ENERGY PRICES WERE WEAK ON WEDNESDAY… as bulls had to step out of the way following yesterday’s supremely bearish inventory report. As such, the liquids markets are flirting with the 38/50% retracements.
If the bulls cannot defend this area then we will be back to sub $40 crude oil quicker than you can say T. Boone Pickens.
DOE Recap: Bottom line, nothing has changed, it was a bearish report. Transportation fuels rose, heating fuels rose and stocks of commercial and government crude oil surged. More to the point, last week domestic crude oil production surged towards a four-year high, 5.48 MMbbl/d.
As we all know, seasonal markets that shift from backwardation to contango are a clear bearish signal. Futures traders are discounting spot material, which can only mean that the market is not concerned with regard to seasonal demand relative to supply.
Distillate supplies increased last week by 0.22 MMbbls or 0.2 percent. As we note in today’s issue of The Schork Report, the typical movement at the end of the winter is a draw of around 1.2 MMbbls. On that note, the typical movement in propane is a 0.2 MMbbl draw, yet the DOE reported a second straight >0.6 MMbbl build. That does not bode well for today’s natural gas report.
Bottom line, the U.S. is flush with distillates. The NYMEX heating oil term structure for next winter has barely moved. In fact, the contango in the winter strip has actually steepened. Similar to gasoline, this is an obvious bearish metric.
Second Time Around: California is back in the “day-ahead” electricity market game. On Tuesday day-ahead trading returned nine years after an earlier attempt at the practice ended with the California energy crisis.
The day-ahead market, which has been run successfully in the mid-Atlantic region by the PJM, lines up electricity resources for delivery the next day. Also like the PJM, the California market is being divided into over 3,000 separate nodes, all with their own pricing. The plan is, that unlike the problems at the beginning of the decade, excessive pricing in one area will not bring down the entire state system. There is also a price-cap this time around, $2500 a megawatt hour. That is about 50 times the going rate for electricity in California today.
Officials for the California ISO say the market ran well and closed a few minutes ahead of time, an indication that things were going smoothly. In the simulations run over the last 18 months, the California ISO has been testing for market abuses. Abuses tied to the Enron scandal helped bring about the collapse of the day-ahead system in 2000-01.
Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.