The Phil Flynn Energy Report
The Race to Zero
Markets today are focused on the race to zero. The FOMC will announce their decision today, and while they’re not expected to cut rates from zero to .25 percent, they will tell you that they will “do whatever it takes” to achieve stability and foster a rebound in growth after what was an ugly GDP.
While many clearing firms and oil analysts were convinced that the front-month WTI futures contract was destined to go to zero, somehow zero is getting further away. Despite fears that oil storage space —conventional and unconventional — is running out, the move in the front month is defying the mantra that the contract had no choice but to trade negatively again. Crude is soaring despite reports that the USO ETF has been forced out of the front-month futures and reports that many FCMs aren’t allowing trades in the front-month June WTI contract.
Most speculative traders were forced out of the front-month contract, and it seems that the market is finding buyers for some of those barrels of excess crude. Expectations are that the reopening of the U.S. economy may lessen the impact of overflowing oil storage.
Or perhaps it was API data that showed oil going into Cushing, Oklahoma is slowing, which gave crude oil a lift. The API showed a whopping 9.978 million barrel build in crude supply that was, surprisingly enough, less than some people had predicted. The 2.486 million barrel build in Cushing was less than expected and is a sign that oil destined for Cushing is going elsewhere.
The API also reported a 1.108 million barrel drop in gasoline supply. Gas demand drops have leveled off and are on the rise, and retail gas prices may have hit bottom as well and are starting to rise. Still, a massive 5.462 million barrel increase in distillate supply is a reminder that the economy is still far from back to normal.
Oil also bounced on reports of an explosion on an oil tanker in Syria. The news is raising concern that desperation over low oil prices may cause some increased tension between oil-producing nations.
Oil products look like they are bottoming. Refinery cutbacks may take its toll as product demand starts to rise. The gasoline market may save the entire complex from going into the abyss again.
The Fed should do whatever it takes and that should help boost commodities today. Volatility seems to be coming back in a bit. Still, we could see some wild moves post-FOMC.
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