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by Brynne Kelly

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June 2, 2017

Is there a case to be made for relative value?

Selling energy at the beginning of April was a great trade.  However, where do we go from here?  Since prices don’t exist in a vacuum, I thought this would be a good time to take a look at how energy inputs have performed relative to energy outputs.

Think of Crude Oil, Natural Gas and Coal as the three major inputs used to produce energy in a consumable form. Their prices are heavily dependent on the demand and price of the products they can be converted into.  The spread (or margin) between the cost of inputs and the sales price of the outputs not only drives investment in these conversion capabilities, but also indicate supply versus demand.

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With all of the focus this past week on OPEC cuts, inventories and demand worries, let’s take a look at the price movements of the three major inputs.


The entire WTI crude oil curve has fallen more than 6.5%  since the beginning of April, 2017.


The front of the natural gas curve has fallen more than 8% since April.

Meanwhile, CSX coal futures have increased over 6% since the beginning of May, 2017.



To get a feel for the relative value of energy inputs, it makes sense to see how consumable energy products have performed.

First off, we have electricity.  Coal and Natural gas are two of the primary inputs used to produce electricity in the US.  While natural gas prices have fallen significantly in the past two months, the “heat rate” has moved higher.  This means that electricity futures prices are not falling as much as natural gas prices.

Another relative value product to look at is ethane.  While it is not normally thought of as an ‘output’ of natural gas liquids, it does take further processing to get it to market which differentiates it from raw production value.

For the past several years, ethane has routinely been ‘rejected’ into the natural gas stream since the outright price of ethane hasn’t been enough to cover processing costs.  From the chart below, you can see that ethane futures have not experienced nearly the drop that natural gas has this year (at least in the front of the curve).


Another obvious consumable output is gasoline.  Gasoline futures have also fallen less than their underlying ‘input’ falling less than 6% compared to oil’s greater than 6.5% decline.

This relative value play can be seen in the rebound of the gasoline crack from its lows in May.  Meaning that while crude oil prices continued to decline, relative gasoline prices increased.

The same is true for ultra-low sulfur diesel (HO).  As oil prices continued to sell-off, distillate cracks actually started to rebound off their May 1 lows.


What does this mean?  Is this a signal?


Oil Spreads

Another place to spot relative value is in oil spreads.

Relative value of oil in one geographic area to another is similar to input/output economics in that differences in prices can impact the movement of production from one market to another.

Key relationships impacting these movements are US prices versus Europe and Asia.  In the past month, US prices (LLS oil in the gulf coast) through the end of the year have gained value with respect to prices in Europe (Brent), yet European prices have lost value relative to Asia (Dubai).  This is not good for US exports.


However, the spread between US and Asian prices has continued to widen.  Meaning that while the economic incentive to move US oil to Europe hasn’t increased, the incentive to move oil to Asia has increased (as seen in the WTI/Oman spread below).


This points to where the market pins their demand hopes.  As long as global oil demand increases, production to meet that demand can come from anywhere as long as the economics support moving oil from one market to another.

Weekly Inventory

This brings us to the weekly inventory changes.

For the week ending May 26, 2017 total stocks declined by (9.9) per the EIA figures below:

The most important part of this week’s inventory draw is seen in the cumulative change in this “summer” totals versus prior years:

The rate of crude oil stock draw-downs this year relative to the last 3 years is certainly impressive, especially considering that oil inventories posted a net build during this same period in 2016 and 2014.

One contributing factor to this draw-down is the growth in US oil exports:


The chart above definitely highlights what could be considered a ‘trend’ of increasing exports and decreasing net imports.  But, it also highlights the fleeting nature of this dynamic from week-to-week.  However, it’s a positive sign to see these export volumes continue to make new highs.

Speaking of inventory levels, we are approaching that time of year when heating oil (distillate) inventories should start to build in preparation for winter heating season (just as natural gas inventory summer builds in preparation for winter).


With all the focus on gasoline inventory and prices, might it be time to take a look at heating oil prices? Spot prices are half what they were at these same inventory levels 5 years ago.

From a relative-value perspective, there is a lot to think about.

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Read More Brynne Kelly Research

Global Oil Spreads Are the Key to Balancing US Oil Inventories

Is a Rotation Out of Oil Into Equities Underway?

Putting Gasoline Inventory Build Into Perspective

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by Brynne Kelly

[email protected]

May 26, 2017

This week the market had to contend not only with weekly inventories, but also with an OPEC meeting and decision.  There was much anticipation and positioning before and immediately after, specifically in the term structure of the curve.  The chart below of the WTI futures curve from May 10 to May 25 highlights this well:

Leading up to the OPEC decision, the curve was decidedly moving into a backward structure starting from around the Dec-17 contract.  The backwardation was at its widest on the 24th (and early the 25th) before news of the meeting hit the wires, but was cut in half after the news was out.

What does this mean and what should you look for in the coming weeks?

Historically there has been a general understanding of what backwardation and contango mean in commodity markets:

Backwardation pulls molecules out of storage.

Contango invites molecules into storage.

Further, Contango invites producers to produce and invest in production while Backwardation leads to future production uncertainty if future prices are unusually low.

Depending on the level of Contango, a producer can cover their cost of carry (storage costs, interest on debt, etc) and then some.  It give producers options regarding how long to ‘carry’ inventory and when and where to deliver their product.  There is comfort in knowing that what you invest in today is worth more in the future (again, depending on the level of the contango).  In addition, it makes it easier to cover the cost of transporting their product on longer journeys.  It takes time to load cargo on a ship and time to get the ship to its final destination.  The level of contango can compensate for that.  A wider contango suggests that the conventional, less-expensive means of storing and transporting have been exhausted and more money is needed to cover the costs of less conventional, more expensive options.

Markets in Backwardation highlight the ‘convenience yield’ of owning a producing asset.  You own a producing asset and can deliver your product immediately into the higher-priced spot market.  Backwardated markets generally reflect an immediate shortage of product not expected to exist in the future.  For example, a major disruption in supply like a pipeline leak will cause the spot market to price at a premium to future markets that reflect the value of the pipeline being fixed.  When a commodity is in demand or fundamentally bullish, the ability to deliver immediately garners a premium (like flowers delivered on Valentine’s Day).  Backwardation can be temporary or sustained (i.e. short-term, weather-induced or a longer-term supply disruption).  Either way, the front of the curve (spot or front-month futures) is the first to react because ‘price’ is the easiest way to balance the change in market conditions.

I mention all of this because the term structures are where people are looking to find and express market sentiment.  The thought was that OPEC would extend their existing cuts to production until sometime in 2018, at which point the cuts would end creating a ‘tighter’ supply demand balance in the short to mid-term than it would experience beyond that.  The expectation being that this might lead to some sort of backwardation in the price curve.  Additionally, one could surmise that backwardation would also help pull molecules out of storage (since it’s more profitable to sell today than in the future) which would organically help to draw down excess inventories.

The problem with this is that it’s more ‘theoretical’ than ‘actual’ at the moment.  Meaning, there isn’t ‘actually’ a shortage of supply in the spot market.  At least not the type of shortage described earlier in the pipeline leak example.  The market continues to keep an eye on gasoline demand with increasing anxiety and the initial impact of an extension of cuts didn’t leave the market with anything tangible to hang its hat on. Rather, it was left with the reality that it will take time for any ‘supply-side’ tightness to actually materialize.  It reminds me of 2014 when US production was materially rising, yet futures prices were reluctant to come off.  It took evidence of increasingly hard-to-find and more expensive storage to finally seal the deal and futures to sell off.  It’s the same this time, there are theories about how these supply cuts might play out and then there will be ‘evidence’.  Look for the evidence.

One place to look for that, obviously,  is in the product markets.  I found it interesting that while crude oil futures across the board shifted materially lower on Thursday, crack spreads were marginally unchanged and have actually moved higher in the last 2 weeks:

The market has built a story around the bearish tone of slowing gasoline demand growth.  Yet the spread margins are not where the selling was.  Does this mean that the issue is not the fixed refining capacity in the US, rather the ability to export incremental barrels?  Meaning we expect there to be enough, however slowing, demand for the amount of finished products the US can both produce for itself and for exports, but that additional barrels of crude can’t economically get to other markets that have more refining capacity.  As discussed in previous posts, global oil spreads have moved slightly in favor of WTI (WTI futures have moved below both Brent and Oman futures) in part, due to OPEC’s earlier production cuts.

Taking a look at oil production versus net US imports since 2010:

and more specifically, in the last 17 months:

Its clear that US net imports did decrease as production was on the rise.  But since the beginning of 2016 we haven’t really gained any ground.  The expectation is that as we would either consume more of our local production and/or export that which we don’t need.  Either way, we need to see a reduction in net imports as proof that current production levels can be sustained without significantly impacting prices.  That is another piece of evidence to look for.

Finally, some comments regarding this week’s inventory numbers.  This week we saw a net draw of (6.1):

I like to put the weekly inventory changes in perspective as a whole by season, like in the Natural Gas markets where inventory is injected into storage over the summer for use (withdrawal) in the winter. While outright inventory levels are important, it’s also key to compare how you are progressing compared to previous years.

In the oil complex, the summer ‘season’ is typically characterized by its demand-related draw-downs of gasoline inventories.  Here’s how this ‘season’ compares to the last 3 years:

If it weren’t for outright inventory levels, especially in gasoline, the seasonal totals so far look fairly impressive.  We clearly have to look for evidence of gasoline demand and/or a reduction in net crude oil imports to have an impact on outright inventory levels.

Using the last 3 year average inventory changes from here through the end of the season (September), this is how inventory levels would stack-up:

Clearly, market bulls would hope for something better than the last 3 year average draw-downs.  This is where the market is hoping OPEC cuts will do the heavy lifting to erode inventories at a faster pace than previous years.  This will only happen if market economics favor exports to move supplies out of the US or if gasoline demand materializes over the summer.

When the market is at a cross-roads, there are a lot of false starts while it waits for something to tip the scale. It’s those that spot the evidence first that catch the real move.




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By Jason Pearce

The Gundlach Trade of 2017

Every year, investors and money managers flock to the Sohn Investment Conference in New York to hear the investment pitches from the top minds in the industry.  Jeffrey Gundlach, the CIO of DoubleLine Capital, is one of the most anticipated speakers of the event.

Given his track record, it’s no surprise.  This is the man that often outperforms the market and most of his peers, who predicted the Trump election win, and who even told traders to buy natural gas when it was scraping the bottom of the barrel at multi-year lows.

Not that he’s always right (he has been bearish on the stock market for years), but his opinion is not one you want to quickly dismiss.

This year, Gundlach’s big idea was to go long on the Emerging Market Index (EEM) and short the SPY.  Now, he did clarify that this does not mean that he’s bearish on the US stock market.  He simply thinks that the Emerging Markets will outperform the US market.

This idea is not a directional bet on the market.  Rather, it is a relative value play or a pairs trade.  In futures trader parlance, it’s what we call a good ol’ spread trade.


One of Gundlach’s main points for this idea is that the US market is overvalued and the Emerging Markets are undervalued.  So with both of them poised for a reversion to the mean, a relative value play is the logical way to go.

This makes perfect sense.  In a prior post, I noted that the current level of the CAPE ratio indicates that the US market is historically expensive.  Right now, the CAPE ratio is either side of 29:1.

The only other two times in the last century when the CAPE ratio in the US was at this level or higher occurred in 1929 and again at the end of 1999.  And we all know how things turned out at the end of the Roaring Twenties and the Dot Com bubble.  Perhaps it’s time to queue up the song Party Like It’s 1999

At the same time, the CAPE ratio on the MSCI Emerging Markets Index is at a historically low reading of 14:1.

The spread between the CAPE ratio in the US and Emerging Markets hasn’t always been this wide.  During the Financial Crisis of 2008, the CAPE ratios for both the S&P 500 and the MSCI Emerging Markets Index had crashed to a similar level of about 10:1.  The ratios for both then rebounded into early 2011 as the US took the lead higher.

Two Paths Diverged

After the ratios of both markets experienced a setback in 2011 and bounced back at the start of 2012, the CAPE ratio on the MSCI Emerging Markets Index rolled over once again.  It continued to drop for another half a decade until it finally returned to the Financial Crisis low in early 2016.

On the other hand, the CAPE ratio on the S&P 500 continued to climb for the last several years.  It is now sitting at a nine-year high.

On an interesting note, when the Emerging Markets CAPE ratio returned to the same level as the Financial Crisis low last year, PIMCO said that buying down there would be “the trade of the decade.”

It looks like they were right, too.  The Emerging Market Index (EEM) has risen a stellar 39% over the last year and a quarter.

So how has your stock portfolio performed over these last fifteen months?

Even though the Emerging Market Index (EEM) has rocketed higher since early 2016, the CAPE ratio is still only sitting at a modest 14:1.  With the CAPE ratio on the S&P 500 now at nose-bleed levels and the CAPE ratio on the Emerging Markets at bargain levels, the disparity between their valuations have become glaringly obvious.

But that’s not gonna help us out with the timing.  We need to see some price action to accomplish that.

Ratio Action

The S&P 500 has outperformed the MSCI Emerging Markets Index since 2010.  However, technical action suggests that this trend could finally be coming to an end.  We are going to look at the ratio between SPY and EEM to determine this.

A near perfect double top pattern in the ratio may have formed on the weekly chart between the multi-year high of 6.60:1 that was posted in early January 2016 and the mid-December 2016 high of 6.58:1.

To confirm that a double top has indeed been established, the SPY/EEM ratio needs to break the lowest point between the two highs.  That level is located at the mid-October correction low of 5.69:1.

The ratio is within spitting distance of the October correction low right now.  Any trader who’s interested in shorting the SPY/EEM spread better have their finger on the trigger and be ready to squeeze it at the drop of a hat.

Early Warning Shot

One could make the argument that the SPY/EEM ratio has already signaled a bearish trend change, despite the fact that a double top has not yet been confirmed.  This occurred back in mid-March when the ratio closed below technical support at the rising 100-week moving average.

In 2011, the ratio broke about above the 100-week moving average and closed above it every single week for five years straight.  (I wrote a post that explains my process for ending up with the 100-week moving average).  The bullish trend was a classic pattern of higher highs and higher lows, making it an easy pairs trade (long SPY and short EEM) to hold for anyone aware of what was going on.

In October, the ratio sank to a one-year low and closed just below the 100-week moving average.  It was a do-or-die moment.  As it turned out, this marked the bottom of the correction.  In just a couple of months, the swift recovery that immediately followed catapulted the ratio almost back up to the early January multi-year high.

After failing to clear the January 2016 high, the ratio rolled over again and started its descent.  Technical support at the 100-week moving average was breached again in mid-March, but this time the SPY/EEM failed to recover.  By this metric, it’s time to be short or be out.  Being long is currently not an option.

Buy, Sell, Switch

Even if you don’t intend to put on a SPY/EEM pairs trade, knowledge of how it’s performing is still valuable knowledge for the average investor.

From the perspective of diversification and/or marketing timing, knowing about the wide spread between the S&P 500 and the MSCI Emerging Markets Index CAPE ratios and tracking the trend in the SPY/EEM ratio can help one enhance returns and manage risk.

Since the case has been made that Emerging Markets should start to outperform the US market, an investor could use this information as a reason to lighten up on US equities and get a little heavier in the to the Emerging Markets.

If you’re an absolute return kind of guy, you could even say that this is a good reason to switch altogether from being invested in US equities to being invested in the Emerging Markets.

Better Risk/Reward

Not only does the recent change in the SPY/EEM trend suggest a regime change in market leadership, but the CAPE ratio also tells an investor where to go for lower risk.

Most people assume that the Emerging Markets carry the higher risk because of political risks, higher volatility in the currencies, less-developed economies, etc.  These are valid concerns.  But the price of Emerging Markets relative to what they actually earn indicates that they are a lot closer to being a good value than what the US market is.

Not to suggest that they can’t decline from here, but the Emerging Markets have much less further to fall than the US market does before getting to what has been an historically an undervalued level.

If there’s a global bear market lurking around the corner and you get caught wrong-footed, don’t you at least want to be invested in the market that drops the least instead of the one that drops the most?

Emerging Markets Have Emerged

Let’s forget this whole relative value play for just a moment and take a look at the Emerging Markets on their own merit.  For a few years the outlook for EEM was bleak.  But things have changed considerably over the last several months.

Back in the summer of 2015, the MSCI Emerging Markets Index broke out of a multi-year trading range…to the downside.  Not a good omen.  Once support at the October 2011 low was breached, there was no reason to try catching a falling anvil.

By January of 2016, EEM was trading at the lowest price since early 2009 and the CAPE ratio had returned to the Financial Crisis low.  At that point, one would not be surprised to see “Abandon all hope, ye who enter here” scrawled on their brokerage confirmations for any purchases of Emerging Markets equities.

But it’s always darkest before the dawn.

A mere two months later, EEM closed back above the October 2011 low.  This negated the downside breakout and triggered a Wash & Rinse buy signal.

Three months after that, the MSCI Emerging Markets Index closed above its 50-week moving average for the first time in over a year.  This signaled a bullish trend change.

Here we are nearly a year later and EEM is still going strong.  It’s stayed above its 50-week moving average this entire time and it’s now trading at the highest price in nearly two years.  Furthermore, the Emerging Markets Index is now trying to crack through trend line resistance (as drawn across the 2007 bull market high and the 2011 secondary top).

Add the current technical picture to the fact that the CAPE ratio has spent the last year and a quarter recovering off a double bottom at the 2008 and 2016 lows and you can see there’s plenty of fuel to keep the rocket going.  Buying the dips and riding the rips is currently the way to trade the Emerging Markets.

Leveraged Bet

Gundlach recommends doing this ETF pairs trade with leverage of 2-to-1.  If you’re a conservative investor, you might want to do this without the leverage.  But if you’re really confident in this trade, that’s fine.  Go ahead and use the leverage he recommended.

But if you’re really, really confident in this trade…

You could step on the accelerator and put on the same spread trade position with futures contracts.

Now, perhaps Gundlach doesn’t understand the insane amount of leverage that’s available to futures traders to execute this idea.  More likely, though, he knows.  He just doesn’t want to be held responsible for telling the rest of the world to go out and trade futures contracts.

The leverage offered on futures contracts can give the typical novice investor way too much fire power.  Think 20-to-1 leverage instead of 2-to-1 leverage.  It’s like the difference between driving a Prius and a Ferrari.  If you’re gonna go for a drive, you had better know in advance how much horsepower you can safely handle.

If you’re conformable with the futures market, you can easily trade the E-Mini S&P 500 Index futures contract against the Mini MSCI Emerging Markets Index futures contract.  Conveniently, they both have the same multiplier of $50 times the index.

Given the fact that the value of the E-Mini S&P 500 is worth more than double the value of the Mini MSCI Emerging Markets Index (the ratio is currently 2.35:1), a trader who wants to lower the volatility might consider using a more dollar neutral position of spreading two Mini MSCI Emerging Markets Index contracts against one E-Mini S&P 500 contract.

The Market Is Master

If you are looking to make a play on the SPY/EEM pairs trade, or any trade for that matter, is very important that you take your instructions from the market’s action.  Put your trust in the price, not in the prognosticator.

For example, what if you’d gone short the homebuilder ETF (XHB) when Jeff Gundlach picked it in May of 2014?  Initially, it dropped about 12% over a five month period from when he made the recommendation.

But then XHB rocketed to new multi-year highs just a couple of months later.

In May 2013, he absolutely hated Chipotle (CMG) stock –even though he said that he likes their burritos- and said it was a short sale.  He didn’t like the chart, the P/E ratio, the low barriers to entry for the competition, etc.

Guess how that one turned out?

From the close of May 2013 through the end of the year, the stock actually increased in price by about 48%!  That wasn’t the end of the run, either.  The stock more than doubled in price in the months and years that followed his presentation.

Would you have stayed short on that?!

Not if you had any leverage.  Even if you did, it took nearly three and a half years before CMG finally dropped back down to the price where it had closed in May 2013.

The point of this is that Gundlach should not be your Guru.  While you may get some good ideas from some of the big traders and investment managers from time to time, it’s important that you overlay all of it with your own research as well.

More importantly than getting in a trade, you have to determine where you will get out of a trade.  A thorough examination of the price behavior will be able to provide you with those exact parameters.  You can’t rely on the other guy to tell you when to bail out of their big trade idea if it goes south.

Also, you need to have your risk management plan totally dialed in.  You shouldn’t ever put on a position that’s so big that one bad trade can wipe you out.  If you’ve caught a tiger by the tail and you’ve picked a big winner, you should have ample opportunity to add to it as the trend unfolds.

But until a trade proves itself, you need to be concentrating on playing good defense.  Remember, Emerging Markets have spent plenty of time acting like submerging markets.  If that happens again, you don’t want to go down with the ship.

More Articles by Jason Pearce:

Profiting From Failure: The Wash & Rinse Trade, Part II

How to Trade with Moving Averages, Part II

How to Trade with Moving Averages, Part I

Market Returns Do Not Equal Investment Returns with Leveraged ETFs

Is The Canadian Housing Market Bad for Canadian Banks?

2017: The Death Year for Stocks

Potential Bond Market Reversal Ahead

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by Brynne Kelly

[email protected]

May 18, 2017


Is there more to OPEC’s strategy than meets the eye?

When oil prices soared to $100 plus for a sustained period of time, the ‘capability to produce more’ was born.  The US and other producing nations rushed to unlock technologies that had previously been uneconomic and unnecessary.  Was OPEC watching as that last barrel came on-line and broke the camel’s back or did they severely underestimate the innovation that soaring prices would create?

Sustained higher prices fueled innovation in drilling and extraction and also fed the renewable enthusiasts.  The subsequent fall in prices then led to cost cutting and production efficiency.  At $100 a barrel for oil, it was easier for ‘green’ technologies to get their foot in the door using the economic argument.  We then saw stricter fuel efficiency mandates, government subsidies that encouraged ‘switching’ to renewable sources, and the idea of energy ‘choice’ became more mainstream as electric vehicles and solar panels gained momentum.  This left the world with a slump in organic demand for oil and oil products and consumers with the idea that they can ‘choose’ the type of energy they buy.

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When OPEC finally announced production caps at the end of 2016 the substance was interesting from two perspectives.  One is the bulk of them came from members exporting medium and heavy sour oils, another is the impact the light/heavy spreads are having on the economics for global oil movements.

It has now been telegraphed that OPEC may agree to extend the production caps at their upcoming meeting.  Is there something more to this strategy than meets the eye?  As they face growing competition from other producers like the US, OPEC’s motives may extend beyond just general price support.  Meaning, is their strategy intended to support their ‘brand’ of crude over lighter brands and will that lead to more disparity in light/heavy crude spreads.  How will that impact the growth of US exports?

Let’s look at the price impact of reducing the supply of heavier crude grades from the market so far this year:

ASCI Sour Crude, Canadian Heavy

The value of WTI relative to both USGC Sour and Canadian heavy crude fell.  We know that refineries are specifically configured to process the most economic grades of oil available to them.  This is how they work their strategic advantage.  For example, since the US has historically been a net importer of oil, and heavier grades were the cheaper option to import (from Canada, Mexico and the Middle East), many US refineries were configured accordingly over time. In addition, many of Asia’s new refineries are designed to run on medium and heavy crude that has a higher diesel yield.  With their proximity to the Middle East’s supply of heavier production, this made sense.

In the mean-time, new supplies of US shale production are now ready to hit the global market and it’s primarily light, sweet oil.  The US has invested heavily in and around the Gulf Coast to accommodate exporting their new-found supplies as slowing local demand has spurred a search for new markets.  They are now juggling the task of importing the slate of crude grades that meet local refiner specifications along with exporting excess production of those that don’t.

Of the 3 main benchmark oil futures contracts, WTI, Brent and Oman/Dubai, WTI is the ‘lightest’ and Oman/Dubai is the ‘heaviest’.  With OPEC cutting the supply of heavier grades from the market at the same time lighter supply is growing, spreads between benchmark oils continue to reflect that.

The loss of premium of WTI over the OPEC basket price can also be seen in the spot market.


The question is, how much of this can be attributed to the heavy US refining maintenance season this past spring and how much is attributed to tighter supply of heavier grades?

Even with the rally in outright prices this week, WTI was the weakest performer.

Brent crude lost value relative to the heavier Dubai grade, but gained slightly relative to the even lighter US grades.  This has been the general trend all year, but has gained some momentum as talks of continued output cuts emerged.

However, it’s interesting to note that while December 17 vs 18 spread in both WTI and Brent futures dipped into contango territory briefly when the market sold off early this month, Dubai(Oman) didn’t follow suit.

I take this as a sign that the market realized any tightness created by summer seasonality and production cuts will be short lived.  Said another way, inventory levels are still high and the market doesn’t want to create incentives to store more via contango.  At this point, any rally in outright prices needs to be led by the front of the market in order to disrupt the mind-set that historically high inventory levels equals low prices.

It’s worth noting that crack spreads moved higher this past week in tandem with the oil price rally.

Spot gasoline prices have been lackluster so far this month with the exception of the West Coast which is still experiencing refinery outages and are now well above levels seen this time last year.

Turning to EIA Inventories.  Was a small draw of (0.4) in gasoline inventories this week all it took to change sentiment?

With this week’s crude draw of (2.5), the total change in inventory over the past 6 weeks have been impressive relative to the same 6 weeks in prior years:

Gasoline inventories, however, remain a net injection over the 6 week period.  The picture is quite different from this period last year which points to the difference in the refinery maintenance season year over year.  Now that the Gulf Coast refiners are mostly back on-line (as seen in the refinery utilization rate for PADD 5 in the inventory table above), it remains to be seen if summer gasoline demand (plus exports) will outpace production and draw down inventory.

We have watched the increase of oil storage capacity over the past year as the market caught up to growing production and the desire to have export facilities.  Growth in both storage capacity and the inventory to fill it has weighed on the market heavily.  Take a look at a comparison of WTI prices to ending inventory levels over time:

Does adding more capacity to store automatically mean lower prices once it has been ‘filled up’?  The success of our ability to absorb this storage capacity as the ‘new norm’ seems to hinge on the viability of the export market.  As noted above, for now, OPEC cuts have been more helpful to heavier crude markets.  But, might it be reasonable to think that with this expanded capacity comes a higher base level of oil in storage to support an export system?  If so, prices have room to move higher.

For now, the US is brimming with light, sweet crude oil in a global market dealing with OPEC’s attempts to tighten heavy and sour oil supplies, but it’s a long way from where we were this time last year before any cuts and still just getting our feet wet with crude exports.

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Read More Brynne Kelly Research

Global Oil Spreads Are the Key to Balancing US Oil Inventories

Is a Rotation Out of Oil Into Equities Underway?

Putting Gasoline Inventory Build Into Perspective

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