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Tuesday, Jan 25 2022

Whiplash Is The Theme Of The Week As Stock Markets Had Their Biggest Daily Swings In Years

Whiplash is the theme of the week as stock markets had their biggest daily swings in years while energy futures are getting swept up in the confusion. After a busy Monday, we’ve already seen a nickel swing in ULSD prices today, with RBOB and crude oil contracts seeing similar back and forth action in the early going. 

Looking at only the charts, and not the headlines, refined products have so far been able to find technical support around the trend-lines that have fueled their bull run over the past 6 weeks. If we see ULSD continue to hold a floor just north of $2.60 and RBOB around $2.40, there’s a good chance we end up seeing another run at 2014 prices levels, but if those levels break (and hold) there’s a good chance we’ll see a 10-15 cent drop coming soon.

The DJIA had its biggest daily swing since the onset of the pandemic, rallying from an 1,100 point loss mid-day to end the session up nearly 100 points, but is pointing to another weak start down nearly 400 points this morning. The Nasdaq 100 had an even bigger bounce, rallying more than 5% off of its lows for the day, the biggest daily reversal since the financial crisis in 2008, but it too is looking weaker again to start today’s trading. 

Perhaps the biggest headwind for stocks is that the FED has been signaling that it will not be coming to the rescue to prop up financial markets, and in fact will be tightening its monetary policy and raising rates, taking the free put option out of the market. How this impacts energy prices can depend on the day, as often times the correlation between the two asset classes can be strong and they move in lock step, but currently are only moving together for short periods of time.  

The VIX chart below shows that stocks are more “nervous” now than they’ve been since we first learned about Omicron, and while energy volatility is elevated, it’s nowhere close to what we saw 2 months ago.

The escalating tensions around Ukraine have become a double-edged sword for energy prices as they weigh heavily on financial markets, adding to the unpredictable nature of trading this week after helping fuel the rally for the past 2 months

new report from McKinsey & Company suggests that the transition to net zero will require an extra $3.5 trillion in spending per year through 2050, for a total of $275 trillion.  Too bad the FED has closed down its printing press for the time being or that would seem like pocket change. The report also noted that while the transition to new fuels may cost 185 million existing jobs, it will create roughly 200 million new positions.   

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
Monday, Jan 24 2022

A Sell-Off In Equity Markets Seems To Be Outweighing Supply Concerns Again To Start The Week

A sell-off in equity markets seems to be outweighing supply concerns again to start the week as energy contracts have turned from 2 cent gains overnight to 2 cent losses this morning as US equities moved deeper into the red following their worst week since the start of the pandemic.

The pen is mightier than the sword?  The selling seems to be largely driven by expectations that the FED and other central banks are ending the money printing party and will soon raise rates to combat inflation, which for the moment is outweighing concerns that armed conflict may soon disrupt the flow of global energy supplies.

The march to war in the Ukraine seems remains the biggest story with numerous threats to both lives and markets. Read here for a list of possible market impacts expected should the invasion take place. 

The IEA last week made a case that Russia’s withholding of natural gas had more to do with the price spike last year than the conversion to lower carbon fuel alternatives, and urged the world to learn a lesson from this, highlighting the growing threat from limited lithium supplies as EV’s gain market share.

Meanwhile, the existing war between Arab nations and Houthi rebels continues to add another level of concern as another missile attack on the UAE this weekend reminded the world that some of the largest oil producers are still trying to kill each other. 

Money managers continue to add to their bets on higher petroleum prices with 4 of the big 5 contracts all seeing net length held by the large speculative trade category increase again last week. Reuters’ John Kemp argues that chronically low inventories are encouraging these bets on higher prices, which suggests they may continue for some time. (see the Commitment of Traders Report table & charts below)

Baker Hughes reported a net decrease of 1 active oil rig working in the US last week, the first weekly decline since October. The EIA on Friday reported that its forecasts suggests oil and natural gas output in the US should continue to grow and reach record highs next year.

Today’s interesting read, from the WSJ: The flaws in CAFÉ standards that will continue contributing to strong fuel demand.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
Friday, Jan 21 2022

Supply Fears To End The Week With Both Energy And Equity Market Heading Sharply Lower In Overnight Trading

Look out below?  Demand fears seem to be outweighing supply fears to end the week with both energy and equity market heading sharply lower in overnight trading. 

The bulls haven’t thrown in the towel however as losses of 7 cents for refined products have turned into only a 1.5 cent decline for RBOB and less than a ½ cent for ULSD by 8am central.   Those sharp bounces overnight set up some good short term chart support just under $2.40 for RBOB and $2.60 for ULSD to determine if we’re just correcting a stronger move higher or calling an end to the winter rally.

It would be easy to attribute some of the selling, especially in gasoline, to another large inventory build reported by the DOE Thursday, but that would be inconsistent with the timing of the selloff.  In fact RBOB prices continued to rally Thursday after the DOE report, and didn’t start to pull back until equities started tumbling late in the afternoon.  

That DOE report also gave the diesel bulls more to hang their hat on as the government’s demand estimate surged (which may mean they didn’t poll the western 2/3s of the US) and days of supply dropped to just 28 days, well below the low end of the seasonal range.

Sticking with the lookout below theme: 

West Coast gasoline basis values have plummeted 30 cents or more in the past couple of weeks as refineries in the region seem to finally be getting healthy, just when the extra supply isn’t needed. 

Ethanol RINs have been tumbling all week but seem to have finally found a bid around the 95-96 cent range, some 35 cents below their highs from less than 2 weeks ago.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Market Talk
Thursday, Jan 20 2022

The Record Setting Rally For Diesel Futures Looks Like It’s Coming To An End

The record setting rally for diesel futures looks like it’s coming to an end, as ULSD is trading 4.5 cents lower this morning, and is down 7 cents from yesterday’s high. Unless there’s a big reversal higher later in the session, this will end an unprecedented stretch of 12 straight trading sessions with increases, which happened to be the first 12 trading sessions of the new year.   

While a drop of almost a nickel is noteworthy, given that we’ve seen prices increase 40 cents during this stretch, and 60 cents in the past month, it’s really not changing the technical outlook yet. The short term test comes in around the $2.63 mark (roughly 2 cents below current values) where the trend line that started on December 20th at $2.10 comes into play. It’s inevitable that that trend line will be broken (if not, we’ll be at $8 diesel by year end) but if it doesn’t happen this week, then the pullback over the past 24 hours looks like an overdue correction, not an end of the trend, and a run at $3 still seems to be a real possibility.

Another factor that may be taking away some upward pressure on diesel prices, natural gas prices in the US and Europe have fallen this week, even as another invasion of the Ukraine by Russia looks to be inevitable. Long awaited supply from Norwegian fields and an influx of LNG imports from China are both earning credit for the pullback in prices. 

There has been an expectation for nearly 6 months that the crude oil market would see a similar recovery in supply this year, but with OPEC struggling to meet its quotas due to a variety of issues, and US output slower to return due to labor and financing challenges, that hasn’t happened yet. Whether or not we see crude make a run at $100 later this year likely depends on if crude oil producers can make up ground like we’re seeing with natural gas.

Ethanol RIN values continue to come under heavy selling pressure this week, and are now down 30 cents from a week ago when a story posing as news broke that the White House may pressure the EPA to rethink their 2022 ethanol blends to combat higher prices. Given the success the administration has had getting its agenda passed lately this makes perfect sense. 

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
Wednesday, Jan 19 2022

ULSD Is Showing Off Once Again, Rallying A Nickel Overnight To A Fresh 7 Year High

ULSD is showing off once again, rallying a nickel overnight to a fresh 7 year high in what would be its record setting 12th consecutive day of gains. The rally has cooled a bit in the early morning hours, with prices only up 2.5 cents as of 7:30 central. While the contract may soon outkick its coverage and see a large pullback in prices, there’s a growing concern that a number of factors could cause an even larger spike before cooler heads prevail and prices begin to cool. 

The forward curve charts below show how futures prices are moving into a steep backwardation, which simultaneously leaves the market susceptible to an even larger spike in paper prices, even while physical markets are seeing heavy selling in basis values as most US regions don’t face the same near term supply crunch, and in many cases are seeing just the opposite today. 

The strength in time spreads is consistent with a market concerned over a near-term supply crunch, which is currently being fueled by the ongoing saber rattling on either side of the Ukraine, along with attacks on a UAE oil facility on Monday. Back to back winter storms in the US that are causing a spike in supplemental heating demand are also factoring into the short term supply concerns on the East Coast, even though most of the country is swimming in excess inventory.

The good news for refiners is this latest rally has boosted crack spreads all along the curve, and with RIN values coming under pressure over the past week will also help their margins, assuming of course that the weakness in local rack markets across large parts of the country that we’re seeing eventually goes away as we move towards spring.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
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