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The Energy Complex Is Selling Off Once Again This Morning As Gasoline Futures Lead The Way Lower
The energy complex is selling off once again this morning as gasoline futures lead the way lower. The prompt month RBOB contract is currently showing 3.5% losses as the oils (heating and crude) trail closely, trading lower by 2.5%. Futures traders seem to be shrugging off the report published by the Department of Energy yesterday which showed a sizeable drawdown in national gasoline inventories. This latest drop in stockpiles only exacerbated the tight gasoline landscape, especially in PADD 1, which contains the New York market, the physical delivery point of the globally traded futures contract.
Market participants could be referencing the increase in crude production as their justification for selling oil in the middle of a shooting war. Even though national oil inventory is still at 5-year seasonal lows, optimism surrounding the steadily increasing number of active production rigs might be enough to convince some ‘help is one the way’ and/or ‘the worst is over’.
Diesel basis markets were relatively quiet yesterday as some take a wait and see approach to valuing the physical markets. The increase in national diesel inventories, combined with the across-the-board bump in refinery run rates for all PADDs, pushed the prompt-second month HO spread below 10 cents for the first time since March yesterday.
Technical (technical) breakdown? Momentum trading spurred by a grim global demand outlook and a coincidental(?) drop in equities markets seem to be taking credit for today’s selloff. The ‘big three’ American energy benchmarks are breaking or already trading lower than a few of their respective moving averages, signaling that lower prices may be coming in the short term. If today’s action holds, refined product futures charts show little support between current levels and the $3.30s. Crude oil, on the other hand, has a test at the $105 level but if that’s broken, a drop to $100 seems likely.
WTI Is Attempting To Lead A Move Higher In Energy Futures This Morning
WTI is attempting to lead a move higher in energy futures this morning as falling inventories and Chinese reopening optimism are both getting credit for the early rally after yesterday’s sell-off.
New York Harbor diesel prices continue their fall back to reality dropping another 25 cents Tuesday, and more than 80 cents so far for the week. Time spreads have been falling along with basis differentials, with the June/July spread hitting a 1 month low just above 10 cents/gallon after starting the month north of 40 cents, which eases the pucker factor for shippers dramatically.
The API reported a 5 million barrel draw in gasoline inventories last week, while crude oil stocks declined by 2 million barrels (despite 5 million barrels released from the SPR) and Diesel stocks increased by 1 million barrels. The DOE’s weekly report is due out at its normal time this morning. The price action suggests that the worst of the East Coast diesel crunch is behind us, but we’ll have to see if the inventories are healing after plummeting to all-time lows in the past few weeks.
The US has lifted some sanctions on Venezuela, allowing talks with Chevron and the government to resume discussions over “potential future activities” but does not yet allow for any operations in the country that has more oil reserves than anyone else in the world, and yet has to rely on oil from Iran to keep its refineries operating at all. Long story short, don’t count on Venezuelan crude short term, although long term it could absolutely be part of the solution to replacing Russian oil, and theoretically so could Iran.
The EU is releasing its plan today for how to end its reliance on Russian energy supply …which will take 5 years. This Bloomberg article sheds light on the handful of European refineries that make ditching Russian crude much more complicated.
Week 20 - US DOE Inventory Recap
It’s Been A Choppy Trading Session For Energy Futures With Overnight Gains Turning Into Morning Losses
It’s been a choppy trading session for energy futures with overnight gains turning into morning losses, and signs of a potential market top flashing even as new records are being set. RBOB gasoline futures and several US spot markets set fresh records on Monday, meaning new record highs for retail prices are coming. While that’s bad news for consumers, and will no doubt continue to dominate headlines near term, there’s a divergence with diesel prices that could be bringing relief.
Monday was a relatively quiet session for NYH ULSD futures, which traded down less than 1.5 cents, but a big day for NYH diesel spot markets that dropped more than 56 cents on the day. A big drop in NYH was inevitable as those values were trading $1/gallon or more than any other US region, and typically once a bubble like that bursts it’s a one way trip lower so don’t be surprised to see more downside now that sellers have emerged.
Just as the backwardation in ULSD, and the spread to NYH, have started their return trip to reality, gasoline spreads have decided to smash records. The Prompt month futures spread for RBOB reached its highest level since the wake of Hurricane Harvey yesterday, and is actually more impressive given that this backwardation doesn’t include the winter RVP discount like that one did. Even more impressive, June RBOB futures are trading $1.15 above January, which is roughly 60 cents higher than the record prior to this year.
The premium for barrels in NYH has sent values for shipping product along Colonial to their highest levels of the year, although as we saw with diesel prices the past couple of months, the backwardation in the market makes this a challenge. The difference between gasoline and diesel however is that the export bid for gasoline is not nearly as strong, so sending barrels north on Colonial seems to make the most sense for those with space.
With supply options in the slim to none category globally the major question is how soon will the record high prices start hitting fuel demand? Rising fuel prices are already being cited as a headwind in Wall Street earnings reports, and we’ll have to wait and see if main street reacts with staycations this summer, or if they’ll pay up to get out after 2 years of travel disruptions.
Gasoline Futures Hit The $4 Mark For The First Time Ever This Morning
Gasoline futures hit the $4 mark for the first time ever this morning even though oil and diesel prices are selling off to start the week.
We’re approaching one of the busiest demand weeks of the year with tight supplies in many US markets, and much tighter supplies elsewhere around the world, which helps explain the 50 cent jump in gasoline futures over the past 4 trading sessions. Then again, we’re also in the seasonal peaking window for gasoline prices, so don’t be surprised to see a big pullback before the end of May.
On the bearish side of the ledger this morning, reports of a sharp slowdown in economic activity in China (which also happens to be the world’s largest importer of energy) and a warning that the US might be next.
Those reports may help explain why diesel prices continue to pull back and trade at a discount to gasoline despite warnings of a potential need for rationing across the East Coast this summer as US refineries are already running near capacity following a rash of closures the past two years leaving no good options to solve the shortages.
Money managers followed a pattern last week, reducing old long positions and adding new shorts with WTI, RBOB, Brent and Gasoil contracts just in time to get run over by the surge in prices to end the week. ULSD contracts saw the opposite with a small amount of new length added and a large amount of short covering that missed out on the subsequent pullback in diesel prices. In other words, it seems like hedge funds continue to struggle to get a grip on the petroleum market, which may explain why Brent open interest dropped to a new 5 year low last week and ULSD OI remains near its lowest in over a decade.
Baker Hughes reported 6 more oil rigs and 3 more natural gas rigs were put to work in the US last week, with Oklahoma taking the state lead adding 4 rigs while a handful of other states added 1 each. The Permian Basin, home to nearly 60% of all active rigs in the country, held steady at 334 rigs for a 3rd week. Last week the Dallas FED released a report explaining why oil producers won’t be the solution to high gasoline prices this year.
Gasoline Futures Have Surged To A New All-Time High On Friday The 13th
Gasoline futures have surged to a new all-time high on Friday the 13th, trading north of $3.90 for the first time and making a run at $4 seem inevitable.
Most cash markets in the US are following the lead of futures and are hitting record highs this morning as well, with Midwestern gasoline a notable exception as Group 3 spots dropped to a 40 cent discount below the June RBOB contract. West Coast basis values meanwhile are seeing strong gains this week following reports of more refinery issues keeping supplies tight in the region.
While it may not (yet) be as dramatic as what we’ve witnessed the past month in ULSD futures, the backwardation in RBOB contracts is reaching extreme levels, with the January 2023 contract trading more than $1 below June values. Just as we saw with distillates, this spread creates a challenging environment of huge basis swings and a reluctance by shippers to hold inventory today and sell it for much less down the road.
Don’t worry about most of the shippers however, as the crack spread charts below show margins that have spiked north of $50/barrel for many, which is roughly $1.20/gallon. Think about what your business will do to save a penny per gallon, and imagine what’s happening at those facilities when they can make $1 just two years after most were hemorrhaging cash. Those higher crack spreads seem to be keeping a bid under RIN values as well, with D6 values reaching their highest levels since last August yesterday.
The IEA followed the lead of OPEC and the EIA in estimating a slowdown in global economic growth in the back half of the year in its monthly oil market report, thanks (or no thanks) in large part to demand destruction caused by “soaring pump prices”. The good news, if you’re looking for an end to high fuel prices, is that the agency expects oil output outside of Russia to grow by 3 million barrels/day from May to December, which should largely offset the drop in Russian output. The report does remind us however that the worst of the supply crunch is still ahead of us as most Russian exports have continued thanks to deals struck before their invasion, but those transactions are quickly coming to an end.