refiners over the last 5 years. The dark purple line represents 2020 year-to-date.
This is the largest indicator of overall demand that one can find in the petroleum complex. We think refiners will continue to run well below capacity through November (when refiner maintenance season winds down) but it remains to be seen if a return to more normal capacity runs after that can be absorbed by the market.
Finally, we look at the calendar 2021 WTI futures curve since the beginning of the year. WTI is stubbornly resisting new lows while the rest of the complex is sitting at or near new lows for the year.
This relative 'strength' in WTI is basically the lever that is reducing all other spreads to their lows (cracks, WTI/Brent, etc.). How much more can spreads tighten before either product prices have to rally or WTI needs to make another move lower?
Of note last week
Around 330,000 barrels of oil equivalent per day (boepd), or 8 percent of Norway’s oil and gas production, would be affected after a Norwegian workers’ union steps up a strike action on October 4, the Norwegian Oil and Gas Association (NOG) said on Friday.
U.N. shipping agency, the International Maritime Organization (IMO), said on Thursday its website and intranet had been disabled by a sophisticated cyber attack and its IT specialists had shut down key systems to prevent further damage. The cyber attack on IMO is the second high profile cyber security breach to hit the shipping industry within a few days. On 28 September container shipping giant CMA CGM suffered a security breach to its peripheral servers, causing the company to shut down access to its online services.
EIA Inventory Statistics
The EIA reported a total petroleum inventory DRAW of 6.50_million barrels for the week ending September 25, 2020 (compared to a draw of 9.80 million barrels last week. Commercial Crude oil inventories posted a weekly DRAW of 2.30 million barrels.
Year-to-date, total inventory additions stand at a BUILD of 79.60 million barrels (vs 86.10 last week).
Commercial Inventory levels of Crude Oil (ex-SPR) and Refined Products are slightly above the 5-year average in oil, slightly within the 5-year average for gasoline and still above the 5-year average for distillate.
Lee Taylor - Technical Levels
Resistance: 40.82 / 42.97 / 44.30
Support: 38.79 / 37.68 / 35.49
The Brent market appears in a more perilous situation than WTI with regards to how it looks technically. Unlike WTI, Friday’s selloff broke under a solid base of support at the 39.90 level. 39.88 is now resistance and a test of 37.68 is likely for December Brent if the market cannot get back above the resistance levels. The pressure on flat price will most likely cause Dec/Jan Brent to .59 then .64.
Resistance: 37.97 / 38.65 / 41.72
Support: 36.60 / 35.50 / 29.01
There is a heavy weight on the oil markets with the recent positive test from President Trump as well as stories about additional closings in New York City. The president’s positive test led to last week’s macro sell off, but the question remains – how much lower this can go. Technically we are extremely near the almost triple low of 36.60 (basis Nov WTI) from early September and Friday. A break under 36.60 would project to 35.50 and likely cause a weekly settlement below 36.11, which then leads us to 29.13. The question remains will this heavy weight cause the oil market to collapse under pressure or can it hold these levels for another attempt at $40? -.30 cents remains strong support for the spot WTI spread with downside to -.36 and upside of -.24.
Resistance: 1.1426 / 1.1607 / 1.1857
Support: 1.1244 / 1.0958 / 1.0655
Nov RBOB has major resistance now at 1.1426. If it cannot break above that level early in the week, look for a move down to 1.1244 then 1.1000. Dec/March RBOB has been trying to get above the -272 level and hold some momentum. If flat price pressure causes it to succumb, then look for a move down to -372.
Resistance: 1.0905 / 1.1059 / 1.1376
Support: 1.0792 / 1.0688 / 1.0604
The heating oil market is desperately trying to say above 1.0792 and 1.0641 to avoid another trip to under $1.00. Stories are already being written about the president’s well-being, but it does illustrate how volatile these markets will be under Covid 19 and a presidential election looming. If the market does get a bounce, the first resistance level in November heat is 1.1376. Just keep an eye on the downside because the fall is quite steep in heat. Dec/March struggled breaking above -396.