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Tuesday, Aug 9 2022

Have Fuel Prices Found A Floor?

Have fuel prices found a floor?

After dropping 60 cents in a week and a half, diesel prices have bounced 17 cents in the past 24 hours, and gasoline prices are up nearly 20 cents since bottoming out last Thursday.  While crude oil prices have also bounced, WTI is up $5/barrel from Thursday’s lows, they’re not keeping pace with the recovery in refined products, suggesting this move may be driven by spread buyers as we head into the fall maintenance & storm seasons with a refinery network that’s more vulnerable than it’s been in decades. 

There isn’t much in the way of a headline to pin the sudden reversal in diesel prices on, and in fact European natural gas prices are pulling back as inventories have recovered in recent days, which would tend to act as a drag on diesel prices. This suggests the move may be more technical in nature, as trading programs and some humans see the latest wave of selling as a good buying opportunity after the head and shoulders and descending triangle patterns that foreshadowed lower prices have now been completed. The first big test for the bulls to decide if they’re serious about this rally is to get diesel prices back north of $3.50, and gasoline prices back above $3.

The latest round of negotiations with Iran over its nuclear ambitions ended without any sign of progress, reducing the odds that Iranian oil exports will legally re-enter the world market. 

The national hurricane center still gives a 40% chance the storm moving over the Atlantic will get a name this week, and the long range forecasts suggest there will be more storms coming soon as the hurricane season reaches its peak a month from now.

HF Sinclair proved that the previous year was a great time to be buying refineries, joining its US peers reporting huge profits for the 2nd quarter. While the company’s newly acquired facilities netted nearly $30/barrel after operating costs, the renewable diesel operations showed heavy losses for the quarter, suggesting that turning soybeans into motorfuel may not be the field of dreams many have been hoping for, even with nearly $5/gallon in various government tax credits and subsidies and diesel prices at elevated levels. 

Speaking of which, the spending bill passed in the Senate this weekend includes the extension of several existing biofuel credits, and the addition of several new credits to encourage more production. One detail that’s already expected to have unforeseen consequences is that Sustainable Aviation Fuels (SAF) will get $.25-$.75/gallon more credits than Renewable Diesel, which will likely mean a shift by some producers away from on-road fuels given the limited feedstocks available to make fuel out of food.

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

Market Talk
Monday, Aug 8 2022

Gasoline Prices Are Trying To Find A Floor, Rising For A 2nd Straight Day After Hitting A 6 Month Low Last Week

Gasoline prices are trying to find a floor, rising for a 2nd straight day after hitting a 6 month low last week, while distillates continue to fall, hitting their lowest levels since March this morning.

ULSD futures took out the April low just under $3.19 overnight and promptly dropped another nickel, before bouncing back to that level later in the morning. That layer of support looks to be about the only thing on the charts standing in the way of a drop to $3 for ULSD, and it’s worth noting that most futures and cash contracts for 2023 are already trading below that level. If you’ve been waiting to lock in diesel prices to meet or beat your budget for the next 12-18 months, this is looking like a good time. Be assured that prices could absolutely go lower from here (in 2008 they dropped from $4.15 to $1.19) but at some point, the market is going to remember that the world is still short on distillate supplies, and the long term trend in place for the past 2 years is still pointing higher.

Some money managers are probably looking for a do-over after making large increases in long positions in RBOB and ULSD contracts last week, just in time for the big price drop. Funds did reduce their long positions in WTI, Brent and Gasoil contracts however, so they weren’t all wrong. The combination of extreme volatility and concerns over the looming economic slowdown seem to be keeping the big money bettors on the sidelines.  The net length held by large speculators in WTI is at its lowest since April of 2020 (also known as the time when WTI went negative) while open interest in RBOB dropped to its lowest level since 2015, and open interest in Brent dropped to its lowest since 2016 last week.

Baker Hughes reported a net decrease of 7 oil rigs active in the US last week, while natural gas rigs increased by 4. New Mexico led the drop in oil drilling activity, with 6 fewer rigs active. It’s hard to say if last week’s count will become a pattern as natural gas has become the commodity of choice globally, or just a small dip on the chart as rig counts approach pre-pandemic levels.

After a 2 month lull, the tropics are starting to heat up as we approach the interesting part of Hurricane season. The NHC is giving 40% odds of development for a system moving across the open Atlantic.  It’s too soon to say where this storm (which will be named Danielle if it develops) is headed, but a path into the Gulf of Mexico is possible at this point so we’ll need to keep an eye on it for a while.

Market Talk
Friday, Aug 5 2022

Crude Oil And Gasoline Prices Are Lower This Morning Than They Were On The First Day Of The Russian Invasion Of Ukraine

Crude oil and gasoline prices are lower this morning than they were on the first day of the Russian invasion of Ukraine, as a breakdown in technical support and sentiment for consumption both seem to be pushing prices lower. RBOB and WTI were attempting to make small gains this morning after trading in negative territory overnight, but if the attempt to bounce doesn’t accelerate soon, the charts suggest we’re in for another wave of selling. 

Gulf Coast and Midwestern gasoline spot prices dipped below $2.50 on implied values overnight, which could mean retail prices below the $3 mark in some markets if values hold around this level for another week or more. Unless the market reverses course, more markets may join the sub $3 retail club in another 6 weeks as the transition to winter-spec gasoline ensues, and producers can once again start blending more butane, which is $1.25/gallon or more cheaper than gasoline.

Diesel prices resisted gasoline’s pull lower for the start of the week, but are catching up now that the bottom end of the descending triangle gave way, and quickly dropped another 12 cents after taking out that chart support before finding a temporary floor just above $3.20 overnight. Fundamentally, it’s difficult to make a case for diesel prices continuing to fall, especially with demand destined to ramp up in the fall.  Read here for another argument on why now may be a good time to buy ULSD.   

One headline that may explain why diesel prices are down more than a dime this morning even as gasoline prices were able to move into positive territory: Germany said it could keep its nuclear power plants operating this winter, which will help ease the shortage of natural gas and distillates needed to power the region. 

The July payrolls report knocked stock prices, along with gasoline and WTI, back into negative territory as another strong reading on the US job market seems to have spooked the machines that base their bets on easy money from the FED, which is sure to be encouraged by the fact that their first 4 interest rate increases haven’t hurt the labor market. Adding more than 550,000 jobs to the government estimate since the last report will also help the argument of those that say the US is not in a recession, despite 2 straight quarters of negative GDP growth.

The tropics remain eerily quiet as we approach the busy part of the Atlantic hurricane season. Officially, the NHC says no new tropical cyclones are expected in the next 5 days, but longer range models are already tracking 2 potential systems moving over Africa, that could develop as they move out to sea next week.  Colorado State’s latest forecast for the season was reduced by 2 named storms, but still suggests we’re in for a busy year with 16 more storms yet to come. The weather channel forecasters seem to agree noting yesterday that 90% of the storm activity is yet to come. 

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

Market Talk
Thursday, Aug 4 2022

Gasoline And Oil Futures Are Approaching 6 Month Lows This Week

Gasoline and Oil futures are approaching 6 month lows this week, following a harsh reminder Wednesday that slowing demand may be the only way to deal with the global energy supply shortage. 

According to the DOE’s weekly report, gasoline consumption in the US has been weaker than the COVID summer of 2020 in 3 out of the past 4 weeks. While the weekly demand estimates are notoriously volatile, and in many cases unreliable in real time, there is no mistaking the market’s reaction to that data point as futures have dropped 25 cents in the past 24 hours. 

Wednesday’s wipeout for RBOB futures, trumped Tuesday’s turnaround and has moved the technical outlook back into clearly bearish territory with a good chance we could see another 30 cent price drop in the next few weeks. It’s not just futures that are falling either, as NY Harbor gasoline prices have started their inevitable slide down an impossibly steep backwardation curve, with cash values down more than 40 cents as basis values start their return to reality. The selloff in both futures and cash markets assures that the streak of consecutive days of lower retail prices across the US will continue past 50.  

If you’re still wondering why California retail prices are more than $1/gallon higher than many other states, take a look at the state fuel tax charts below (courtesy of the API), and then remember California ends up adding another 40-something cents per gallon in LCFS and Cap & Trade program costs on top of these official taxes. 

Diesel inventories remain 24% below their average seasonal levels. PADDs 1 & 2 continue to have the lowest inventory levels relative to prior years, and the Midwest looks particularly vulnerable in the coming months as harvest demand ramps up, and Gulf Coast refiners have their hands full sending Barrels out to sea, rather than north as they’ve done for decades during this time. Speaking of which, Diesel exports have averaged north of 1.5 million barrels/day over the past month, meaning nearly 2 billion gallons of distillates have been sent overseas during this time. Remember that the next time someone asks why gasoline is so much cheaper than diesel in the next few months. 

OPEC & Friends announced the smallest output increase they’ve ever made yesterday, .1mb/d for September with some reports suggesting this move was a political slap in the face to the US President, while the official press release suggests it was because of “severely limited availability of excess capacity”. It seems there’s a good chance they’re both right.

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

Market Talk
Wednesday, Aug 3 2022

Chart Support Survived A Big Wave Of Selling To Start The Week

Chart support survived a big wave of selling to start the week, and petroleum prices are now moving higher as buyers (or more likely the algorithms they’ve programmed) gain more confidence that a price breakdown is unlikely in the near future. RBOB gasoline futures are up more than 20 cents from Monday’s low trade, and back in the July trading range. ULSD prices are up 15 cents from Tuesday’s low, but need to get back above the $3.55 mark to break the descending triangle pattern that still threatens to push prices to $3 in the coming weeks. 

Early (and unofficial) reports from the OPEC & Friends meeting suggest the cartel will make a modest increase of 100,000 barrels/day to its quota in September. Oil and product prices actually moved higher following those rumors as the increase is the smallest on record for the cartel, and is essentially meaningless given that actual output has lagged behind the allowed quotas for the entire year. 

The API reported a build in crude stocks of 2 million barrels last week, while refined products were estimated to have small declines of less than ½ million barrels each. Keep in mind the build in oil stocks includes the ongoing drawdown of oil from the SPR, and all else being equal, would equate to a nearly 5 million barrel decline in US stocks if those barrels weren’t being released. The EIA’s weekly status report is due out at its normal time of 9:30 central.

While the shortage of refining capacity to meet fuel demand in the Western hemisphere has been well documented this year, the EIA on Tuesday published a note highlighting 9 new refinery projects slated to come online in the next 18 months, that will add nearly 3% to global refining capacity…all of which are in Asia and the Middle East, which will further shift the global flow of oil and its various products. 

While backwardation remains a major theme in global energy markets, for the first time in many months 2 US regions have actually slipped into a contango price curve for distillates.  Both Group 3 and Chicago ULSD prices are now trading higher for September delivery than they are for prompt barrels, which is a reflection of the lull in regional demand prior to the harvest season. This compilation of recent articles suggests you shouldn’t bet on this trend expanding to other markets. 

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

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