News & Views
Week 56 - US DOE Inventory Recap
The Strategic Petroleum Reserve Disappointed Markets Yesterday And Led To A ~4% Rally In Energy Prices
Well that didn’t work: the volumes announced to be released from the Strategic Petroleum Reserve disappointed markets yesterday and led to a ~4% rally in energy prices. Even with the addition of the oil being liquidated from a handful of Asian countries, the grand total returning to the market was less than expected. Prompt month European crude oil futures are exchanging hands over $82 per barrel, American WTI is trading around $78 this morning.
The Department of Energy published an interesting note including some details about the specifics of yesterday’s announcement.
The American Petroleum Institute estimated a 1.3 million barrel drop in national oil inventory levels last week, accompanied by the rare ‘no change’ in gasoline stocks and a tame draw-down of less than a million barrels of diesel. The DOE’s version of events will come out at its regular time today (10:30 EST).
In case you haven’t heard, retail gasoline prices are high. While it’s anticipated that many will stay home on turkey day, this year’s COVID recovery is likely to cause a 13% YOY increase in auto travelers. It will be great to see family, too bad it’ll be the most expensive to do so since 2012.
Prices are drifting lower this morning as the market adopts a ‘wait-and-see’ approach ahead of a possible response from OPEC+ following yesterday’s SPR release. The cartel is scheduled to meet next week and news surrounding the continuation, cessation, or alteration of their typical monthly increase of 400,000 barrels of oil supply will be closely watched.
The US Has Released 50 Million Barrels Of Oil From The Strategic Petroleum Reserve
The US has released 50 million barrels of oil from the Strategic Petroleum Reserve in an effort to cool the rally WTI futures that has been chugging along since April. The White House also claims the sale will be made in conjunction with similar releases by other countries including China, Great Britain, Japan, South Korea, and India. WTI futures are up a dollar on the news.
While the intent of an SPR release is to put a damper on to short-term supply disruptions, drivers in California won’t likely see any relief from record high gas prices in the near future. Oil supply isn’t the issue on the West Coast: below average gasoline stocks and refinery throughputs combined with recovering demand will keep prices high until refined product supplies catch up.
The premium on the Colonial gasoline pipeline has cooled off after hitting multiyear highs earlier this month. Steep backwardation in Northeast regional prices, suggesting a “product’s tight now but won’t be soon” economic outlook, are keeping a lid on gasoline linespace values while the backwardation in Gulf Coast diesel prices have the premium on diesel shipments poking their head into positive territory for the first time in years.
Refined product futures are up around 1.5% so far this morning, eyeing a run at a host of support-turned-resistance levels. As it stands now the downward trend we’ve seen in gas and diesel prices over the past month and a half is intact, albeit strained from this morning’s round of buying.
Gasoline And Diesel Prices Are Up Today While American And European Crude Oil Benchmarks Are Drifting
Refined product futures are drifting higher this morning, attempting to recover from last week’s selling that saw prices down 4% by the end of Friday. Gasoline and diesel prices are up around .5% today while American and European crude oil benchmarks are drifting lower to start the day.
The commitments of traders report showed a 10% drop in WTI net length held by hedge funds last week. Brent crude likewise saw a decline in long bets made by Money Managers for a sixth week in a row, lending credence to the idea that the recent trend of lower oil prices might be nearing completion.
Lower oil prices might not be the best this for everyone though: Baker Hughes reported yet another increase in active oil production platforms. Seven rigs started pumping last week, bringing the total active count to 563, 250+ more than were running this time last year.
The White House is set to announce its decision on the new Federal Reserve Chair this morning. While this might be one of the most important economic decisions Biden has made so far in his presidency, political factors might be taking the reigns in this nomination as the president seeks to secure support for his ~$2 trillion healthcare, education, and climate-change legislation.
Some technical oscillators are hinting at an oversold refined product futures market while weekly charts place both prompt month gasoline and diesel futures in a clearly defined downward trend. Lower prices are expected for both contracts with the $2 mark a viable price target in the near term.
A Rise In COVID Cases Are Taking Credit For This Morning’s Heavy Selling Action
A rise in COVID cases across the pond are taking credit for this morning’s heavy selling action. While Austria going back into full lockdown might make for a catchier headline, the consideration of a joint release of petroleum reserves by the US and China shouldn’t be slept on. The European crude oil benchmark is trading below the psychologically important $80 mark this morning, but it seems to be the refined product futures that are leading the complex lower. Both gasoline and diesel futures are down over 3% to start the day, equivalent to +$3 per barrel.
Gasoline futures are plowing through a slew of would-be technical support levels this morning, including its 5-, 10-, and 50-day moving averages before the market has officially opened for the day. While it no longer seems that last month’s rounding top chart pattern will end up coming to fruition, today’s action seems to solidify the bears’ control of this market. Lower short-term prices likely comes as welcome news to consumers who are expected to stay home next week rather than drive for turkey day.
The Environmental Protection Agency announced yesterday that the deadline for compliance according to the Renewable Fuel Standard for 2020 and 2021 has been delayed for all obligated parties, and gave small refineries more time to comply for 2019 obligations. Both ethanol and biodiesel credits traded lower on the news but the move pales in comparison to the volatile trading we’ve seen for the past year. (charts below)
While it’s still debated whether or not a release of stockpiled oil will have any long-term benefits, the seemingly bearish precedent of ‘more supply = lower prices’ may be enough to kick chart technical into the correction that’s been anticipated. Even if futures see a heavy selloff in the next couple months, that might not do any good for some metropolitan areas that are seeing record high fuel prices due to refinery outages.
Energy Prices Plunged To 7 Week Lows Wednesday, Even After DOE Reported Strong Recovery
Energy prices plunged to 7 week lows Wednesday, even after the DOE reported a strong recovery in petroleum demand, putting the complex back where it started the week, on the verge of a technical breakdown that could shave another 20-30 cents/gallon off of refined products. A surge in gasoline imports may have been the biggest contributor to the pullback in prices Wednesday as it seems to have knocked the wind out of the rally in NYH spot prices, and slashed more than 1/3 of the backwardation out of that market in just a single day.
As has been the case most days ever since prices peaked a month ago, a big selloff has been met with some modest buying this morning. It looks like the $2.35 range for ULSD and $2.25 for RBOB are setting a new temporary floor, and will become the pivot point for the next several days.
Running out of ideas? As political pressure heats up over the highest inflation in 30 years, the White House seems increasingly desperate to find a solution to reduce gasoline prices. Another letter was sent to the FTC to try harder to find out who is cheating even though that produced no results the last time they tried it, more rumors of a coordinated SPR release are being floated amongst other brilliant plans like banning crude oil exports again, even though that’s more likely to raise gasoline prices by further straining the transportation network.
None of those options reflect the reality that refiners are still recovering from a near-death experience in 2020 that slashed capacity and deferred necessary repairs meaning there are no short term solutions until the plants undergoing maintenance (both planned and unplanned) can come back online, which has proved to be a big challenge in recent weeks. Even then, there’s not a short term fix to the driver shortage, which means that even when prices for diesel in Phoenix trade nearly $1/gallon above other parts of the country like they are today, long hauling fuel to help heal the supply crunch can’t happen like it would in years past.
The ethanol market remains the best indicator that this tightness is one of transportation more than supply, as $1/gallon or more of backwardation persists over the next few months, even as ethanol output in the US remains near all-time highs and inventories are holding just below their average for this time of year.
An inconvenient promise? The administration also just opened up the largest Gulf of Mexico oil lease in history, auctioning off more than 80 million acres, which of course has environmental groups fuming as it comes just a few days after pledging to aggressively reduce carbon emissions. This is the problem with a country that at least pretends to follow the rule of law, as the administration had tried to block this type of sale but was overruled in the courts, meaning this administration is now stuck granting more oil permits than its predecessor, but still seeing prices increase.
Week 55 - US DOE Inventory Recap
Tight Gasoline On The East Coast And Tight Diesel Across The Southwestern US Continue To Be Major Themes
Tight supply today is battling with concerns about a demand slowdown tomorrow for control of the energy markets this week, with no clear winner so far as petroleum futures pull back into the red after their rally attempt stalled out Tuesday.
Tight gasoline on the east coast, and tight diesel across the southwestern US continue to be major themes this week. Space on Colonial’s main gasoline line reached a 5 year high Tuesday (after trading in negative territory for nearly 2 years) as the New York harbor saw yet another push higher in prompt basis that expanded the price spreads from the Gulf Coast to the East Coast, and from today until the end of the month.
Markets across the Southwest meanwhile are seeing some of the biggest spreads on record as a combination of refinery maintenance both planned and unplanned, pipeline delays and healthy demand continue to create localized shortages, particularly for diesel. Basis values in LA for non-carb diesel (which has to go out of state) jumped 9 cents Tuesday as shippers looked for ways to get barrels to Phoenix, while the options from the Gulf Coast are slim to none at the moment.
There are numerous refineries attempting restart from maintenance activity in the back half of November stretching from coast to coast to coast and how successful they are will go a long way to determining how quickly these supply squeezes heal.
The API reported an increase in US crude supplies of 655,000 barrels, while Cushing OK stocks had another decrease of nearly ½ million barrels. Gasoline inventories declined by 2.8 million barrels while distillates were up just over 100,000. With the unusually strong backwardation in gasoline prices, PADD 1 gasoline stocks should be watched closely in today’s DOE report to get a feel for when prices will come back down to reality.
A stronger US Dollar, which reached a 16 month high Tuesday, is getting some of the credit for the move lower in commodity prices, even though the correlation between asset classes has been weak for some time. Strong economic data from the US, inflation fears, and concerns about slowdowns in Asia are all getting credit for the push higher in the dollar, but the timing of the move in energy contracts compared to the dollar index suggest petroleum futures are still largely ignoring their long term relationship.
The Bulls Survived A Big Test On Monday
The bulls survived a big test Monday, bouncing sharply off of 6 week lows and continuing to rally overnight, putting the risk of a price collapse on hold for now, although weekly charts continue to favor a move lower by year end.
Multiple refinery snags seem to have helped contribute to the sudden about-face in prices Monday, including reports that the country’s largest refinery was having to reduce production after a failed unit restart a month after an unplanned shutdown. The other indicator that the move was supply driven was that time spreads continued to strengthen, pushing several contracts into even steeper backwardation.
Between the COP26 pledges and 2,700 page US “infrastructure” bill, there’s a lot of data to sort through this week that could theoretically at least impact energy markets. Based on the price action in petroleum futures, the early reaction from the market is that none of this is going to have much impact any time soon. Read here on how the funds from this new law will flow through state governments, starting 6 months from now.
One relatively small (you know, only $5 billion) piece of the bill signed yesterday will be good test for EV market, as it provides funds to buy battery powered school buses. How the industry can handle this process, whether or not those buses can even be produced any time soon, may go a long way to signaling the viability of the electric car dreams held by so many. Meanwhile, how to power those vehicles will certainly become a growing point of contention as coal prices in the US have reached a 12 year high.
Supply chain snags are slowing the gains in US crude oil output, and helps explain why the drilling rig count haven’t jumped more with prices at 7 year highs. Here too the rapidly changing climate landscape may be playing a role, as a WSJ article this morning suggests that funding for US drillers will be more challenging after COP26, which may mark the end of decades of cheaper production. Of course both points are welcome news to OPEC, who is already urging caution from producers as signs mount that the world is shifting to a crude surplus.
Speaking of which, the IEA noted the rise in supply in its monthly oil market report. A few highlights from that report are included below.
-The world oil market remains tight by all measures, but a reprieve from the price rally could be on the horizon. Contrary to hopes expressed in Glasgow at COP26 this is not because demand is declining, but rather due to rising oil supplies.
-Global oil production is already rising. In October, oil supplies leapt by 1.4 mb/d … A further boost of 1.5 mb/d is expected over November and December even as OPEC+ disregarded pleas from major consumers to ramp up beyond a monthly allocated 400 kb/d to cool prices.
-Refinery activity is picking up after autumn maintenance, while end-user demand is on track to strengthen further as more countries open up to international travel
The Energy Bulls Are On The Ropes Once Again To Start The Week
The energy bulls are on the ropes once again to start the week, with refined product prices touching 6 week lows, WTI struggling to hold onto the $80 mark, and charts continuing to suggest that lower prices may be ahead. Seasonal influences with driving slowing down and harvest activity ending also tend to work against product prices this time of year, and a warm fall has reduced concerns of a cold snap depleting natural gas supplies and forcing a run on diesel.
While the outlook for futures seems to be getting more bearish by the day, physical markets across the country are telling a much different story with pockets of tight supply for both gasoline and diesel continuing to challenge suppliers who can no longer rely on long haul trucking to help heal the situation.
Tighter than normal gasoline supplies along much of the East Coast, and ample supplies along the Gulf Coast have widened the spread for RBOB gasoline prices between the two markets to a two year high north of $.16/gallon. Colonial linespace values for gasoline have followed suit, also reaching a new 2 year high at 3 cents/gallon Friday. A steeply backwardated forward curve in the NYH seems to be the only thing keeping a lid on those premiums as prices will drop about a nickel in the time it takes to get space on the line, until when it will actually deliver at the end of it.
Adding to the extreme backwardation in the region, ethanol prices in the NYH jumped back to the $4/gallon level Friday, and LA spots are following close behind. West Coast gasoline values meanwhile continue to push into the stratosphere as refiners are still struggling to make up for the numerous disruptions we’ve seen in the past 2 months and deal with the long term reality that the state is going to require billions more in investment to continue operating.
Diesel supplies meanwhile are tight across the Southwestern US with markets from El Paso to Phoenix seeing the largest rack spreads since SNOVID shut down every refinery in Texas last February.
The weekly commitments of traders report is delayed in the US until today due to Veteran’s day, but we did get a look at ICE contracts where Brent crude saw money managers liquidating length for a 4th straight week as prices retreated from 7 year highs. Gasoil (European’s version of ULSD) contracts meanwhile saw a slight increase in net length despite a large jump in new short positions added during the week, suggesting the big money funds aren’t throwing the towel in on higher priced energy contracts just yet.
Baker Hughes reported a net increase of 4 oil rigs drilling in the US last week as producers continue their slow recovery despite high prices. Most notable in last week’s report was a drop of 5 rigs in New Mexico and an increase of 10 in Texas, suggesting Permian producers may be moving away from Federal land in NM in favor of private lands in TX, based on the campaign promises of the President to stop drilling on public land. In reality however, the Biden administration is on pace to approve more drilling permits than his predecessor as high prices prove once again to be more influential than political leanings.
The Highest Inflation Reading In 30 Years
The highest inflation reading in 30 years sparked a round of risk-off selling Wednesday as traders seem concerned that these rising prices can no longer be considered transitory, which will force the FED to tighten its monetary policy sooner than later. Energy and equity markets were both caught up in the selling early in the session, the DOE’s weekly report didn’t help as petroleum futures continued moving lower throughout the day.
The big selloff keeps the rounding top pattern in play for RBOB, with a good chance that we’ll see another 20 cent drop if prices break below $2.25 in the next week or so. WTI and ULSD are more neutral technically that gasoline, and also have a better seasonal outlook, but need to hold above last week’s lows of $2.39 for ULSD and $78 for WTI to avoid another move lower.
The total US petroleum demand estimate for the week dipped below 2020 levels for the first time since March, when we were comparing to pre-lockdown levels. While the DOE’s weekly consumption estimates are notoriously volatile, they did offer a harsh reminder that demand doesn’t only move higher after 18 months of recovery, especially this time of year. Charts from the DOE’s weekly report are below.
OPEC’s monthly oil market report kept forecasted supply and demand figures steady for next year, but like the EIA’s outlook earlier this week noted that gas-to-oil switching for electricity generation should boost demand and prices this winter. The cartel’s oil output continued moving higher in October as they made good on the plan to slowly return production to the global stage. The report also highlighted the recovery in refining margins globally over the past few months that is helping keep some plants that were on the verge of permanently closing still operating.
A surprise agreement between the US & China announced Wednesday may end up being the most meaningful result of the COP26 meetings, as the 2 largest emitters in the world account for roughly 40% of greenhouse gases. As with most of the pledges made at this conference, the details are scarce, and it’s likely to take years before actual changes are made, but the sign of cooperation does open the door to more US exports of LNG replacing Chinese coal, which is arguably the most impactful step available to reduce emissions short term.
We will be attending our company’s annual meeting tomorrow and will not send out an update in the morning.
Week 54 - US DOE Inventory Recap
California Regulators Requiring Refineries To Improve Their NOx Emissions
West Coast gasoline values outpaced the rally across the rest of the country with CARBOB gaining more than a dime in both the LA and San Francisco spot markets. The big jump in CARBOB basis values to 8 month highs didn’t coincide with any new refinery disruptions, but it did come just 2 days following a ruling by California regulators requiring refineries improve their NOx emissions, which will cost billions to implement, and could force another plant or two to shut their doors.
The EIA raised its price outlook for crude oil in the latest Short Term Energy Outlook, and noted that fuel switching from natural gas to petroleum for electricity generation should continue pushing demand higher in the coming quarter. That said, the agency also increased its production estimates for next year as drillers race to take advantage of higher prices, which they predict will push prices lower in 2022. The report also highlighted the extreme backwardation in the price curve, noting that this type of price structure typically only happens following a severe supply disruption, whereas this time it’s been the fast recovery in global recovery that’s driven the tight supply.
The API reported a draw in crude oil inventories of nearly 2.5 million barrels last week, snapping a 6 week streak of increases, while gasoline stocks dropped roughly ½ million barrels and diesel increased by about the same. That report gave prices a brief bounce in the afternoon, but failed to sustain the upward momentum overnight. The DOE’s report will be out at 9:30 central.
Ethanol looks like it may have made the turn lower after an insane rally of $1/gallon to start November pushed prices to all-time highs in some markets, although reports of logistical bottlenecks caused by rail and trucking delays are likely to continue to cause headaches until the winter demand slowdown takes hold.
Energy Futures Are Moving Higher And Attempting To Break Out Of The Rounding Top Pattern
Energy futures are moving higher for a 3rd straight session, and attempting to break out of the rounding top pattern that continues to suggest lower prices are coming in the weeks ahead. The $2.40 range for gasoline and $2.50 for ULSD still look like good resistance ranges that could mean the difference between another run at multi year highs before year end, and the bearish pattern formation that could push prices much lower in December.
Oil prices are lagging behind refined products this morning, which may be partially caused by rumors that the White House may order the release of some Strategic Petroleum Reserves to combat soaring prices. Read here if you’re wondering whether or not that’s a bad idea. To summarize, an SPR release “…is rather like tapping into your retirement fund to pay for a vacation.”
Meanwhile P66 announced that its Belle Chasse refinery, one of the refineries that may have been able to actually buy crude oil from the SPR and turn it into the products consumers actually can use, would be converted into a terminal facility after the company decided the repairs needed after Hurricane Ida weren’t worth the investment.
Ethanol prices are holding in the stratosphere for now with NYH spots still north of $4/gallon, while others are trading north of $3.30. There’s more than $1/gallon of backwardation in the market over the next 30 days as US ethanol production is holding at all-time highs, so look out below once those prices start to head lower. RIN prices have continued their decline this week, as the industry continues to wait impatiently for the long overdue RFS volumes. An ethanol lobbying group is suing the EPA over these delays, while simultaneously celebrating the EPA’s rejection of the first small refinery waiver exemption its ruled on under the new administration.
The inventory data deluge for November starts today. We’ll see the EIA’s monthly short term energy outlook later this morning, then the API inventories this afternoon. The DOE’s weekly report is out tomorrow, then OPEC’s monthly report on Thursday.
There are just 3 weeks left in the Atlantic Hurricane season for 2021. No storms are currently being tracked by the NHC, extending this period of calm after all the storm names were used up in the initial list during a busy season.
Energy Futures Are Drifting Higher This Morning
Energy futures are drifting higher this morning after the big three contracts ended last week with across-the-board losses. Prompt month West Texas Intermediate futures are leading the way this morning showing 1% gains in early trading; gas and diesel futures are tagging along at .3% gains.
Money managers (aka “Smart Money”) trimmed their net positions in all four of the main energy contracts last week. Not only were long positions liquidated, new short positions were added for each of the American contracts, further suggesting more traders are betting on lower prices in the near future.
Baker Hughes reported an addition of 6 operating oil production rigs las week. It isn’t difficult to see why there are twice as many platforms running than there were a year ago: oil prices have doubled in the same time frame.
The rounding top chart pattern all three American benchmarks are showing have held their form despite Friday’s buying. If the pattern holds and becomes valid, we could see 30-40 cents come out of refined product prices in short order. Oil futures could be slashed by $20 per barrel at the same time.
The Fall Rally In Energy Prices Officially Ended Thursday After Huge Reversal In Morning Trade
The fall rally in energy prices officially ended Thursday after a huge reversal in morning trade wiped out 7 cent gains for refined products, leading to more heavy selling the afternoon. The complex is attempting to find a bottom this morning with modest gains, but the trend lines were broken this week, and the charts continue to favor lower prices in the weeks ahead.
In addition to the bearish technical outlook, the big physical players seem to be figuratively buying this selloff and literally not buying it as basis values in most US cash markets dropped for a 2nd straight day, adding to the severe losses in futures.
If you buy gasoline in the North East, you’re probably wondering why your prices went up yesterday even when RBOB dropped a nickel. Ethanol is the culprit as the price spike went completely off the rails yesterday, with values in the NYH area surging more than 50 cents on the day, after already jumping more than 40 cents this week. That jump in prices was enough to override the drop in gasoline, despite the 90/10 ratio between the two components. The forward curve chart below shows how incredibly steep the backwardation has become thanks to increased production, and a profound inability to transport that product, with $1/gallon separating prices in Chicago over just a few months, and New York values are nearly $1 more expensive than that today.
OPEC & Friends made no changes to their current output agreement Thursday, and will meet again in the month. This lack of change was credited with both yesterday’s price pullback, and the rally overnight, which tells you how much those headlines are worth. While the White House wasted no time in expressing their discontent with the cartel’s decision to only add 400,000 barrels/day of oil every month to global supplies, the Saudi Energy Minister clearly seemed to be growing weary of the criticism: “Oil is not the problem,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters. “The problem is the energy complex is going through havoc and hell.”
Another one bites the dust: Shell announced yet another refinery closure, with plans to shutter part of its German refining complex in the coming years, which would take roughly 150mb/day of capacity offline. P66 meanwhile announced it would begin repairs to its Belle Chasse facility that was swamped by Hurricane Ida, although it’s still not clear whether or not that plant will ever operate as a refinery again.
US payrolls increased by 531k in October, and the previous two months estimates were revised sharply higher in today’s jobs report, knocking both the official (U3) and real (U6) unemployment rates down a couple of tenths. Equity markets and the US Dollar jumped following the report which was stronger than most predicted, and energy futures seemed to not care much. This report could be another double edged sword however as the FED has made it clear this week that they’re looking for stronger employment as a signal before raising rates next year.
Conflicting Headlines And Inventory Data Points Continue To Confound The Market
Energy contracts had their biggest 1-day selloff since July on Wednesday as a steady round of selling that started Tuesday afternoon continued throughout the day. Just when it looked like that the bulls had thrown in the towel and we were in for a technical breakdown, prices have rallied sharply overnight, wiping out most of Wednesday’s big losses as conflicting headlines and inventory data points continue to confound the market.
No official announcement from OPEC yet, but most reports continue to show expectations that the cartel will stick with its current output plan, in spite of pressure from world leaders to increase more.
Headlines about Iran seem to be causing at least some of the whiplash in prices, with news of a return to nuclear negotiations getting credit for some of Wednesday’s selling, followed by Iran claiming that the US had tried to seize one of its oil tankers in the Sea of Oman reminding everyone that negotiating with Iran is a fool’s errand challenging.
Equity markets have rallied to new record highs after the FOMC made it clear that they still believe inflation levels at their highest levels in 30 years are still transitory, and that the FED can be patient with interest rate hikes. Even though the correlation between energy and equity markets has been close to zero in recent weeks, the market’s reaction to that statement does seem to take a fear-induced selloff off the table for now.
Who would ever guess that on a day when the DOE reported US Gasoline inventories reached a 4 year low, and PADD 1 inventories (home to the NYMEX delivery hub) reached a 7 year low, would also be the day when gasoline futures had their biggest daily drop in nearly 4 months. Of course, given the size of the rally over the past 1, 4 and 18 months, this seems a little bit like the market’s tendency to buy the rumor and sell the news, in this case pertaining to tightening supplies. This is also a good reminder that the futures market is less concerned about where we are today, than where we are headed, and with seasonal factors all pointing to gasoline stocks building steadily over the coming months, and high prices surely to dent consumption, it’s getting harder to see a reason to keep on betting on prices above a 7 year high.
Despite the big bounce this morning, charts near term continue to favor lower prices as refined products are setting lower lows and lower highs on the daily charts ever since prices peaked in late October. The $2.40 range for RBOB and $2.50 area for ULSD look to be good near term pivot points to watch. If prices can climb back above those levels, there’s a chance we see another run at the October highs, but if they can’t, another big move lower seems likely.
One more bearish factor to consider, it wasn’t just futures that were selling off heavily Wednesday, most cash markets saw basis values decline as well, pushing cash markets even further down on the day. When the big physical traders aren’t believing what the robots are doing the exchange, we’ll often see those diffs move contrary to futures, but yesterday’s action suggests that the concern of the winter demand doldrums for gasoline is real. No such concerns for ethanol prices however as spots continue to surge to record highs across the country, even as US ethanol output remains well above normal levels. While the ethanol forward curve has become murky due to a lack of trading in those futures, it looks like there’s 50-60 cents of backwardation between now and the end of the year, which means whenever the ethanol logistics logjam breaks there’s going to be a huge move lower in a hurry.
Week 53 - US DOE Inventory Recap
Petroleum Complex Fell Out Of Bed Wednesday Morning With Refined Products And Crude Oil Down
It looks like petroleum complex fell out of bed Wednesday morning, with refined products down a 6-7 cents and crude oil down more than $2, but in reality this selling started just after Tuesday’s (strong) settlement and continued throughout the overnight session. The move lower has wiped out the gains of the previous two sessions, the leaves the energy complex on a precarious technical footing, and threatening a much bigger move lower after a strong rally for most of the past 18 months.
Yesterday’s API report is getting credit this morning for the drop in prices as the most heavy selling occurred shortly after that report was released. US Crude oil inventories built by nearly 3.6 million barrels last week, but refined products only saw small moves, and Cushing OK inventories dropped yet again. The DOE’s weekly report is due out this morning.
A fire broke out at the Shell refinery in Convent LA, as the company was attempting to start its main crude unit, delaying the lengthy repair process since the plant shut during Hurricane Ida more than 2 months ago. That news seemed to help RBOB futures find their footing after a weak start Tuesday, although clearly that strength is proving to be short lived. It’s worth noting that the $2.39 range for RBOB is where we’re seeing December futures trade currently, and
Refinery disruptions around the US, Canada and Europe are all contributing to some of the steepest backwardation in gasoline prices we’ve seen in a decade. NYH RBOB is worth nearly 14 cents more today than it is at the end of December, which helps explain why premiums for space on Colonial are barely positive even though there’s a 9 cent spread between the Gulf and the Harbor on a prompt basis.
Don’t be surprised if the next 24 hours is full of more price swings. We’ll get the FED’s announcement on tapering their money printing program later this afternoon, which has the potential to create big waves in financial markets including the energy arena, although many times we see a bit of a delayed reaction as the people still involved in trading need time to digest the statement.
OPEC and Friends meet tomorrow morning and usually we’ll see prices swing ahead of any official announcement – if there is one at all – as floating rumors to reporters seems to be a favorite past time at these events.
Energy Futures Continue As Markets Await Decisions From Two Major Powers In Global Oil Prices
The choppy action in energy futures continues as markets await decisions from the two major powers in global oil prices, OPEC and the US Federal reserve. A rally Monday to start November’s trading pushed prices further away from the brink of a technical breakdown, but most contracts are slipping back into the red this morning.
More OPEC members are signaling support of Saudi Arabia’s pledge to stick with the output agreement that will add 400,000 barrels/day of production each month until mid 2022, which they argue will balance the global supply/demand equation.
The November FOMC meeting starts today, and will conclude with an announcement on the FED’s changes to monetary policy tomorrow. While expectations for interest rate hikes remain non-existent until the middle of 2022, this meeting is expected to start the process of reducing the FED’s extraordinary bond purchases which started during the depths of the pandemic to stabilize markets. There is concern of a “taper tantrum” if equity markets respond poorly to the removal of the free money that’s fueled a record move in stock prices, and other forms of inflation, that could spill over into commodity prices as well.
Lots of pledges coming from the COP26 meetings this week: The US President announced new proposed rule to limit methane emissions in the US, which many believe to be the low hanging fruit in the climate battle. The regulations, if passed, would give federal oversight to more US gathering systems (something likely to face a legal battle in Texas) and cut even further back on natural gas flaring. Perhaps the biggest change in this proposal from prior rulings is that they would apply not just to new facilities, but to existing ones as well.
Along with the rally in refined products Monday, RINs had their first move higher in nearly 2 weeks, after D6 values had dropped 30 cents from their October highs and D4s fell by 25 cents. Still no updates on the RVOs for 2021 from the EPA, which may mean those numbers are being held as a bargaining chip in the congressional tax, spending and climate bills that continue to go nowhere, or that the agency is more focused on the new rules on methane and doesn’t have the resources to comply with the RFS timing mandates.
Energy Futures Continue To Hold In A Sideways Pattern
Energy futures continue to hold in a sideways pattern, setting up more back and forth action, in what appears to be a bit of wait and see ahead OPEC & COP26 meetings this week. One thing we learned, from the G20 meetings over the weekend: Most of the world is in a tough position of wanting less fossil fuels long term, but needing more of them today, and not really agreeing on how to close that gap.
Reminder that the severe backwardation in RBOB futures has the newly prompt December contract trading well below where the November contract when off the board Friday, so even though prices are up a couple cents this morning a continuous chart will show RBOB down 7 cents or more. The ULSD curve isn’t as steep as RBOB, but here too, cash prices are ticking higher around 1.5 cents this morning even though prompt futures values are lower today than were Friday.
China announced Sunday that it would be releasing gasoline and diesel fuel from its strategic reserves to help stabilize markets, a move some reports suggested would push prices lower Monday. Naturally the market had other ideas as the rare move proves 2 things: 1) China’s energy traders are some of the best in the world, stockpiling reserves when prices plummeted 18 months ago and selling them now at 7 year highs and 2) there are limited options short term to supplement dwindling energy supplies.
Money managers reduced their net length in WTI and Brent contracts last week, but added to their length in refined products. RBOB and Brent both saw a jump in new short positions added as some funds appear to be trying to call a top to this market, while ULSD and WTI saw a large amount of short covering, proving how challenging (and costly) trying to call a top can be. A WSJ article over the weekend highlighted how inflation fears can drive hedge funds and other money managers into oil…and thereby help create inflation.
Baker Hughes reported a net increase of 1 oil rig drilling last week, with the DJ Niobrara and Williston basins each adding 1 rig, while the Permian declined by 1. A rare occurrence last week: The Permian saw a new natural gas rig put to work, showing the industry adjusting to the new world where natural gas is again a commodity worth selling rather than burning off, and where the infrastructure has grown to be able to bring that gas to market.
One month left in the hurricane season: Tropical storm Wanda has formed over the Atlantic, but looks like it will stay far away from the US and not be a threat. There’s one other system currently being tracked by the NHC but it too looks like it will stay offshore if it develops.