News & Views
Gasoline Plucked Energy Futures Out Of The Red Yesterday Morning
The demand figures from the DOE report seemed to be the impetus for the buying action we saw yesterday. The counter-seasonal spike in petroleum demand, specifically gasoline, plucked energy futures out of the red yesterday morning, continuing the streak of gains the big three American benchmarks have been enjoying for the past six sessions. Also, the confirmation of the API’s estimate of a drawdown in crude oil, gasoline, and diesel stockpiles offered no bearish support.
Futures are attempting to sell off again this morning, citing Chinese demand concerns as its reason. WTI and Brent prompt month contracts are down around 20-30 cents per barrel so far today while refined products’ March contract (widely referenced as the price-setting contract this late in the month) are both trading flat.
The EIA published an uplifting note this morning showing CO2 emissions from energy consumption hitting a 40-year low in 2020 in the US. The transportation sector, which makes up just under 40% of the nation’s emissions, was down 15% since 2019 due to COVID-19 lockdowns. It will be interesting to see how much that number comes back up with some companies’ ‘back to office’ push.
The NYMEX will be open tomorrow and settle at its regular time despite most market participants taking the day off to celebrate the new year. It is not a banking holiday however petroleum Price Reporting Agencies will not publish new prices tomorrow.
Week 52 - US DOE Inventory Recap
The Energy Complex Is Drifting Lower This Morning In Another Slow Day Of Futures Trading
The energy complex is drifting lower this morning in what looks to be another slow day of futures trading. Gasoline, diesel, and both major crude oil grades’ prompt month contracts are down ~.2% so far this morning.
One thing that could breathe some life into this thin market is the Department of Energy’s inventory report, due out at it’s regular time today. The American Petroleum Institute published their report late yesterday, estimating an across-the-board draw in total inventory levels for crude oil, gasoline, and diesel. A confirmation of those estimates could inspire enough buying to keep the 5-day streak of gains alive.
Barring another global shutdown (which as we know isn’t an impossibility) it seems to be the consensus that our oil supply glut days are over, for now. Rebounding demand, regional supply crunches, and decreased spending on energy discovery and infrastructure are the factors the banks, oil companies, and countries are warning could lead to an oil shortage in 2022. Those market dynamics paired with the looming threat of inflation could see oil prices make a run at $100 per barrel next year, a level not seen traded since 2014.
Ethanol prices fell sharply yesterday as prompt barrels begin their slide down the steep backwardation we’ve seen the past few months. Chicago ethanol, sometimes used as a national benchmark, was estimated around $2.62 yesterday, the lowest price seen since October.
As of yesterday Exxon will keep it’s Baytown refinery at reduced rates while it continues efforts to identify the source of last week’s explosion that injured four. It’s hard to tell if the Gulf Coast basis traders literally or figuratively hit snooze: they either know and don’t care or are taking the week off. It’s probably both.
The Bulls Are Taking Advantage Of The Low-Volume Week
The bulls are taking advantage of the low-volume week, rallying refined products nearly 3% over the past couple of trading sessions. Expectations of higher demand growth from China and India seems to be how we are justifying the buying strength so far this morning. American and European crude oil benchmarks are adding about $1 per barrel so far today.
While still very contagious, the Omicron variant seems to be affecting people less intensely than the Delta variant and the original coronavirus. It seems global governments are taking a softer stance on the latest novel strain, some eliminating social distancing protocols altogether. The Center for Disease Control has reduced the quarantine time for positive cases from ten days to five, leading energy bulls to believe that drivers will be getting on the road that much quicker.
Money managers increased their net long positions in the ‘big three’ American energy contracts last month, according to the report published by the CFTC yesterday. The net length in WTI futures held by the Producer/Merchant category of traders ticked lower last week but remained in the ballpark of 5-year highs. Given the price action over the past couple of weeks a redesignation of who’s called the ‘smart money’ might be in order.
Prompt month gasoline futures have punched through a couple moving averages this morning, marking bullish sentiment. Diesel futures have now made up everything lost on Black Friday’s selloff and are poised to make a run at the October high of $2.60. While technical strength seems to be the name of the game this week, it is important to note that price action on low volume should be taken with a grain of salt. We could see a short term correction next week once the holidays are over.
2,000 Flights Were Cancelled Since Christmas Eve Due To Staff Shortages
The energy complex is drifting lower so far this morning in what looks to be a quiet week for futures trading. Stranded between two holidays, this week’s price action will likely be inconsequential as attention has already shifted to next week’s OPEC+ meeting where Cartel’n’Friends will decide if they’ll go ahead with a 400 thousand barrel per day production increase in February. The American crude oil benchmark leads the way lower this morning, shaving nearly 80 cents off the prompt month contract, while gas and diesel trail behind with ~1 ½ cent losses.
It was a rough weekend for airlines: over 2,000 flights were cancelled since Christmas Eve due to staff shortages. The mild-but-contagious Omicron variant drove the increase in air travel workers calling in sick. While only 50 flights scheduled for today have been cancelled, there are no clear indications when air travel will return to ‘normal’, whatever that is.
Baker Hughes reported an addition of seven oil rigs last week, bringing the total active production platforms in the US to 586. Last year’s recovery rally in oil prices continue to drive decision making when it comes to flipping the ‘on’ switch: 9 out of the last 10 weeks have seen a net increase in operating production sites.
The Commitment of Traders report is delayed due to last week’s holiday and will be released today at 2:30 pm CST.
ExxonMobil reported an explosion and resulting fire at its 584mbd Baytown refinery early Thursday morning. Gulf coast gasoline basis values drifted higher (in a muted fashion) once it was discovered that the unit affected by the accident processes gasoline components. Four workers were injured.
Decline In US Oil Inventory Reported Yesterday By The Department Of Energy
The larger than expected decline in US oil inventory reported yesterday by the Department of Energy is taking credit for yesterday’s rally. National stockpiles fell by 4.7 million barrels last week, which follows the seasonal trend of moderate declines going into the holidays, however this marks the 7th consecutive week inventory levels have been below the 5-year low. The crude oil headline number seemed to overshadow the 5.5 million barrel build in gasoline stocks, which was larger than estimates but also expected this time of year. Diesel stocks added a modest 205 thousand barrels.
The two-pronged dose of positive news surrounding the Omicron variant surely didn’t hamper yesterday’s rally. Research showing the latest novel variant to have less severe symptoms (albeit much more contagious than previous iterations) has experts hopeful this may hasten the diseases progression from pandemic to endemic. The S&P 500 was up ~1% on the news.
Prompt month American natural gas futures are down nearly 5% this morning while European prices hit record highs as cold weather rolls in and Russian supply cut out. No end in sight: the latest public discourse has Putin denying the mass movement of Russian troops along the Ukrainian border while pointing the finger at the US and NATO for escalating tensions in the region.
Heating oil futures are the closest of the ‘big three’ energy contracts to completely retrace the losses suffered on Black Friday. If the $2.36 level can be reached, technicals leave the door open to a run at the $2.50 level in short order. Gasoline futures have about twice the distance to cover (about 13 cents) before it accomplishes the same feat.
Week 51 - US DOE Inventory Recap
Gasoline Prices Are Leading The Modest Move Lower This Morning
After a strong Tuesday rally, energy and equity markets are slipping back into the red in the early going Wednesday as traders begin to wind down their activity ahead of the Christmas break.
RBOB and ULSD futures are hovering right around the weekly trend lines that have been in place since they peaked out in October some 40 cents above current values. If they can break through that resistance, there’s clear sailing on the charts for at least another 10 cent rally, and a decent chance we could see 20 cents added in the next few weeks, even as seasonal factors would tend to lean the other direction. If those trend lines continue to act as repellant to these rally attempts however, it seems inevitable that we’ll see prices make another run at the November lows.
Gasoline prices are leading the modest move lower this morning, with another large inventory build seeming to weigh on RBOB futures. The API reported that gasoline stocks grew by 3.7 million barrels last week, while crude and diesel inventories saw declines. Large builds are what we expect to see in gasoline this time of year, and we typically continue to see them until winter inventories peak some time in February ahead of the spring drawdown. Last weeks’ DOE report broke the mold and showed a large decline in gasoline stocks amidst a record surge in demand that seemed a little too good to be true, which could mean today’s report has a large correction and puts more downward pressure on prices.
Speaking of downward pressure: Ethanol prices along the East Coast have finally started to pull back from the $4 level, dropping 65 cents in the past week, and closing the gap with prices in other parts of the country that started their return to reality about a month ago. It’s not a shortage of ethanol that’s causing the price spikes, but a shortage of transportation to get the ethanol from the middle of the country where it’s made, to the coasts where it’s consumed, and as gasoline demand has started the annual winter decline, those bottlenecks appear to be easing, and the forward curve chart suggests there’s another dollar/gallon left to come out of these prices before the correction is done.
The next front in the cold war? While Russia continues its sabre rattling campaign over the Ukraine, the soviets are also seeing recognition of their new carbon program by the EU. No word yet if the EU refuses whether or not the Russians will simply invade the EU’s carbon scheme.
A Dallas FED report Tuesday highlighted the big strides in battery technology over the past 30 years, while noting the improvements still needed if EVs are going to move from 2% of US vehicle sales to anything resembling the 17% target the EPA just set for 2026.
Supply Issues Seem To Have Put The Omicron Demand Fears On The Back Burner Temporarily
Oil prices have bounced nearly $4/barrel, and refined products by a dime since Monday’s lows as a combination of supply issues seem to have put the Omicron demand fears on the back burner temporarily.
Part of the bounce is being blamed on Libya declaring force majeure on its oil exports Monday as several of the country’s largest fields were closed by militants ahead of the country’s election, which may or may not happen this week. OPEC has already been struggling to meet its output quotas, compared to pre-COVID when it struggled to keep its members from over-producing, and these shutdowns will only make that issue worse.
European natural gas prices are also soaring this week as cold weather arrives just in time for Russia to remind the world of its supply power by reversing flows on a pipeline that supplies Germany. While the supply crunch in Europe and Asia were often blamed for propelling oil and diesel prices higher earlier in the year, the Reuters chart below shows that US natural gas prices haven’t flinched during this latest price spike, which could be a reflection that LNG exports from the US simply can’t move fast enough to supplement during these winter weather events.
Stock markets are also rallying after 3 days of heavy selling, with plenty of guesses as to why, but little in the way of actual news to support the sudden turnaround. That begs the question for the rest of the week, is this a short term correction or the end of the Omicron fear selloff? For energy contracts, look to the trend lines once again for the answer, with the weekly charts showing that RBOB needs to climb above $2.15 and ULSD above $2.25 to consider this move anything more than a dead cat bounce.
The EPA announced its new fuel economy standards for passenger vehicles Monday, which it called the most ambitious ever, and would require average an increase from the 2020 record of 25.4mpg to 40mpg by 2026. The plan focuses on model years 2023-2026, and estimates that electric vehicles will need to increase from 7% of the new vehicles produced in 2023 to 17% in 2026, on top of new technology in gasoline engines, in order to reach the standard.
Meanwhile, it looks like the EPA will get another chance to shut down the refinery formerly known as Hovensa, as a new auction has resulted in yet another company planning to attempt to restart the twice bankrupt facility.
Another Wave Of Selling Is Kicking Off Christmas-Week Trading
Another wave of selling is kicking off Christmas-week trading as more bad news on the Omicron spread continues to dominate the headlines, and central banks have made it clear that the printing presses will not be available this time around.
Bond markets are also flashing warning signals as the US Treasury yield curve has shrunk to its lowest level in a year, which is seen as an indicator of an increased risk of recession in the months ahead. The good news is that the treasury yield curve is not yet close to inverting, as it did prior to each of the last recessions in the US.
After technical resistance held up and broke the recovery rally in energy prices last week, the charts are pointing lower with a retest of $2.00 looking likely for refined products. Already this morning RBOB futures dipped to $2.02 during the worst of the overnight selling, and even though ULSD futures are trading around $2.15 at the moment, a test of their November low just about the $2 mark looks like a decent bet in the weeks to come.
Money managers looked like they’re having a hard time deciding what to do with energy contracts last week with WTI and ULSD seeing large reductions in net length, while RBOB, Brent and Gasoil contracts all saw increases. One unusual note from this week’s commitment of traders report: the Producer/Merchant trade category saw its net length reach a 5 year high last week, compared to a more typical short position as producers tend to sell forward to hedge their output. It’s hard to say what might be driving this length, especially since a lot of producer hedging filters through the Swap Dealer category, but the result seems clear that oil producers are either comfortable moving forward without locking in the prices on forward output, or their lack of capital is preventing them from doing so, making pullbacks like this potentially more damaging.
Baker Hughes reported another net increase of 4 oil rigs working last week, the 6th week out of 7 to have increases. The chart below shows that although the rig count has built steadily over the past year, the rate of increase is noticeably lower than the recoveries in 2011 and 2016, which appears to be a factor of both supply & labor challenges, and the aforementioned restrictions in capital.
Electric Vehicles are once again taking center stage of the political theatre in Washington, as a provision to add an additional $4500 tax credit for union-made EVs may have been the straw that broke the build back better bill’s back.
Fear Seems To Be Creeping Back Into Both Energy And Equity Markets
Fear seems to be creeping back into both energy and equity markets leading to a broad selloff to start the last day of the last “normal” trading week of the year. From here on out volumes and liquidity tend to get sketchy which can create both extremely boring trade, and some very volatile trade depending on how the computer programs manage the lack of human interaction.
Take your pick of fear headlines driving the move lower this morning. Omicron is proving to be spreading faster and vaccine resistant forcing more lockdowns, and more delays of return to work plans. Fear of hawkish central bank policy on inflation. Tech stocks getting hammered. Santa’s elves are struggling with supply chain bottlenecks. Whatever cause you choose, there’s no mistaking that both RBOB and ULSD prices rallied right into their weekly trend-lines and then pulled back sharply in the past 24 hours, which makes the bear market look very much intact, and setting up another test of the $2 mark in the weeks to come.
On the other hand, if you’re bullish on refined product prices heading into the winter, then you might point out that despite the pullback, prices this week did set a higher high and higher low than he past two weeks, and that trend lines are overrated indicators, so there’s really no reason for a big selloff soon, especially with the potential for a Santa Claus rally in stocks coming next week. If you’re in this camp, the vampire squid known as Goldman Sachs agrees with you as they’re making a case that $100 oil is still possible next year.
Speaking of conflicting opinions on market direction: RINs are having a really hard time making up their mind after the EPA changed the game on the RFS last week. After 4 different swings of 30 cents or more, D6 ethanol RINs are hovering just under the $1 mark. D4 RINs have not been as volatile (which is normal for the lower volume contract) and the spread between D4 and D6 has blown out to an all-time record beyond 60 cents for 2021 contracts, compared to spreads of less than a dime for most of this year, while the spread for 2022 contracts is less than 30 cents, reflecting the dramatic change in the RVOs.
Today’s interesting read: A report from the Dallas Fed on the acceleration in US migration from major metro areas to Texas since the pandemic started. Some interesting notes: California/New York and Illinois (Chicago) are seeing mass exodus that would make Moses proud. DFW is the leading recipient of migrants within Texas. People from Houston are moving to DFW, but people from DFW aren’t moving to Houston. Oklahoma is the only state seeing an influx of Texans, which makes sense since it’s basically a suburb of DFW now.
Equity And Energy Prices Have Been Moving Modestly Higher Since The FOMC Announcement
Equity and energy prices have been moving modestly higher since the FOMC announcement was released Wednesday afternoon, snapping the losing streak that gripped most markets in the front half of the week. That sigh of relief rally sets up another test of the downward sloping trend-lines that have had refined products under pressure for the past two months, with the $2.17 area for RBOB and $2.28 for ULSD pivotal levels to watch if a longer term bear market is going to be avoided.
The FED announced an accelerated reduction in its bond buying programs, increasing their taper by roughly double the previous schedule, and also forecast 3 rate increases in 2022. While this announcement marks one of the most dramatic course changes in the FOMC’s history, it apparently was less severe than many in the market were anticipating following the record inflation readings over the past few months, as equities and energy prices all rallied following the news, while the US Dollar declined, and the probabilities of rate increases for 2022 actually ticked slightly lower.
Refined product prices were already reversing course from early morning losses after a DOE report that surprised with some bullish readings.
The DOE’s weekly estimate for US Petroleum demand reached an all-time high last week, surpassing 23 million barrels/day for the first time on record. Diesel demand led the move with an incredible 36% increase week on week, marking the highest weekly reading since 2003. Those figures are taken with a large grain of salt however as the DOE’s weekly estimates are notoriously volatile, and particularly this time of year we tend to see a huge recovery rally in the weeks after Thanksgiving, only to see demand tumble to its lowest levels of the year the last week of December and the first week of January.
Gasoline demand also saw a healthy increase, that helped drive a counter-seasonal decline in gasoline stocks. Here too, a strong recovery after the Thanksgiving holiday hangover makes sense, but there are plenty of signs that demand may already be under pressure from the rash of severe storms that have swept most of the country over the past week.
Speaking of which, another round of severe storms swept from New Mexico to Minnesota Wednesday, with hurricane force winds reported in numerous spots. So far, there haven’t been reports of damage or power loss to refineries in the storm’s path, so it may be a non-issue for fuel supply.
Week 50 - US DOE Inventory Recap
Energy Futures Are Moving Lower For A Third Straight Day
Energy futures are moving lower for a 3rd straight day, setting up a pivotal test of chart support to end the week, after the December recovery rally failed to break the downward sloping trend-lines.
Volatility indices are showing that fear is creeping back into financial markets after calming in the 2 weeks after the Black Friday meltdown. This time it’s inflation and the FED’s reaction to it that appear to have both equity and energy markets on edge as record price increases seem to be forcing the central bank to act more aggressively to reduce their money printing programs than previously expected. Tapering bond purchases, shrinking the FED’s balance sheet, and then raising interest rates are the foreshadowed plan, the trillion dollar question is whether or not executing that plan will spark another recession.
Want to see an example of how the market reacted to yesterday’s record Producer Price Index increase? The CME’s fedwatch tool showed the probability of an interest rate increase by March at just 19% a month ago, and 33% yesterday prior to the PPI, and today that probability has jumped to 39%. Fed Fund futures are also suggesting a 60% probability that we’ll see at least 3 rate increases in 2022.
The API reported small builds in refined products of 426k barrels of gasoline and 1 million barrels for diesel, while crude stocks had a small decline of around 815k barrels. That news seemed to be largely ignored with the FED in focus, and it’s possible we may see a similar lack of reaction to today’s DOE weekly report. Oil production and Refinery Runs will be two numbers to watch in this morning’s report as the country and much of the world seem to be moving rapidly from supply shortages to excess.
Speaking of which, Chinese refinery runs increased sharply in November, echoing the estimates from both OPEC and the IEA earlier this week, which serves to both relieve the supply crunch that was tormenting the country for several months, and to put more downward pressure on margins world-wide.
Want to see the most dramatic example of a market healing rapidly in December? Take a look at Phoenix diesel which has dropped more than $1/gallon in 2 weeks.
Inflation Fears Seem To Be Taking Credit For The Selloff In Both Energy And Equity Markets
After a soft finish Monday, energy futures have moved modestly lower again this morning after another failed rally attempt overnight. Inflation fears seem to be taking credit for the selloff in both energy and equity markets as the last meeting of the year for the FOMC has investors suddenly seeming nervous.
A lot has changed in the past month as the FED seems to have changed its stance while inflation continues to hit new 40 year highs and unemployment has dropped sharply. While almost no-one expects a rate increase at this meeting, the CME’s FEDWATCH tool shows that a majority now expect at least one rate increase by May, whereas a month ago only 1/3 expected to see an increase by then. While so far the FED’s pivot hasn’t had a big impact on equity or energy values, there’s a case to be made that a hawkish FED is reason to sell any rallies, whereas over most of the past two years a money printing FED was a reason to buy any dips.
Speaking of which, futures sold off sharply in the 2 minutes following the release of the PPI reading for November that showed producer prices have climbed 9.6% over the past 12 months, a record high for that reading, which will no doubt catch the attention of the FOMC, and provide another data point for those that want to tighten up monetary policy.
The FED meeting seems to be overshadowing the monthly data deluge from the alphabet soup of oil market reporting groups.
OPEC’s monthly oil market report was highlighted by a forecast that Omicron is, “…expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges.” The report did shift the growth estimates originally marked for Q4 2021 to Q1 2022, but kept the overall demand estimates for next year unchanged.
The IEA’s monthly oil market report took a more bearish tone, reducing its demand estimates for both 2021 and 2022 due to restrictions on international travel caused by the surge in COVID cases, and projecting that global supplies are set to outpace that demand starting in December. The report highlights the recovery in US oil production as a leading cause for the supply increases, and notes that the world’s 3 largest producers could all reach record levels next year.
Bothe the OPEC and IEA reports highlighted an increase in global refinery runs over the past few months, and note that Omicron is likely to hurt those refinery margins as facilities will once again have to get creative to find a home for their excess jet fuel.
The EIA’s monthly drilling report is projecting that both oil and gas production in the Permian basin will reach record highs in January, while none of the other major US shale basins is even close to recovering to pre-COVID production levels. This article on the boom in export facilities along the gulf coast offers a look into why the focus remains on the Permian, and into the efforts to try and prevent those export facilities from being built.
RIN markets continue to struggle to digest the changes to the RFS program announced last week. D6 ethanol RINs remain the most volatile, dropping 20 cents before the announcements, then rallying 40 cents after the announcements, only to drop 20 cents over the past 2 days. D4 RINs meanwhile have a large backwardation, with 2021 values trading some 20 cents above 2022 values.
The EPA this morning published a notice of opportunity to comment on their proposed denial of all petitions for small refinery waivers to the RFS, which claimed that since all market participants face the same RIN prices, no disproportionate economic hardship exists for those smaller plants. Assuming the proposal sticks, that would add roughly 4.5 billion RINs to the total obligated amount needed over the past 3 years.
Choppy But Relatively Quiet Start To The Week For Energy Futures
It’s been a choppy but relatively quiet start to the week for energy futures, with refined products seeing a rally attempt overnight turn into modest losses earlier this morning, only to move back to small gains around 7:30 am central. While a 4-5 cent range overnight may raise eyebrows at times, it’s actually much less volatile than we’ve been experiencing over the past two weeks, as the Omicron fears seem to have been largely removed from the market even as its spread continues.
The back half of December is notorious for a lack of volume, which can create both some wild price swings if anything interesting happens, and a general lack of movement if not, as most people focus on finishing up Christmas shopping, and thinking about what might be coming in 2022, and less about what’s going on today.
Refined products still need to add about a nickel to break the downward sloping trend on the weekly charts that started back in October. If they fail, we may see one of the strongest years ever for energy prices end on a weak note.
No reports yet of damage to supply infrastructure in the path of the devastating tornado outbreak this weekend, although the Wood River and Robinson IL Plants were both in the vicinity. The country’s largest refinery in Pt. Arthur Texas meanwhile was forced to shut several units Sunday due to a loss of power. The lack of price reaction to that news suggests the disruption from that downtime is minimal, or that there’s not much focus on near term fundamentals.
Money managers continued to liquidate length held in Brent, RBOB and Gasoil contracts last week, but were tip toeing back into WTI positions after the huge Black Friday liquidation. There was a large amount of short covering in refined product contracts last week, suggesting those that had been betting on a big price drop were content to take their winnings and move on after prices reached 3 month lows to start December.
Baker Hughes reported a net increase of 4 oil rigs drilling in the US last week, marking a 5th straight week of increases. The Permian basin accounted for 3 of those rigs, with gains split between Texas and New Mexico. Year on year the total US rig count is up 213 total rigs, but still 214 below this time in 2019.
Petroleum Futures Are Set For Their Largest Weekly Gains Since August
Petroleum futures are set for their largest weekly gains since August, as prices move higher again to start Friday’s session after a modest reversal Thursday slide lower. Assuming there isn’t a major reversal later today, this week’s action would snap a 7 week losing streak for refined products, and move them out of the bear market territory they entered to start the month.
There is still more work to be done to break the downward sloping trend-lines which should create a pivotal test to end the week. Both RBOB and ULSD are just a penny or two away from breaking those trends that knocked 50-60 cents off of prices since peaking in October, but if they fail to sustain their momentum, there’s a strong case to be made that we could see another wave of selling soon.
Regional markets are already seeing some major moves lower this week despite the rally in futures, particularly in the case of diesel, where tight supplies in the Southwestern US and Ohio Valley are healing quickly as refineries come back online and pipeline schedules get back closer to normal.
Bye bye Backwardation? The forward curve charts below show the dramatic flattening of the futures price curves over the past month as the supply crunch has eased across most markets. Also note that the rally over the past week has been fairly steady over the next 3 years, which is consistent with the move higher in equity markets as Omicron fears are put on the back burner.
RGGI credits jumped to a record high this week, joining a strong rally in several credit markets, only to plummet Thursday after Virginia’s governor signaled his intent to pull the state out of the regional cap & trade program. We also recently saw Connecticut and Massachusetts pull back from the New England Transportation Climate Initiative program, as high energy prices prove to be a powerful political motivator.
Speaking of which, the Consumer Price Index for November was released this morning, and the annual inflation index reached its highest annual level in nearly 40 years at 6.8%. Energy prices ticked higher immediately following that report, which apparently makes sense since energy price gains account for much of that inflation. The inflation reading excluding food and energy was at 4.9%, which is “only” the highest since 2008. For those that remember 2008, or 1982, you can see why these inflation figures are troubling to many.
Reversal Thursday Is In Effect To Start Thursday’s Trading
Reversal Thursday is in effect to start Thursday’s trading, pushing prices modestly lower after a strong 3 day rally for both energy and equity markets. While the recovery rally this week puts the threat of a bear market on hold, refined products still need to add another 5-7 cents in order to break chart resistance and put an end to the 7 week slide.
While yesterday’s DOE report was largely shrugged off, it’s clear that near term fundamentals probably aren’t the reason for prices bouncing 25 cents this week, and may provide headwinds to future rally attempts. The holiday demand hangover hit hard, and helped drive big increases in gasoline and diesel inventories across the country. After a 2nd straight healthy increase in inventories, US gasoline supplies look like they’ve officially made the turn higher for winter, and should continue building for the next 8-10 weeks before beginning the spring drawdown.
Refinery runs reached a 3 month high as refiners continue to come out of a busy fall turnaround season, and deal with a rash of unplanned upsets all over the country. While production is increasing, it’s still not back to where it was before Hurricane Ida hit the Gulf Coast in August. PADD 2 runs saw the bulk of the increase, which should help to alleviate the extreme product tightness that followed most Ohio refineries being knocked offline in the past month.
Ethanol production jumped last week as producers race to take advantage of the highest prices in a decade, before the inevitable collapse with forward values trading more than $1 below prompt barrels. RIN values stabilized yesterday after Tuesday’s whipsaw action, trading between $1.02-$1.10 for D6 ethanol RINs on the day.
As the natural gas chess match between the US & Russia ramps up, the EIA is highlighting that new export facilities along the Gulf Coast will create the world’s largest LNG export capacity by the end of next year. Will that be enough to prevent another energy supply crunch in Europe if Russia turns off the taps in retaliation for sanctions? It’s hard to see how they could any time soon, when Russia is currently providing nearly 30% of European gas supplies, while the US accounts for only 3% and most US exports are heading to Asia.
Week 49 - US DOE Inventory Recap
US Equity Markets Have Wiped Out Their Black Friday Losses And Energy Futures Are Close Behind
US equity markets have wiped out their black Friday losses, and energy futures are following close behind with both refined products up more than 25 cents off of last week’s lows. While the rally is no doubt impressive, we still need to see RBOB regain the $2.20 mark and ULSD get above $2.30 in order to break the downward sloping trend lines that started 7 weeks ago. If those levels hold as resistance, than this rally looks more like a short term correction rather than a reversal of the downward trend.
Omicron-who? A new Pfizer study suggests that 3 doses of their vaccine is effective against that strain of the virus, adding to the sense of relief that’s washed over markets this week. Whether or not that translates into relaxed travel restrictions may be the deciding factor in the sustainability of this rally.
Amidst the huge rally in stocks, energy futures and chaos in some regional supply markets and environmental credits, the normal fundamental data seems to be taking a backseat. The EIA’s short term energy outlook lowered the agencies demand forecast because of Omicron-induced travel restrictions, and set a price forecast for WTI in the low $60s for next year. That report was basically ignored during yesterday’s big rally, and may already be considered obsolete given the optimism for the vaccines’ effectiveness. The API’s weekly report was also largely shrugged off as inventory builds for gasoline and diesel did little to slow the upward momentum, while WTI prices stalled out overnight even though US crude inventories declined. The DOE’s weekly report is due out at 9:30 central, and we’ll just wait and see if anyone pays attention to it.
It was a wild day in RIN markets as the long overdue RFS proposals from the EPA finally were released, just a year (or two) later than the law says they should be. D6 RINs traded down 15 cents on the day to a 1 year low of $.75/RIN when the rumored numbers came out in the morning, then rallied 30 cents to end the day up 15 cents at $1.05 after the actual Renewable Volume Obligation (RVO) recommendation was released by the EPA. The actual proposed numbers came in very close to the leaked numbers from back in September, which retroactively changed the 2020 blending mandate lower and reduced the 2021 volumes as well.
Why the big rally then? Along with the proposed volumes, the EPA also proposed to deny more than 60 pending small refinery exemptions (SRE) from the RFS, which according to the table below suggests every single SRE submitted since 2019 is going to be denied, a stark contract to the previous 3 years when most were granted. So what? That means even though the RVO target has been lowered, the actual volumes needing to be blended may still go up. In addition, the EPA raised the 2022 blending obligation, and set the stage for further increases in 2023 and beyond.
It’s worth noting, particularly given the large amount of fake news surrounding this topic, that neither the RVO or SRE proposals are final yet, and there will no doubt be lawsuits challenging both decisions, meaning the industry will continue operating without knowing exactly what the law really is.
The Natural Gas war: After a phone call between the US & Russian Presidents Tuesday, US Officials signaled a plan to force a shutdown of the Nordstream 2 natural gas line that exports Russian natural gas to Europe if there’s an invasion of the Ukraine. There’s no doubt the Russians know how to play a game of chess, so it will be interesting – if not terrifying for those relying on that supply – to see their response. This event may end up being one for the history books, whether or not the US Excess natural gas supply can help secure Europe’s shortage, or will they continue to prove reliant on an unfriendly neighbor to the East. Hopefully that’s the only part of this story that ends up in the history books.
The Sigh Of Relief Rally Continues For A 2nd Day In Energy And Equity Markets
The sigh of relief rally continues for a 2nd day in energy and equity markets, and volatility indices are moving lower as the Omicron fears appear to be subsiding. With refined products trading more than 20 cents above the lows set last week, it’s easy to think that the bearish trend may be over, but there’s still more work to be done to break the downward sloping trend lines for both ULSD and RBOB. Likewise, while WTI has regained the $70 level, it will need to make a push above $77 if it’s going to avoid creating a head and shoulders pattern that could ultimately push prices to $50 or below in the next 6 months.
One potential headwind for the petroleum rally: Natural Gas prices have plummeted as warmer weather forecasts bring expectations for lower heating demand this winter. After much of the rally in energy prices this summer and fall was fueled by natural gas and coal shortages in other parts of the world, suddenly the US looks like it may be long. Then again, as tensions with Russia escalate over the military buildup near the Ukraine, there’s a risk that natural gas may become the weapon of choice to combat sanctions, given Europe’s dependence on Russian imports.
The selloff in RINs slowed Monday, but values for D6 ethanol RINs did dip below 90 cents, marking the lowest trade levels since January. Ethanol prices look like they’ve started their inevitable collapse with Chicago spot values down 70 cents since Thanksgiving, and other regional markets showing signs that they aren’t far behind. Then again, transportation headaches continue, with dredging along the Mississippi interfering with barge traffic, and delaying ethanol deliveries to some gulf coast markets.
A WSJ Article this morning notes that vehicle traffic in the US is rising, but remains below 2019 levels as the work from home wave helps keep cars off the road.
Refined Products Along With Oil Prices Are Moving Higher This Morning With Tightening Global Supply
After 7 straight weeks of declines that have knocked prices down more than 20%, refined products are moving higher along with oil prices this morning with tightening global supply and some Omicron optimism both getting credit for the early rally. We saw nickel rallies for refined products get wiped out in 4 out of 5 sessions last week, so it’s hard to get too bullish about these gains until we see them last a whole day.
RIN prices had avoided the volatility for most of the week, but crumbled Thursday and Friday following reports that the EPA was (finally) set to announce RVOs that would reduce the amount of renewable blending required by refiners. The sellers are back out this morning following a report late Friday that the EPA is also considering allowing new kinds of renewable fuels – perhaps even renewable electricity – to generate RINs, and could vastly increase the supply of those credits if true. On the other hand, if the agency does allow more products to generate RINs, that could be an excuse to increase the RVO.
The clowns are exiting the Volkswagen: Money managers slashed their net length across the petroleum complex in the last week of November, which no doubt played a big role in the Black Friday rout, in addition to the volatility we saw last week. ULSD, RBOB and Brent crude all saw reductions in both long and short positions as hedge funds seem to be bailing out of the petroleum game, while WTI and Gasoil saw a huge influx of new short bets in addition to the long liquidation.
The moves were even more dramatic in carbon credits as money managers bailed out of both CCA and RGGI contracts at an unprecedented rate last week. A margin hike was given credit for part of the sharp move lower in CCA’s after a 6 month rally that doubled their value, since those funds prefer to trade with other people’s money as long as it doesn’t cost them much, and the reality that emissions have actually declined in recent quarters, which is lowering demand.
Baker Hughes report no change in the total number of oil drilling rigs active last week, as an increase of 5 rigs in New Mexico offset declines in Texas, Louisiana and California.
It’s Been A Wild Week Since The Black Friday Meltdown
The volatility continues in energy prices with Thursday’s session featuring multiple nickel swings and a 13 cent trading range for refined products, and Friday’s session starting out on a strong but cautious note. It’s been a wild week since the Black Friday meltdown, and the forward curve charts below help put some perspective on how dramatically the landscape for petroleum products has changed in that time.
OPEC & Friend’s decided to stick with their current plan to increase production by 400,000 barrels/day each month, which caused a bit of a flash crash yesterday morning, with refined products dropping from nickel gains to nickel losses in just a matter of minutes, before recovering back to nickel gains later in the day…only to have those gains wiped out in the afternoon. The theory on why prices have found a temporary floor even though OPEC didn’t slow its production plans is that the cartel must not see Omicron as having a long term impact on global demand if they’re willing to stick to their plans. In addition, the cartel did leave the door open to additional changes if needed to stabilize the market.
RIN trading had been unusually quiet over the past week as traders seemed more focused on the wild swings in refined products and ethanol prices, but sold off sharply Thursday afternoon dropping to 2 month lows following a Reuters report that the EPA would finally be releasing its past-due RVO figures and that retroactive reductions in blending obligations were expected. The drop in RIN values, which is continuing this morning, offers a little relief to refiners that have seen their gross margins hit hard over the past month as refined products have led crude lower since prices peaked.
The November jobs report showed an increase of 210,000 jobs during the month and another substantial decrease in both the headline and real (U6) unemployment rates. Both October and September’s jobs estimates were increased. Equity and energy prices ticked modestly higher after the report, and then gave back those gains, but the moves were minor in comparison to what we’ve become accustomed to this week.
This week’s interesting read: Enron’s complicated legacy on the 20th anniversary of its bankruptcy.
Today’s less interesting, but still noteworthy read: An EIA note this morning highlights the widening of crude oil price spreads owing to returning OPEC Production and higher natural gas prices.
Disappearing Rallies Are Becoming A Theme In The Energy Arena
Disappearing rallies are becoming a theme in the energy arena this week as Wednesday’s action saw 10 cent overnight gains erased throughout the day, and already Thursday we’ve seen nickel gains overnight turn into 3 cent losses early going. The smack downs of any attempted bounce are adding to the bearish sentiment on the charts, and leaving the complex at risk of another sharp selloff in the back half of the week.
There is no doubt that fear is taking hold of both equity and energy markets, with volatility indices soaring to 1 year highs, and each mention of a new Omicron case seeming to have an immediately negative impact on prices, particularly now that the FED seems to be changing its stance, and viewing the virus as an inflation risk, not a reason to create more inflation themselves as they’ve done the past 2 years.
The best hope for a recovery rally that’s able to last more than a few hours may come from the OPEC & Friends meeting this morning, if the cartel agrees to pause or reverse its output increases due to the Omicron outbreak and its expected impact on global fuel demand. Then again, the guesses that the cartel may change course today have been increasing all week and yet prices continue to fall.
The DOE’s weekly report was largely shrugged off and overshadowed by the Omicron in the US story Wednesday, but there are some bearish fundamentals that won’t help encourage buyers to step in and buy the dip. US Crude oil production reached an 18 month high, even though there’s still a quarter million gallons per day of production offline from Hurricane Ida, and numerous bottlenecks in the supply chain slowing the rate of drilling. As those two issues are worked through in 2022, it’s likely we will see US output jump north of 12 million barrels/day at a time when the world doesn’t seem to need more supply.
Speaking of which, the report also showed a large pullback in US fuel demand, particularly in gasoline, and with the holiday hangover not yet in the numbers, we could see another big drop in consumption in the weeks to come.
While the meltdown in futures is getting most of the attention this week, prices in the Pacific Northwest have been resisting the trend with basis values jumping sharply higher as at least 3 refineries in the region are still having to reduce run rates due to a lack of crude oil supply caused by last month’s flooding. The good news for suppliers in the region is that Transmountain pipeline is still on track to restart next week which should bring relief to those plants in short order.
Week 48 - US DOE Inventory Recap
Product Prices Pushed The Petroleum Complex Into Official Bear Market Territory On Tuesday
Another double digit drop in refined product prices pushed the petroleum complex into official Bear Market territory Tuesday, ending an 18 month price rally. December trading started on a much more optimistic note with product rallying 10 cents in lockstep with a big bounce in US equity markets overnight, but have already cut those gains in half, leaving the complex vulnerable to more big swings.
Refined product spot prices are down more than 30 cents so far this week as cash markets catch up with the Black Friday meltdown, and ethanol prices decided to join in on the fun Tuesday plummeting 50 cents in the New York harbor and 40 cents in other spots.
The two agencies with strongest potential influence on energy prices are OPEC and the US Federal Reserve. This week will feature both as comments from the Fed chair Tuesday helped spur another broad based sell-off that could be classified as a “Taper Tantrum” by the big money funds that expect their big money to be free and easily printed.
OPEC is now taking center stage as their technical committee meets today and then the full group meeting tomorrow, with several reports guessing the cartel may use Omicron as an excuse to pause their plans to steadily increase oil output. With several producers already struggling to meet their quotas, that change in the stated plan could help prop up oil prices, even if in real terms it doesn’t mean any less oil coming to market, and would also send a signal to the US & other nations that they shouldn’t bring their SPR knife to the oil price gun fight.
The API reported builds in refined products last week of 2 million barrels of gasoline and 800,000 barrels of diesel, while oil stocks had a small decrease of roughly 750,000 barrels. That report seemed to be largely shrugged off based on the price action Tuesday afternoon through the overnight session, as the larger macro issues continue to be driving the Risk-off/Risk On action across asset classes. The DOE’s weekly report is due out at its normal time this morning. While that report may have less impact than normal on futures, watch the refinery runs by PADD to see how plants are progressing through maintenance to get a feel for how quickly some of the supply shortages in pockets around the country may heal.
Science getting in the way again: California’s Air Resource Board published a study this week that shows Bio Diesel and Renewable diesel blends are actually creating more NOx pollution than “traditional” CARB #2 diesel in modern engines. The Next Steps listed by the Agency are to take several months to ask more questions, so it’s unlikely we’ll see any changes to the state’s current regulations any time soon, but it will create new challenges for the state’s biodiesel blenders.