News & Views
ULSD Futures Contract Continued To Smash Records And Reset Charts Thursday
The runaway train known as the May ULSD futures contract continued to smash records and reset charts Thursday, reaching a new all-time high of $5.22, which is more than $1/gallon above the high set in 2008, and 55 cents above the high set earlier in March.
It’s the last trading day for May RBOB and ULSD futures, so for those in the NY Harbor and Group 3 based markets that haven’t already switched over to referencing June futures, you’ll want to be sure to watch the HOM and RBM contracts for direction today.
Usually an expiring contract in a volatile month can bring some fireworks on the last few trading sessions, and we certainly saw that in Thursday’s action with the May contract smashing all-time records and trading $1/gallon above June. Overnight we saw the opposite however as it took more than 12 hours for the first trade in the May HO contract to happen.
With open interest at decade lows as extreme volatility and backwardation (which led the CME group to increase margins this week) appear to be keeping many traders on the sideline, volume should be extremely low today so we could see hardly any trading, but there may be huge price swings if anyone needs to get something done.
The US dollar has surged to a 20 year high this week, as rising interest rates and a flight to safety have international dollars pouring into the us. (So much for those plans to replace the dollar with Yuan…) While obviously that’s not slowing down diesel prices any, the dollar strength could end up slowing the energy rally if it breaks the back of international buyers now facing a double whammy of record high fuel prices and their own currencies devaluing vs the dollar.
Bottom line, prices are simply becoming unaffordable, if supply is available in the first place, which is going to hit demand in a big way. Anecdotal evidence of this: employees of a major oil company were complaining yesterday about how much it cost them to fill up. That actually happened.
RIN prices (and your grocery bill) continue to surge as the various edible oils used to make “advanced” biofuels are being hoarded by countries scared about feeding their people.
No surprise that quarterly earnings reports this week are showing huge profits for oil producers and most refiners less than 2 years after the industry was left for dead. Considering that prices didn’t really rally until the 3rd month of the quarter, things are looking even better for Q2, although the inflationary impact of the war is giving plenty of reason for concern further out into the future.
Diesel Prices Have Hit A Record High This Morning
Diesel prices have hit a record high this morning as global markets are experiencing a Lord of the Flies moment as they come to terms with the shortage of oil products, both edible and fossil.
RINs are rallying to their highest levels in almost a year as Indonesia’s palm oil export ban was expanded to include unrefined oils, which is setting off another frantic scramble for replacements to process all sorts of foods, fuels and other products.
While ULSD futures have reached all-time highs, only the NY Harbor spot market is trading above where it peaked out in March, while other cash markets around the US are still well below their peaks. The extreme backwardation that has been well documented over the past month is a primary driver of this spread between markets, and also makes resupply a challenge when there’s a 70 cent price drop looming in the next 30 days.
Prompt diesel prices in the Chicago market are trading more than $1/gallon below those in the NY Harbor, so if you live in PA you might notice a few more tankers heading east this week as those with both the supply and the freight capacity could net $5,000 or more per load. While it’s not unusual to see Chicago trade at steep discounts to neighboring markets at times, it is unusual to see San Francisco spot diesel trading nearly $1 below NYH values, especially given the reduction in operable refining capacity in the bay area in recent years.
The big question for the months ahead is whether the other US markets will rally to meet New York, or if New York will collapse to get in line with its neighbors. It seems likely that 80 cent backwardation won’t last long (just as 15 cent backwardation which shocked the world in 2008 didn’t) and the divergence between regional markets can often be the precursor to a trend reversal. That said, total US diesel inventories remain well below their normal range, and international buyers are frantic, so it’s much too soon to say this rally is coming to an end.
Week 17 - US DOE Inventory Recap
The Energy Complex Seems To Be Taking A Breather This Morning
The energy complex seems to be taking a breather this morning after Russia cutting natural gas supply to its neighbors overwhelmed the potential demand destruction from new COVID lockdowns and pushed prices higher yesterday. As of now, gasoline futures are trading on the green side of flat while diesel and American crude oil contracts are posting ~1% losses to start the day.
The spread between the expiring May and June ULSD futures contracts continued to set records yesterday with the former trading as high as 71 cents above the latter. A combination of a dismal short-term supply outlook and end-of-the-month trading volatility is taking credit for yesterday’s sharp increase. Physical markets scrambled to offset the change in futures prices with 5-20 cent gains or losses, depending on which futures month each market is referencing.
The API’s national inventory estimate published yesterday afternoon didn’t seem to move the needle in overnight trading. The Institute estimated a moderate build of 4.7 million barrels of crude oil last week while gasoline stockpiles drew down by almost 4 million barrels. The total diesel inventory for the country grew by just under 500,000 barrels, however the more interesting number traders will be looking is the inventory levels in the New York market. If the Department of Energy publishes new all-time lows this morning, we will likely see another surge in prompt month diesel futures.
Crude and heating aren’t the only oil markets the war in Ukraine is distressing: many different cooking oil supplies are tight around the world, causing some countries to ban exports. While this might not affect refined product prices outright, it is pushing some blendstock and renewable credit prices higher. Corn futures, the underlying product influencing ethanol and D6 RIN prices, is trading at highs only seen once in the history of the contract. Soybean oil, the main price driver for biodiesel and D4 RINs, is setting new all-time highs this morning. It will be interesting to see, now that food scarcity is contributing to higher energy prices, if more start asking the question “should we be growing crops for fuel?”
Energy Prices Continue Their Recovery Rally After A Big Selloff Monday Morning Was Largely Erased In The Afternoon
Energy prices continue their recovery rally after a big selloff Monday morning was largely erased in the afternoon. Diesel prices once again continue to steal the show as the market seems to be dealing with the realization that a demand slowdown is tomorrow’s problem, and today there’s still not enough supply to go around.
The May diesel contract is smashing records for the steepest backwardation on record as it trades 51 cents above the June contract with less than 4 days until expiration. Those huge swings in time spreads continue to wreak havoc on US cash markets, with markets trading vs June seeing big premiums while some of those still trading vs May are starting to see hefty discount. The exception to that is the NYH which has cash prices still trading nearly 20 cents above May futures as the region slogs through the lowest inventory levels in history.
The Chicago market meanwhile is facing the opposite situation, trading nearly 60 cents below NYH prices as inventories swell thanks to big refining margins and weak spring demand. Theoretically at least long haul trucks could move from the eastern fringe of Chicago-based markets to take advantage of that arbitrage window, but as we’ve seen over the past 18 months, the shortage of drivers makes that move less likely.
While there was a modest pullback in biodiesel prices and their associated RINs after Indonesia said it was “only” banning processed palm oil exports, not all of them, a Bloomberg article highlights why the shortage of oils is going to lead to another spike in grocery prices. The EPA meanwhile has been compelled by the courts to finalize its 2020-2022 RFS obligations, just 6-30 months behind the schedule set out in the law.
A Heavy Wave Of Selling Hit Energy Markets To Start The Week
A heavy wave of selling hit energy markets to start the week, as more demand fears seem to be driving a risk-off stance in markets around the world.
Beijing started mass COVID testing, which sparked fears that another one of the world’s largest cities would be locked down. Already the lockdowns in Shanghai have pushed Chinese oil consumption down an estimated 20% in April.
Slowing consumption is not just an international story anymore. A slowdown in US trucking demand is a concerning leading indicator for some, and a welcome change for others after more than a year of severe shortages in trucking capacity.
While demand fears are grabbing the headlines, supply shortages have not gone away yet, and we’re seeing more evidence of that today in diesel markets, both traditional and renewable. While most of the NYMEX futures contracts are seeing double digit losses this morning, May ULSD is down less than 3 cents, and trading nearly 36 cents above its June counterpart. Think about that for a second, diesel prices are worth more than 1 cent less every day in the near future given this extreme backwardation.
Biodiesel prices are surging to new record highs, and their RINs have rallied to their highest levels in more than 8 months last week, while ethanol & its RINs follow close behind. Indonesia announced a ban on palm oil exports to protect its domestic food supply, which sent shockwaves through the food and fuel oil industries which were already reeling from the war and weather-related supply restrictions. There was some relief this morning as the government clarified that the export ban only applied to processed oils, leaving crude palm oil available for export, for now.
Money managers continue to take a cautious approach to energy contracts, with short covering by speculators pushing net length in Brent higher, while new shorts in WTI decreased the net bet on higher prices. Refined products also saw minimal changes on the week, and continue to see extremely low levels of open interest as risk managers apparently still telling traders “don’t touch that” after the record shattering volatility in March.
Baker Hughes reported a net increase of 1 oil rig and 1 natural gas rig drilling in the US last week. North Dakota took credit for the increase this week, giving Texas a week off as it prepares for a new boom cycle after record setting permitting in the region last month.
There were a pair of noteworthy refinery fires over the weekend. One outside of New Orleans sent 8 workers to the hospital but is not expected to have a major impact on fuel supplies as the facility was in the midst of shutting down for planned maintenance. The other at an “illegal” refinery in Nigeria is reported to have killed more than 100 people in a shocking reminder of how desperate some countries are for fuel.
Oil And Gasoline Prices Are Seeing Modest Losses This Morning
Oil and gasoline prices are seeing modest losses this morning, which are being blamed on demand fears coming from China and a hawkish FED, while distillates are seeing modest gains after Thursday’s big drop.
Crude oil prices would end the week with a loss if they settle near current values, but they did manage a higher high and higher low on the charts, and didn’t threaten the bullish trend line which keeps the door open for higher prices to come. It’s a similar story for distillates, which have stalled out since racing to $4 once they broke out of their triangle pattern, but are still leaving the door open to higher prices in the near future. Gasoline meanwhile looks the weakest both fundamentally and technically, even though we’re just around the corner from the annual parade of “driving season” headlines that come right about when prices actually peak for the season.
Comments from the FED Chair all but guaranteed a 50 point rate increase at the May 4 meeting, and set the stage for even larger increases in the next 3 months. Looking at the CME’s Fedwatch tool that analysis activity in FED fund futures, a month ago, there was a 0% probability that the FED would raise the target rate to 2 percent by July, and today that probability is at 95%.
Reports from China suggest the country’s oil demand is dropping 20% in April due to the Shanghai lockdowns, which is actually kind of scary when you think if where prices might be had the world’s largest importer not been shutting down for the past month.
Meanwhile, another report based on satellite data of Russian oil fields gives another reminder that the country’s output is just now starting to decline more dramatically as the deals struck before the invasion of Ukraine are now running out. Many refiners in the country were already forced to slash rates or shut down completely due to a lack of outlets for their product, reducing total output by 15% or more since the start of the war.
A Dallas FED study this week took a closer look at the OPEC & Friends supply gap as the cartel has been unable to meet its oil output quota for several months. The report highlights how “…infrastructure issues and the difficulty of attracting sufficient investment to offset production declines at existing wells...[mean] many OPEC+ countries are unable to take advantage of the higher production quotas they will receive under the group’s agreement.”
If you’ve tried to buy a car in the past year you probably know it’s not just oil output that’s struggling with infrastructure issues and supply bottlenecks, a report this week highlights how numerous renewable energy projects are facing similar hurdles, creating a growing backlog of projects that are delayed, some of which will likely eventually fall by the wayside as a result.
A Reuters article this morning highlights the shifts US refiners are making to maximize diesel output when they would traditionally favor gasoline, and gives another reminder why inland refiners are having a much harder time finding a home for their production than coastal facilities.
Diesel Prices Fell Out Of Bed This Morning While The Rest Of The Energy Complex Continues To Move Higher
Diesel prices fell out of bed this morning while the rest of the energy complex continues to move higher. The drop comes despite the fact that US diesel inventories reached a 14 year low last week, and east coast inventories are approaching their lowest levels on record.
PADD 1 (East Coast) diesel stocks reached a 26 year low last week, and dropped below 25 million barrels for just the 2nd time in the 32+ years that the DOE has published this data. Even more influential for futures prices, PADD 1B, which included the central-Atlantic states that host the NY Harbor trading hub, and helps explain why we’ve seen such dramatic moves in the time spreads for ULSD.
None of that helps explain why ULSD futures dumped overnight while the rest of the complex stayed in positive territory, but this could just be some profit taking after the May HO contract came within ½ cent of reaching the $4 mark overnight. Watch the $3.85 level for May ULSD today. If prices can hold above there, the 14 cent pullback looks like nothing more than consolidation that will eventually give way to another run higher. If it breaks however, we should see a move towards $3.75 in the next couple of days (or hours given the volatility we know is possible).
East Coast gasoline stocks are also far below normal levels for this time of year, manifested through numerous terminal outages stretching from Florida to New England in the past several weeks, but are not nearly as dramatic on a historical basis as diesel inventories.
US Crude production saw its 3rd increase in the past 4 weeks as the ramp up in drilling activity is finally starting to show up in the output figures. Reports suggest that there’s a record amount of permitting going on in the Permian with prices north of $100, and the DOE still predicts the US will reach record output in the coming year, so expect this growth to continue, but probably at a rate that’s much slower than many who want lower prices would like given the lead time needed to bring those wells online.
US refiners continue to increase run rates despite a handful of unplanned maintenance events in the past week, and many of those that are running hard are enjoying their best margins in a decade or more, particularly if they have access to the global waterborne markets. Some inland markets are seeing some heavy discounting at the rack level however as local refineries are incented to run as hard as possible, even if it means taking a loss on some of the products that aren’t in high demand right now.
Short term chart note: Watch the $3.85 level for May ULSD today. If prices can hold above there, the 14 cent pullback looks like nothing more than consolidation that will eventually give way to another run higher. If it breaks however, we should see a move towards $3.75 in the next couple of days (or hours given the volatility we know is possible).
Week 16 - US DOE Inventory Recap
A Supply Problem Today Will Create A Demand Problem Tomorrow
A supply problem today will create a demand problem tomorrow. That seems to be the theme for petroleum markets around the world as we experience another volatile week of trading.
Energy futures are moving higher again to start Wednesday session after weathering a wave of Selling Tuesday. A bearish outlook for the global economy got much of the credit for yesterday’s big selloff in energy contracts, even though equity markets seemed to largely shrug off the IMF’s report.
Both technical and fundamental factors are favoring stronger diesel prices near term, while there are some warning signs flashing on the gasoline chart as we reach the time of year when those prices often top out.
ULSD futures are looking poised to make another run at the $4 mark, after bouncing 17 cents off of Tuesday’s low. RBOB futures meanwhile have several bearish indicators on the charts and threatening to make a run back below $3 if they can’t find some upward momentum in the next couple of days.
The forward curve charts below show that despite Tuesday’s big pullback, prompt values are still up over the past week, while forward values have actually moved lower for ULSD and Crude Oil, which seems to be a clear reflection of the short supply today, shrinking demand tomorrow phenomenon.
The API was said to show draws in crude oil and diesel inventories of 4.5 million and 1.6 million barrels respectively, while gasoline stocks increased by almost 3 million barrels last week. That report seems to help explain why WTI and ULSD futures are outpacing RBOB so far this morning. The DOE’s weekly report is due out at its regular time since Good Friday was not a US Federal holiday.
A report that Russia’s crude shipments dropped 25% in one week was a harsh reminder that we may not have seen the worst of the supply crunch as deals struck before the invasion were still being honored over the past two months.
Switzerland may be opening a door to a partial solution to the Russian export problem this week, keeping its well-known neutrality and secrecy intact. The Swiss agency in charge of monitoring EU sanctions said it promises to make its rulings on Russian purchases that may fit through the “strictly necessary” loophole strictly confidential.
Gasoline And Diesel Prices Have Dropped Almost 20 Cents/Gallon From Monday’s High Trades
Gasoline and diesel prices have dropped almost 20 cents/gallon from Monday’s high trades. Meanwhile the TSA and other groups announced they are dropping mask mandates.
Those are unrelated but significant events. It’s a good reminder that correlation is not causation in a time when 10 cent price swings happen in a minute or two, and occasionally there’s a clear reason for those moves. So far there doesn’t seem to be a fundamental story behind the pull-back, but given the big wave of selling that hit futures just before the settlement Monday, which wiped 10 cents off prices in a matter of minutes, it wasn’t surprising to see some follow through selling overnight.
While refined products rode a rollercoaster Monday, Ethanol, Biodiesel and their corresponding RINs were all rallying, as grain prices approach all-time highs reigniting the food vs fuel debate. Unlike the rally in energy prices, money managers seem to be eager participants in the grain contracts, with hedge fund positions approaching record net length and helping push those prices higher, for now.
The Dallas FED released a study last week on the rapid rise in commodity prices, noting that volatility is nothing new, but such a widespread price increase across so many different commodities certainly is. The study highlighted the impacts on financing global commodity trade, and how that could negatively impact the economy.
The EIA has acknowledged that those high prices are sticking around for a while, predicting record high retail gasoline and diesel prices this summer, but softening the news by saying that after adjusting for [runaway] inflation, these are only the highest prices since 2014.
Another eventful trading session for diesel prices witnessed before 8am, while gasoline futures only managed a pedestrian swing
It’s been another eventful trading session for diesel prices with 11 cent gains and 6 cent losses both witnessed before 8 am, while gasoline futures have only managed a pedestrian 10 cent swing. Although product prices have pulled back sharply from their overnight highs, charts continue to favor higher prices in the weeks ahead, while fundamentals seem to offer demand destruction as the only option to end the rally near term.
The diesel contract lived up to its technical promise, moving sharply higher after breaking out of their triangle pattern on Thursday, reaching a high of $3.97 overnight before sellers stepped back in. The early morning trading has seen ULSD face a wave of selling even as RBOB and WTI bounce, suggesting there may be some spread unwinding taking place that’s holding diesel prices down after they rallied 75 cents in less than 5 days.
Still cautious: Money managers continue to take only relatively small positions in petroleum futures and options as the extreme volatility we’ve experienced the past two months seems to be keeping many speculators on the sidelines. Open interest in refined products did see a healthy increase last week but remains near the lowest levels of the past decade.
Bullish or Bull headed? The producer/merchant category of trader has fewer short positions in diesel contracts now than they did in April of 2020. Put that another way, diesel producers are hedging less of their production today when prices are near $4, than they were 2 years ago when they were less than $1.
Baker Hughes reported a net increase of 2 oil rigs and 2 natural gas rigs active in the US last week, with Texas once again accounting for the majority of the increase. The White House announced over the weekend that it would resume oil leasing on Federal lands, although fewer acres are up for grabs, and royalty requirements have increased.
Energy Prices Are Pulling Back Slightly After A Furious 2 Day Rally
Energy prices are pulling back slightly after a furious 2 day rally that added almost 60 cents to diesel prices thanks to a combination of bullish fundamental and technical factors. RBOB prices meanwhile have “only” rallied 30 cents this week before this morning’s pullback, while WTI added more than $10/barrel since Monday’s lows. Yesterday’s DOE report gave plenty more examples of the tight supply for refined products across much of the US, even though crude oil stocks are seeing large increases.
A little less than half of the big build in crude oil inventories reported yesterday can be attributed to the ongoing drawdown of the Strategic Petroleum Reserve (SPR) which pumped out another 4 million barrels last week, and if the announced plan comes to fruition, that should increase to 7 million barrels every week through the summer.
Unfortunately, the crude coming out of the SPR can’t go directly into your fuel tank, and didn’t prevent diesel stocks from dropping to their lowest levels in more than 8 years. Gasoline stocks also had a sizeable draw during the week, dropping well below average levels for this time of year.
A big question mark left by the DOE report: Are we already seeing the early stages of demand destruction with diesel implied demand dropping for a 3rd straight week, helping diesel days of supply to build, even though inventories and diesel production both saw big declines on the week? One thing seems clear looking at the refinery output charts below, US refiners have been doing whatever possible to maximize Jet Fuel production over the past couple of weeks, which seems to be a big contributor to the drop in ULSD production.
Gasoline demand meanwhile is holding steady with year-ago levels, ramping up as we approach the driving season, but holding well below the figures we saw prior to COVID. In general gasoline supplies are on the low end of their seasonal range, and relatively healthy compared to diesel, but the East Coast (PADD 1) is the exception to that rule, with inventories well below the seasonal range, and helping to explain the ongoing terminal outages scattered across the region.
Refinery runs dipped for the first time in 5 weeks as a handful of weather disruptions and maintenance events (some planned, some not) continued to hamper facilities seeking to capitalize on the best potential margins in a decade.
Week 15 - US DOE Inventory Recap
The Big Bounce Continues For Energy Futures, With ULSD Prices Leading The Charge Again
The big bounce continues for energy futures, with ULSD prices leading the charge again, trading 36 cents above the lows set last Thursday. The rally in RBOB has been less impressive, but gasoline prices are still up more than 20 cents from Monday’s lows, keeping the door open for another push higher.
The monthly data deluge of monthly and weekly inventory reports that started yesterday is giving the world a harsh reminder that there just is no short term solution available to the energy supply crunch, and the charts continue to favor higher prices now that support held up once again.
The API reported large declines of around 5 million barrels for both diesel and gasoline stocks yesterday, while crude inventories were estimated to have a large increase of 7.7 million barrels.
OPEC’s oil production increased by 54mb/day in March, just a fraction of what the cartel was targeting as it continues its return from voluntary production cuts that started during the COVID demand collapse. The supply chain problems that seem to be hitting just about every industry these days, and the reality that oil production isn’t as simple as its often made out to be, seem to be at play here as well, with several countries seeing declines in their production even as they’re trying to increase. Make no mistake, if these countries were able to cash in on prices north of $100 they would be doing it - as OPEC used to have to work hard to keep these countries from over-producing their agreed-upon quotas in prior years.
The OPEC monthly report also dropped its forecast for both global supply and demand for the balance of the year due to the war in Ukraine. It’s worth noting that despite the reduced supply estimates, non-OPEC oil production is still expected to grow this year, just not by enough to offset the expected loss of Russian supply. The report also highlighted the surge in refining margins caused by the tight diesel (particularly Jet Fuel) markets around the world. See the charts below for more from the OPEC report.
The DOE/EIA’s monthly report also revised its global demand estimates lower as the economic models it uses predict a slow-down in GDP growth as a result of the war, and the high prices for food and energy that are coming along with it. The report predicts that US retail gasoline prices will stay at record highs this summer, but below the levels we saw in 2014 after adjusting for inflation, before declining through 2023. The EIA’s forecast suggests that it will still take another year for US oil producers to reach pre-COVID levels, but that global production increases will be enough to build inventories every quarter through next year, despite the assumed drop in Russian supplies.
You think our inflation is bad? Take a look at the last chart from the EIA’s STEO report below showing international natural gas prices, which are running 7-10 times the prices for natural gas in the US.
Energy Markets Are Moving Sharply Higher Tuesday, Erasing Most Of The Large Losses From Monday’s Session
Energy markets are moving sharply higher Tuesday, erasing most of the large losses from Monday’s session. An uptick in fighting in the Ukraine, some relaxation in Shanghai’s COVID lockdown restrictions, and a reminder from OPEC that help is not on the way are all getting some credit for the big bounce in futures. From a technical perspective, this bounce keeps the weekly trend-lines intact, and keeps the door open for another significant move higher in the next few weeks.
An announcement from the White House is getting lots of headlines over a largely meaningless approval of E15, in an attempt to lower gasoline prices/garner some votes while largely ignoring a more impactful shift in biofuel production options.
The approval of E15, which had already been approved under the previous administration, only to have that approval struck down by the courts, probably won’t change much as the markets equipped and eager to move more ethanol (aka the Midwest corn growing states) are already relatively well supplied with gasoline vs the coastal markets, that are having just as hard a time finding ethanol due to logistical bottlenecks with rail cars and trucks as they are finding extra gasoline. There’s also that dirty little detail that ethanol blends may actually pollute more than gasoline, particularly higher blends in the warmer months, that continues to be an inconvenient detail when the world suddenly cares more about high prices than climate change.
Meanwhile, buried in the last paragraph of the White House announcement, and ignored by the headlines, was word that the EPA is proposing approval of Canola Oil as an “advanced biofuel” feedstock for Renewable Diesel and SAF. This move could be significant as some claim that Canola can produce 4X the oil per acre as soybeans, and should help alleviate some of the stress on feedstock supplies if the EPA’s pathway is approved later this year.
OPEC’s monthly oil market report is due out later this morning. Last month’s report took an unusual but honest approach to forecasting, saying they simply weren’t yet able to predict the impact to demand caused by the fallout from Russia’s invasion of Ukraine. Yesterday, cartel officials told the EU that they would be unable to replace Russian oil exports, which could create one of the worst oil supply shocks ever.
The EIA this morning gave a good reminder of how globally intertwined US energy supplies are, reporting that both imports and exports of petroleum products increased last year. Other petroleum products continue to be the largest mover of both imports and exports as petrochemicals to support numerous non-transportation-related items continues to grow even as the world tries to go green.
Energy And Equity Markets Are Both Starting The Week In The Red
Energy and equity markets are both starting the week in the red as fears of FED’s inflation fighting and the fallout over China’s COVID lockdown are both getting credit for the latest round of selling after Friday’s big price bounce.
The heavy wave of selling puts the energy complex at the low end of its recent trading range, and threatens the weekly bullish trend line, but there’s still more room to fall before chart support is actually broken. Peg last Thursday’s low trades as the first test near term for refined products. RBOB came within ½ cent of that low this morning before bouncing by 3 cents, while ULSD futures are still trading 6 cents higher than the lows we saw just a few days ago.
The housing market is already seeing the plan for higher rates having a cooling effect on prices, and that same phenomenon is probably influencing other commodity markets as well, which really is exactly what the FED is trying to have happen.
While China is reporting no new COVID deaths during the Shanghai lockdown, there are reports that refineries will be forced to cut runs and/or increase export volumes to manage the rapid decline in regional demand.
Money managers continued to trim their net length in most energy contracts last week, with only ULSD seeing a net increase. Open interest for ULSD continues to plummet as the surge in volatility we saw in March was apparently too much to handle for many participants.
A financial times article notes how the chaotic markets, and the increased margin calls that come with them, may explain why we’re seeing the reduction in liquidity and more volume flowing to the major commodity trading houses. This phenomenon hasn’t gone unnoticed in Ukraine, whose President reached out to the 4 largest trading houses at the end of March to ask they stop facilitating the flows of Russian exports.
“There’s a general concern across the marketplace that we’re losing participation,” he said.
Baker Hughes reported an increase of 11 oil rigs and 3 natural gas rigs drilling in the US last week. The record amount of workers hired reported in the Texas oil patch in February seems to be hitting the ground as the Permian added 9 rigs, and the state accounted for 12 of the 14 total rigs added last week. Still, despite the big weekly increase, the Permian has about 90 fewer active rigs now than it did pre-COVID, and the total US count is still down about 140.
Read this Rystad Energy report on why the SPR releases announced last week will only have a temporary impact on prices.
Energy Futures Are Seeing Modest Gains To Start Friday’s Trading
Energy futures are seeing modest gains to start Friday’s trading, but the pattern of the week that sees early gains turn into big losses on the day should keep the buyers on edge. The coordinated announcements of SPR releases continue to get credit for the drop in fuel prices this week, while supply shortages continue to hamper physical markets around the country.
Despite what’s setting up to be another sizeable weekly loss, and a 40+ cent drop from Monday’s high trade, ULSD futures are still hanging on to their bullish stance after bouncing sharply off of trend support during Thursday’s sell-off. RBOB futures meanwhile are looking a little more perilous, with a break below the $3 mark opening the door to another 20-30 cents of losses in the next week or two. So far however, the bulls have been able to hold support, so it’s too early to call for an end to this most unusual of spring gasoline rallies.
After being uncharacteristically quiet through the chaos of March, RIN trading got interesting again yesterday. Several RIN contracts rallied a dime in morning trading after the EPA announced it would release its ruling on 36 small refinery waiver requests later in the day. As was widely expected given that price rally, all 36 requests were denied, consistent with the current administration’s policy of denying all requests. What wasn’t expected however is that the EPA also announced that 31 of the 36 that were denied a waiver, wouldn’t actually have to buy any RINs, and the gains from earlier in the day were quickly erased, along with any shred of credibility remaining for the RFS program.
EPA is denying the 36 remanded SRE petitions for the 2018 compliance year….Concurrent with today’s denial action, EPA is also taking action to provide an alternate compliance approach that allows 31 small refineries to meet their new 2018 compliance obligations without purchasing or redeeming additional RFS credits.
Just what a battered supply network doesn’t need, another busy year for hurricanes. Colorado state published its first Hurricane Activity forecast for the year Thursday, calling for another above-average season with an estimated 9 hurricanes 4 of which will be category 3 or greater.
After A Strong Start Wednesday, Energy Prices Saw Another Wave Of Heavy Selling
After a strong start Wednesday, energy prices saw another wave of heavy selling, which pushed most gasoline spot prices to their lowest levels since Russia invaded Ukraine. We’re seeing a similar pattern in the early going this morning as 9 cent overnight gains for RBOB futures have shrunk to 2 cents in the past couple of hours, and diesel prices are flat after trading up nearly 7 cents overnight.
The pullback has products moving closer to their weekly trend-lines, but we’ll still need to see another 7-8 cent decline for gasoline and 10-12 cents for diesel before the bullish trend faces a real threat.
The waves of selling may have to do more with concerns about the FED’s war on inflation, and another announced SPR release (half of which the US already announced last week) than it does on near term fundamentals, because the DOE’s weekly report continued to provide plenty of data points to prove just how tight the supply network is relative to the past 10 years.
Diesel inventories did see small increases for a 2nd straight week, but remain well below their seasonal range, and imports of distillates reached a 9 month low reminding us that help is not on the way. Not surprising given the $7 price tag around New York, jet fuel supplies are also dropping well below their seasonal range and giving us the most eye opening example of the logistical challenges being experienced by shippers these days. (See DOE charts below)
Good news: US refiners are running at pre-pandemic rates, keeping the country in a relatively strong position vs many countries struggling to find supply these days. The bad news is refinery utilization is in the mid 90s already, which is at the top end of its seasonal range, and suggests that there may not be much more left to give as we enter the driving season, and any refinery disruptions (don’t say Hurricane) are going to be magnified as a result.
Other good news for those that want to see prices pull back is that US crude oil output was estimated to increase by 100mb/day for a 2nd straight week, reaching a post-pandemic high of 11.8 million barrels/day.
A few interesting reads on how the supply dominoes are falling globally. How Chinese teapot refineries are flying under the radar buying Russian Crude. How India is replacing higher premium Saudi Barrels with discounted Russian supply.
Week 14 - US DOE Inventory Recap
After A Sizeable Selloff Tuesday, Energy Futures Are Rallying Once Again
After a sizeable selloff Tuesday, energy futures are rallying once again, following the daily price teeter totter of Russian sanctions restricting supply vs COVID Lockdowns restricting demand, with the supply concerns given an edge most days. A new wrinkle this morning that may be nothing, or could end up as the next excuse for prices to rally, Gazprom’s website was taken down by an apparent hack this morning, which could end up (either directly or indirectly) restricting natural gas flows to Europe.
The US dollar reached a 2 year high Tuesday as the FED continues to signal a strong stance to combat inflation. Most years the dollar has a negative correlation with commodity prices as a stronger dollar makes oil and other contracts relatively more expensive for international buyers. The past year however has seen the opposite as the flight to safety and anti-inflation influences are caused by many of the same challenges that are pushing commodity prices higher.
A couple of noteworthy items on the HO (ULSD) futures chart this week.
First, the 25 cent gap on the daily chart left behind by the expiring April contract (thanks to the extreme backwardation giving most traders heartburn the past two months) took less than 3 days to be filled. Second, there’s a large symmetrical triangle pattern forming on the charts, that favors another run at $4 diesel later in April if the theory that those patterns will lead to a break out in the same trend direction they started in proves true.
The API reported small changes in US fuel inventories last week, with crude stocks up about 1 million barrels, diesel up about ½ million, and gasoline stocks down about ½ million. The DOE’s report is due out at its normal time. Items to watch this week are PADD 1 inventories to see if there may be a change in the extreme backwardation in ULSD futures (or an end to the insanity of $7 Jet fuel prices) and the import/export flows as the world continues to try and adjust to the missing Russian cargoes.
An EIA note this morning highlighted the growing demand for ethane, which is outpacing the growth of all other petroleum products in the US. That note is a good reminder of how the “other” uses of petroleum products, like clothing production, continue to increase since many still don’t realize the connection to the fossil fuels they want to do away with that are much more visible in transportation fuels.
Energy Futures Are Moving Higher For A 2nd Day
Energy futures are moving higher for a 2nd day as supply shortages and the threat of more sanctions make last week’s SPR release more of a distant memory. The recovery rally after last week’s sell-off keeps the bullish trend lines in place and leaves the door open to another run at the $4 mark for refined products, even as Chinese COVID cases hit a new high and threatens to crimp global demand.
Saudi Arabia raised its oil prices in May, to record high differentials for some Asian markets, reflecting the continued challenges for buyers to find near term supplies to replace the loss of Russian exports.
Just one more reason not to fly to New York: Last Thursday we mentioned the spike in NY Harbor Jet Fuel prices, which at the time had surged by more than $1/gallon over ULSD/HO futures. That price spike went completely wheels off in the following two sessions, with NYH spot prices now trading $4 above futures, and threatening to reach $8/gallon. Take a look at the chart below and note how this move made the record setting price swings in March seem quaint by comparison. There’s a well-known saying that the best cure for high prices is high prices, and this could be another example as this mind-blowing price spike hits the East Coast, and will encourage steps like waiving the Jones Act to allow the US to supply itself and alleviate these short-term shortages.
While it pales in comparison to Jet prices, ULSD basis in the NY Harbor is also holding near record highs at more than 35 cents above NY Harbor ULSD futures. That premium boils down to a premium paid to have barrels now, vs at the end of May when the prompt futures contract would be delivered. That extreme backwardation is leading to huge swings in both directions for basis differentials around the country, depending on which futures contract that market is trading in reference to. See the 2nd chart below.
Too late for a do-over? Global refining margins have rarely been as high as they are currently, with outages across Russia and Ukraine caused directly or indirectly by the war, some European and Asian facilities facing feedstock shortages, and several US plants struggling with unplanned maintenance, you start to wonder if any of the facilities shuttered or sold in the past 18 months may attempt a comeback. Just yesterday Vertex closed on its purchase of Shell’s refinery in Mobile AL that was part of Shell’s refinery giveaway when going green was still the thing to do. It sure seems like you could get more than $75 million for a 91MMB/Day facility on the Gulf Coast today.
Circular logic. The EIA this morning highlighted California’s Cap & Trade program, and noted the sharp increase in credit prices at the most recent auction, bringing in nearly $1 billion for the state. That $1 billion would cover about 10% of the cost of the CA Governor’s proposed plan to give a $400 rebate to vehicle owners to help offset high fuel prices.
Energy Futures Are Climbing To Start The Week, After One Of The Biggest Weekly Declines Since The COVID Lockdowns 2 Years Ago
Energy futures are climbing to start the week, after one of the biggest weekly declines since the COVID lockdowns 2 years ago, as new supply concerns seem to be outweighing last week’s SPR release announcement.
The big story so far today appears to be European nations calling for new sanctions, some which could target energy supplies, over the “war crimes” that were laid bare as Russian troops pulled back from Kyiv.
Meanwhile, a Bloomberg article over the weekend noted how Russian ships are switching flags, and turning off transponders at record rates to get around international sanctions, and keep supplies flowing.
Want to get off the ride? Open interest for petroleum contracts continued to decrease dramatically in last week’s CFTC Commitments of Traders report. ULSD futures & options positions dropped to their lowest level in more than a decade as it appears some companies either can’t stomach the extreme volatility or can’t finance the margin calls that come with it. While Money manager positions have changed relatively little during the chaos of the past month, perhaps most notable is that producers for crude and diesel are holding some of the smallest hedge positions they’ve had in nearly a decade.
Baker Hughes reported a net increase of 2 oil rigs, and 1 natural gas rig drilling in the US last week. The Permian basin saw an increase of 4 rigs on the week, offsetting single rig declines in the Eagle Ford and Williston basins.
Not the kind of tourism they’re looking for? Mexico announced plans to suspend fuel subsidies near the US border to deter Americans from crossing the border to buy gasoline.
Choppy Morning For Energy Prices, But The Volatility Continues To Slowly Diminish
It’s been another choppy morning for energy prices, but the volatility continues to slowly diminish, with “only” 10-12 cent price swings for refined products, compared to the 30-50 cent swings we got used to seeing in March.
So far the biggest story of the day is that Natural gas continues to flow from Russia to Europe despite threats to cut off supplies today for countries that wouldn’t pay in Rubles. An apparent loophole in the Russian ruble rule may allow both sides to keep those supplies moving, without “giving in” to the other, which seems to be helping alleviate some concerns of an immediate supply shortage.
Yesterday’s big news was the biggest planned release of US strategic petroleum reserves on record, after OPEC & Russia signaled they were not changing their supply plans despite pleading from the US and other nations.
While the long term impact of this SPR release (which accounts for less than 2 days’ worth of global demand) is debatable, it has certainly taken some of the backwardation out of the forward curve, and may become one of the regulatory arbitrage deals in history for buyers capable of utilizing that crude today and paying it back later at much lower prices.
That’s not a joke. The first day of April trading brings with it the first day of May ULSD as the prompt diesel contract, and it opened up trading some 35 cents below where the April futures contract ended. What does that mean for you? If you’re looking at a continuous chart you may see a huge drop in futures prices, but in reality, your cash prices are pointing to a 4 cent gain at the moment.
While the world worries about how they’ll replace energy supplies, Russia is struggling to cope with simultaneous inventory excesses and shortages within its borders. More Russian refineries are signaling that they’ll be forced to cut run rates due to a lack of storage as their buyers have disappeared, leading to the biggest drop in output on record in that country. On the other hand, Russia’s military continues to grapple with a lack of fuel supply, which is probably going to get worse after a Rosneft fuel terminal just 40 miles from the Ukraine border was reportedly attacked.
March was another strong month for job growth in the US, according to the estimate just released another 431,000 positions were added, and the February and March estimates were revised even higher by a combined 95,000. That strength helped lower both the headline and U-6 unemployment rates to pre-pandemic levels of 3.6% and 6.9% respectively. Equity markets did not react in a big way to that report, but energy futures did seem to find a bid just after its release.