News & Views
Demand Fears Are Hammering Energy Prices This Week
Demand fears are hammering energy prices this week, with gasoline futures reaching a 7 month low, while distillates have dropped nearly 30 cents so far this week. Today is the last trading day for the September RBOB and ULSD contracts, so watch the October futures (RBV and HOV) for direction if your markets haven’t already rolled to the new reference months.
Tomorrow, the prompt RBOB contract will be a winter spec, which is trading around $2.45 this morning, some 15 cents cheaper than the expiring summer grade contract, and will be the lowest price since January 25th. Gulf Coast cash markets have already started trading winter-spec gasoline grades, and are trading below $2.30/gallon this morning, which could mean some retailers in the south may be posting prices below $3 this weekend if prices hold.
China’s new lockdowns, on top of reports that their factory activity was already slowing down are both contributing to the bearish sentiment this week, as is the sense that Europe is already in a recession, and things may only get worse as consumers struggle just to heat their homes.
OPEC’s technical committee reported a larger surplus in oil supplies than previous forecasts, and highlighted the risks to oil demand caused by inflation and the tighter monetary policy attempting to combat it. While that outlook gives the cartel an excuse to announce production cuts at their meeting next Monday, reporters in Russia are claiming the OPEC & Friends group is not yet putting that option on the table. Of course, Monday just happens to be a holiday in the US & Canada, and spot markets won’t be assessed but futures will be open, meaning we could see some wild price swings that will keep rack prices moving even while most are trying to soak up their last few moments of summer.
The API reported a draw in gasoline inventories of 3.4 million barrels last week, and a decline of 1.7 million barrels for distillates. Crude oil stocks were up just under 600,000 barrels on the week, which is not too impressive given that we’re still seeing SPR releases of nearly 7 million barrels each week. The DOE’s weekly report is due out at its normal time this morning.
The storm that will probably be named Danielle in the next few days should move north and not make a direct hit on the US. The other storm moving off the African coast will have to be watched for a few days, but isn’t given high odds of becoming a US threat either, while a 3rd system in the north Atlantic is too far out to sea to be a threat.
Demand Fears Are Outpacing Supply Fears To Start Tuesday’s Trading As China Has Initiated Yet Another Round Of COVID Crackdowns
Demand fears are outpacing supply fears to start Tuesday’s trading as China has initiated yet another round of COVID crackdowns, shutting down markets and cities across the world’s largest oil importer. Gasoline prices are down a dime in the early going, and crude oil prices have already erased most of Monday’s big gains.
Diesel prices are resisting the big pull lower from crude and gasoline today – after dropping by a dime Monday – following reports that Russia is cutting more natural gas deliveries, this time to France, as Moscow continues to use its most powerful weapon in its war on Europe.
Speaking of which, a WSJ article this week highlights that even though Russia may be fumbling in its shooting war in Ukraine, its energy revenue has continued to grow as the world has shifted to find new ways to get their oil and products to market as creative traders find no shortage of loopholes in the current sanctions.
European leaders agreed to meet next week to come up with emergency plans to deal with runaway electricity prices that are pushing households across the continent to the brink of bankruptcy or worse. Price caps for natural gas are one of main ideas being floated to deal with this issue temporarily, even though price caps can be counterproductive as they remove the incentive for some producers to rush to bring more output online.
BP’s Whiting refinery outside of Chicago has initiated restart, and could be back up and running by the weekend if all goes well, which is easing concerns of a regional supply crunch that prompted the EPA to waive summer RVP specs a few weeks early.
While refinery capacity losses have justifiably grabbed many headlines over the past year, ExxonMobil has been quietly expanding one of its facilities, in Beaumont TX, and is ready to bring 250,000 barrels/day of new capacity online early next year. That additional capacity is the equivalent of one above-average size refinery, and will effectively replace the 260,000 barrels/day facility that was killed by Hurricane Ida last year.
There are very good odds we’ll have a named storm heading towards the US by Labor day, with the NHC still giving 80% odds of development for a system moving across the Atlantic. The good news is that forecast models suggest there are low odds that this storm will hit the US, and will more likely stay out to sea as it moves north parallel to the East Coast next week. A 2nd system is currently given 40% odds of development in the next 5 days as it moves out to the Atlantic, and long range models suggest we should expect a new system every few days for the next several weeks as conditions for development improve.
Refined Products Are Sliding To Start The Week
Refined products are sliding to start the week, while crude oil prices are up more than $1/barrel in the early going.
Weaker equity markets following the FED’s Friday reminder that it wasn’t done fighting inflation is getting some credit for the sell-off. In addition, refined products appear to still be taking cues from European energy prices which are seeing a healthy sell-off after Germany reported it was ahead of schedule in filling up its natural gas storage, which could help avoid an electricity crisis this winter.
The EPA has waived summer gasoline RVP requirements a few weeks ahead of normal for 4 Midwestern states to help deal with the fallout from a fire at the BP refinery outside of Chicago which is the largest plant in the region, and 6th largest in the country. In addition, Michigan’s governor has declared a state of emergency, Chicago basis values jumped on Friday as buyers scrambled to find other options, with the refineries restart timeframe still up in the air.
Short covering was the theme last week for money managers, who slashed their bets on falling petroleum prices in dramatic fashion, and drove a large increase in net length on most contracts. ULSD was the only one of the big 5 petroleum contracts that saw a decline in net length held by large speculators, even though 5% of the outstanding short positions were covered during the previous week. Open interest in crude and refined product contracts continues to hold at 5-7 year lows, which appears to be a key contributor to the low volume/high volatility daily price swings we’ve become accustomed to.
4 more oil rigs were put to work last week, according to Baker Hughes’ weekly rig count, while natural gas rigs saw a decline of 1. The Texas side of the Permian basin accounted for most of the increase in oil drilling last week, while the Eagle Ford basin saw a decrease of 2 rigs on the week.
The tropics woke up after a long summer nap. The National Hurricane center is tracking 4 different potential storm systems this week. Three of those systems are given low odds of development, but one is given 80% odds of getting a name over the next 5 days. If that storm isn’t named by Wednesday, this would be the first time in 25 years that we’ve gone the entire month of August without a named storm. Despite the slow start, forecasters are still calling for an above-average storm season, which means September is going to get very busy if they’re right.
After A Brief Pullback Thursday, Energy Prices Are Climbing Once Again
After a brief pullback Thursday, energy prices are climbing once again, ending a strong week that followed Saudi Arabia sending a harsh message to the US President and the global oil market about its plans to set a floor under prices.
A fire at the largest refinery in the Midwest that’s shut down production at most operating units comes just as the region prepares for its peak diesel demand during the harvest. For a supply network already stretched thin, particularly on distillates, this is exactly the type of disruption that has the potential to create a rash of outages if the refinery isn’t able to resume production soon. Given the location of the facility near of Chicago, this won’t directly impact the NYH market, but it still could impact futures as traders could be forced to unwind positions, and with low volume and open interest, it doesn’t take much to create big price swings.
We did see ULSD have a large correction Thursday, pulling back after rising 97 cents/gallon in just 13 trading sessions. While an 18 cent reversal in a day is noteworthy, the contract still maintained a higher high and higher low on the daily chart, and has wasted no time this morning resuming the rally, which makes yesterday’s slide look like profit-taking rather than the end of the trend.
Another potential influence in Thursday’s big reversal (besides the fact that Thursday’s often host reversals) is the influence of the ULSD/RBOB spread that has seen record setting moves in the past week. That spread started the week at 68 cents/gallon then surged past $1.20 before pulling back yesterday. The “heat to gas” spread is one of a handful of trades known as “widow makers” in the industry, and the action this week demonstrates why.
Financial markets are focused on a speech by the US FED chair later today, with fed fund futures showing that the market is essentially split on whether the September FOMC meeting will end with a 50 or 75 point rate increase.
Gasoline Prices Across The US Are Hovering Near 7 Month Lows This Morning
Gasoline prices across the US are hovering near 7 month lows this morning, while diesel prices are trading at 3 month highs. The extreme divergence between products this week appears to be a reflection that the driving season is winding down, while much of the world is wondering how they’ll heat their homes this winter.
Oil prices are seeing modest gains as OPEC’s president indicated the cartel is open to the Saudi suggestion of cutting output to put a floor under prices, although the gains remain tempered by the potential for new supply coming online, particularly from Iran.
Yesterday’s DOE report added to the bearish gasoline, bullish diesel dichotomy with a huge drop in demand for gasoline, while distillate days of supply continue to sit at critically low levels. In 4 out of the past 7 weeks the DOE’s implied demand estimate for gasoline has fallen below 2020 levels, when the country was largely still on lockdown. Demand for diesel in the US is holding near average levels, and production is holding strong with refining margins still elevated, but strong exports are continuing to keep domestic stockpiles at low levels.
US crude oil exports are also holding near record highs, which is also keeping domestic stockpiles at low levels despite the ongoing release of barrels from the SPR of roughly 1 million barrels every day. Even though the US has become the world’s favorite exporter of energy supplies this year, domestic refiners are still dependent on imports of oil to optimize their output, and have a new option from Mexico to help replace the barrels they used to buy from Russia.
Diesel Is Winning The Price Tug Of War So Far This Week
Diesel is winning the price tug of war so far this week, rallying 75 cents from the lows set August 8th while gasoline prices continue to stumble pushing the premium for ULSD vs RBOB to 98 cents/gallon this morning.
New York harbor spot gasoline prices have been leading the slide lower, completing their return trip to reality after starting August trading 50 cents above futures and 70 cents above some regional counterparts. That easing can also be seen in the September/October (U/V) RBOB spread which has plummeted as resupplies by pipe, boat and truck raced to take advantage of the huge arbitrage opportunity before the transition to winter grade fuels starts next month.
The forward curve charts below demonstrate the changing opinions in the market over the past month. Crude oil and gasoline prices are lower than a month ago at the front of the curve, suggesting that fears of supply shortages have eased, while prices further forward have been increasing, which suggests that the fears of a recession have been declining as well. Diesel is the exception to that trend, with prices across the curve up from month ago and week ago levels, as solutions to the shortage of distillates (in some parts aided by the shortage in natural gas) are few and far between and whatever economic slowdown is expected isn’t big enough at this point to push diesel prices lower.
Two more potential storm threats are being tracked by the NHC, although both are given low 20% odds of developing. We’re in the Cabo Verde portion of the Hurricane season now, so we can expect new potential systems every few days for the next 3-4 weeks, and will just have to wait and see which become major hurricanes.
Today’s interesting read from Rystad Energy: Why Russian oil production has bounced back this summer, and why it will drop again this fall.
Week 34- US DOE Inventory Recap
There’s A Tug Of War Between Gasoline And Diesel Prices This Week As RBOB Futures Come Under Heavy Selling Pressure
There’s a tug of war between gasoline and diesel prices this week as RBOB futures come under heavy selling pressure, while ULSD looks poised to make another run at $4.
The dichotomous action between gasoline and diesel prices pushed the premium for ULSD more than 90 cents/gallon above RBOB futures, something we’ve never seen outside of the chaotic early days of the war in Ukraine. When the October contracts take the prompt position next week, the spread will be north of $1/gallon as RBOB transitions to its winter spec, which may also explain part of the weakness in the gasoline contract recently as traders realize that the driving season is rapidly coming to an end.
US equity markets are another bearish influence on gasoline prices lately as the correlation between the two has been the strongest in the past two years, just in time for the summer stock rally to run out of steam. Yesterday was the worst day in 2 months for the S&P 500, and it appears that the sellers trickled into the gasoline arena. Distillates meanwhile seem to be ignoring the move in stocks and more in line with the fact that the world is still facing a severe supply shortage which may get worse this winter.
Speaking of which, the Saudi Energy Minister (an outspoken critic of speculators in the oil market) expressed his displeasure with oil markets trading lower in the past 2 months despite the global energy supply crunch, and suggested it may cause OPEC to cut production. That statement helped oil prices bounce after an early selloff Monday which was blamed on news that negotiators were closing in on a deal with Iran, even though the US state department says significant gaps remain.
Diesel Prices Up 60 Cents Since Bottoming Out 2 Weeks Ago As ULSD Futures Try To Drag Energy Complex Higher
Diesel prices are up 60 cents since bottoming out 2 weeks ago, as ULSD futures are trying to drag the energy complex higher to start Monday’s session. A test of $3.80, which twice marked a temporary price top in July, looks like it could be pivotal this week, with a break above that level opening the door for a run to $4.20 as we head into fall.
So far oil markets are not reacting much to news of the latest suspicious shutdown at the CPC export facilities that transport around 1 million barrels/day of crude from Kazakhstan through Russia to markets around the world. Instead, it seems like an early slide in crude oil is being blamed on the renewed chances of a deal with Iran that could bring another 1-2 million barrels/day back onto the world market in 6 months or less if negotiations actually go somewhere this time.
Money managers were acting bullish on refined products, and bearish on crude oil last week, with the large speculative category of traders making big additions to bets on higher prices in Gasoil and gasoline contracts, while WTI and Brent saw their net length decrease by 8% or more. RBOB, ULSD and Brent all saw notable increases in open interest last week, but levels remain near 5-7 year lows as funds continue to largely stay on the sidelines.
The storm system moving over the Gulf of Mexico the past few days failed to develop as it moved towards the coast. The NHC is tracking another system moving across the Atlantic this week, although it is given just 20% odds of developing so far.
Baker Hughes reported no change in the count of total US oil rigs drilling last week, while the natural gas rig count dropped by 1. The past 4 weeks have seen a stall in the slow but steady increase in drilling activity and may mean we don’t see rig counts reach pre-pandemic levels by year-end unless they start to pick up soon.
Snakebit: The refinery FKA Hovensa and FKA Limetree Bay best known for losing billions of dollars last year in a failed bid to restart operations caught fire again over the weekend, even though the facility remains largely shuttered. Speaking of snakebit refineries; Pemex officials have requested another $6.5 billion to finish the Dos Bocas plant that is now on pace to be almost double the original budget, if it’s completed at all, despite already having a grand opening party.
The Energy Complex Is Taking A Breather This Morning
The energy complex is taking a breather this morning with the big three US benchmarks posting >1% losses to start today’s trading session. Both gasoline and diesel futures are down around 3.5 cents so far today while the prompt month crude oil contract leads the way lower trading ~$1.50 per barrel under yesterday’s settlement.
Despite the buying action seen since the bullish weekly inventory report was published on Wednesday, the September WTI contract is poised to end the week lower as concerns surrounding the not-recession remain. A strong US dollar and weak equity performance are also cited as reasons for crude oil futures maintaining the bearish trend it’s been in since prices hit highs over $120 per barrel back in June.
The spread between New York Harbor and Gulf Coast gasoline prices remains at the highest levels in recent memory, even after it’s dropped 26 cents from last month. Refiners are pushing as much product as they can up to the northern Atlantic coast, but the practical avenues of moving product from refining country to the tri-state area are limited. With the premium over shipping costs on the Colonial Pipeline going ballistic, producers are exploiting a well-known loophole to resupply the tri-state area.
The system the National Hurricane Center has been tracking this weak crossed over into the Gulf of Mexico overnight, and is now given a 40% chance of cyclonic organization in the next 48 hours. While it is expected to form into a tropical depression later today or early tomorrow morning, the Center expects it to make landfall somewhere in northeastern Mexico and cease development, sparing the refining heart of the US in Houston.
Energy Futures Drifting Higher This Morning
Energy futures are drifting higher this morning save the New York distillate contract, sinking modestly lower to start today’s trading session. Oil futures look to be making a comeback run at the $90 level while gasoline prices eye breaking above $3.
The Department of Energy’s weekly inventory status report released yesterday spurred across-the-board buying in Wednesday’s trading session. A sizeable 7 million barrel drawdown in crude oil inventories along with a ~4.5 million barrel drop in gasoline stockpiles lead the headlines and stoked bullish sentiment in energy traders. However, the ‘number of the day’ was American crude oil exports which was up 137% from last week at nearly 3 million barrels per day, an all-time high. Likewise, supertanker freight rates reached two-year highs as interest in shipping crude oil returns to pre-pandemic levels.
Today is the 64th consecutive day of falling retail gas prices and while some might say the worst is over, regional inventory levels paint a dimmer picture. Total US gasoline inventory remains at record seasonal lows as it has since early April. While gasoline inventory is around the 5-year average level for the Gulf Coast region, this is the second week in a row we’ve seen a sharp decline in the nation’s refining center as refiners rush to resupply a product-starved East Coast.
What could really throw a wrench into the energy market’s recovery is a wide-scale supply disruption. Meteorologists are tracking a system that’s currently crossing the Yucatan peninsula and are projecting it to run up Mexico’s east coast over the next week. The National Hurricane Center gives the storm a 30% chance of developing over the next five days.
Week 33-US DOE Inventory Recap
Energy Futures Are Mixed This Morning With Refined Products Drifting Higher
Energy futures are mixed this morning with refined products drifting higher while both American and European crude oil benchmarks sinking slightly to start the day.
The American Petroleum Institute estimated an across-the-board draw in energy inventory on their report released yesterday afternoon. The ~4.5 million barrel drop in gasoline stockpiles was the largest drop of the three headline values. The institute estimated a drawdown in crude oil and distillate stores of 500 thousand barrels and 800 thousand barrels respectively.
Speculators will likely wait until the Department of Energy releases their weekly inventory report (due out at 9:30am CDT) to make their bets on today’s market direction. A further recovery of national crude oil inventories, which has been on the up-and-up since June, could spur more selling of the prompt month WTI futures contract. The price of crude oil has dropped around $37 per barrel ever since the nation’s stockpile re-entered its 5-year seasonal range after spending most of 2022 at new all-time seasonal lows.
Tail wagging the dog? Some believe a revival of the Iran nuclear deal is unlikely given the price of oil has returned to pre-Ukrainian War levels. The agreement to allow Tehran to continue developing its nuclear technology has been in flux ever since the White House terminated the deal back in 2018, resulting in sanctions that cut the countries oil export capabilities. Even if some sort of compromise is met, a return of Iranian oil to the global market is only expected to cut oil prices by $5-$10 per barrel, which pales in comparison to some of the market moves we’ve become accustomed to seeing since February.
The EIA published a note this morning stating that they expect the production of liquid fuels to outpace demand for the rest of the year. They highlighted that Russia’s higher-than-expected production was a main driver of their outlook revision. While further sanctions from the EU against Moscow, scheduled for the end of this year, still loom, the ability of Western powers to prevent energy exports from Russia are questionable at best.
Energy Futures Are Green Across The Board This Morning
Energy futures are green across the board this morning after yesterday’s selloff had the prompt month RBOB contract break below the $3 level. WTI crude oil futures likewise dropped below $90 per barrel in Monday’s trading session. The September heating oil contract is pulling the complex higher today, trading up 1.2% over yesterday’s settlement while gasoline and crude oil drift marginally higher this morning.
While outwardly bullish on the future of oil prices, Saudi Aramco (the world’s largest energy company) divested much of the profit it made in the first half of the year in alternative forms of energy including wind, solar, and hydrogen. Of course when you make $48 billion in profit in Q2 alone, whose to say a few bucks shouldn’t go to green energy, which seems to be the popular play on Wall Street ever since US lawmakers passed its most recent climate bill.
The National Hurricane Center is now tracking a new system forming off the east coast of Nicaragua, which it gives a 20% chance of cyclonic organization in the next five days. The NOAA’s current projection has the storm hopping over the Yucatan peninsula and into the Gulf of Mexico by next week, where it could threaten energy infrastructure if it makes landfall as anything more than a rainmaker.
New York gasoline prices are trading nearly 50 cents higher than their Gulf Coast counterparts this week. Low regional inventory levels, lack international imports, and previous refinery closures are the cited reasons for the current market condition, which has pushed premiums for shipping gasoline on the Colonial pipeline through the roof over the past 30 days. Shippers looking to send gasoline from Houston to New York paid 19 cents over the interstate pipeline’s tariff to do so last week.
Short sellers’ profit-taking looks to be the reason for this morning’s buying action however traders seem to be taking a relatively bullish stance on diesel prices. The ongoing war in Ukraine and it’s effect on international distillate inventory levels paints a grim picture for this winter, when much of Europe will use the fuel to heat their homes. In combination with the backwardated futures market disincentivizing traders from holding addition inventory, some expect this winter’s diesel stockpiles to reach critically low levels.
The Energy Complex Is Trading Lower This Morning With WTI Futures Leading The Way Lower
The energy complex is trading lower this morning with WTI futures leading the way lower, shaving nearly $5 off the prompt month contract. Chinese low growth demand estimates are taking credit for this morning’s selloff which is pushing American crude oil prices down to the lowest levels seen since February this year. Refined product futures are following suit this morning with both gasoline and diesel prices dropping 10-13 cents.
Money managers trimmed their long positions and bolstered their short positions of WTI crude oil futures last week. The “smart” money earned their title’s quotations marks as the oil benchmark jumped nearly $4 from 8/8 to 8/12. Speculators did the same with their positions in RBOB, European crude oil, and gasoil last week but ULSD continued to stand out from its counterparts. Market bettors continued to trim their shorts resulting in an increase of their net position for the 6th week in a row.
The National Hurricane Center is tracking a storm just north of the Lesser Antilles but give the system a 0% chance of organizing within the next couple days. While it may seem like 2022’s Atlantic hurricane season is a snoozefest, its important to remember that on average the largest hurricanes typically come in the months of September and October.
RBOB futures are testing some technical support on their weekly charts this morning, possibly turning the low $2.90s into a key level in deciding whether prices can continue falling. Should gasoline prices fall and stay below that level, there is little on the charts to keep them from continuing lower to the $2.70s. Diesel futures on the other hand face a myriad of technical resistance levels between where we are trading currently, the $3.40s, and the $3.20s. If we see a meltdown in energy prices over the next couple weeks, expect distillate prices to drop much slower than the rest of the complex.
Energy Prices Are Moving Lower In The Early Going Friday After A Strong Week
Energy prices are moving lower in the early going Friday after a strong week in which fear of inflation and slowing demand both eased, while fears of supply disruptions returned. From a chart perspective, gasoline and diesel prices have returned into more neutral territory after failing to break near term resistance and are set up for another period of back and forth action – just like we saw yesterday with ULSD experiencing multiple 10 cent moves on the day.
The IEA disagreed with OPEC’s estimates for declining global fuel demand Wednesday, raising its oil consumption estimates, with consumers switching to oil-based products to supplement the electricity grid during the summer heat wave (and tight natural gas supplies) driving the increase and masking the “…relative weakness in other sectors…”. Of course, it’s typically not crude oil that’s being used to supplement electricity supplies, it’s some form of diesel whether it be known as Gasoil, fuel oil etc. which explains why we’ve seen ULSD prices react to movements in natural gas prices, while gasoline prices tend to go their own way.
The IEA increased its forecast for Russian oil output as buyers in some parts of the world are getting awfully creative to find ways around sanctions. Read here for an interesting story on a big gamble on old ships to carry out dangerous ship to ship transfers of Russian crude. Never doubt the ingenuity of an oil trader.
The IEA’s monthly report ended with a word of caution: “…with supply increasingly at risk to disruptions, another price rally cannot be excluded.” Read this Reuters note for more specifics on why European distillates are particularly vulnerable.
Speaking of disruptions, the storm system moving across the Atlantic didn’t turn into anything this week and the only other system on the NHC’s watch list is given just 10% odds of developing off the coast of Texas and Louisiana, although it is expected to bring heavy rains to the region over the weekend. We’re getting to the time of year where we can expect waves to move off the African coast every few days, and each of those waves has the chance to become a hurricane. Where those storms head will likely determine if this season is a nuisance or a disaster for energy supplies, with early forecasts suggesting Florida may be the storm magnet this year, which would be bade news for retirees, but good news for suppliers compared to the past 2 years of Louisiana landfalls that pummeled refinery row.
There are all sorts of new energy-related incentives in the new bill moving through congress. While electric vehicle incentives are capturing much of the attention, a lack of domestic battery production may limit the impact of those plans. Meanwhile, residential heat pumps may become the hot new item and lower carbon cement could end up making a larger impact on emissions than the slow moving changes in the transportation sector.
Massachusetts is jumping on the congressional climate bandwagon, passing a new bill this week that would join the California dream of banning sales of new gasoline and diesel powered vehicles in 2035, and designate some cities as fossil fuel free and ban natural gas in new construction. This comes just a few months after the state backed out of the proposed Transportation and Climate initiative that would have enforced a cap and trade style program on fuel suppliers.
Energy And Equity Markets Are Celebrating Signs Of Slowing Inflation With A Big Price Rally
Energy and equity markets are celebrating signs of slowing inflation with a big price rally, which in the case of refined products, will likely end the streak of declining retail prices, aka start increasing inflation again. Refined products are making a strong case that the summer price floor is in, with RBOB futures up 37 cents since Friday’s lows, and ULSD futures up 34 cents since bottoming out Monday. Now that we have at least a temporary floor in prices the question becomes whether the bulls will make another run, or if we’ll be stuck in a sideways price purgatory pattern for the coming weeks?
For RBOB , the next test looks to be the August high at $3.14, and if that breaks, a run to $3.36 looks likely as trading programs will look to fill the chart gap left behind by the ridiculously severe backwardation from the August to September contracts. Speaking of which, this rally may well be the last big move for RBOB prices of the year (unless there’s a hurricane) as we will transition to winter grade specs in just over a month.
For ULSD, the low $3.50s mark a good short term pivot point, and have already repelled one rally attempt overnight. If buyers can breach that level, a run back to $3.80 looks likely before month end.
Yesterday’s DOE status report showed that import/export flows continue to have major influences on US fuel stockpiles. Gasoline exports surged to their highest level since 2018 last week, and gasoline imports declined again, pushing total gasoline stocks sharply lower on the week, and stocks along the East Coast (PADD 1) to an 8 year low. Those extremely low inventory levels have helped push NY Harbor gasoline basis levels back to 50 cent premiums over their USGC counterparts, and sent the price for leasing space on Colonial to a new 8 year high.
Diesel and crude oil inventories meanwhile both saw healthy builds as exports slowed last week from the record setting pace we’ve seen earlier in the summer. Don’t expect that trend to last, particularly for distillates, as we head into the busier demand times of the year with the fall harvest and winter heating seasons.
Gasoline saw a strong recovery in its weekly demand estimate, after last week showed figures lower than the COVID summer of 2020, but US consumption remains below last year’s levels and the 5-year seasonal average. Refinery runs did increase in all 5 PADDs, with the East Coast seeing the highest run rates since the PES refinery blew up in 2019 after PBF restarted a unit at its Paulsboro NJ facility that had been shut down due to weak economics following the pandemic.
OPEC revised its global economic and oil demand outlooks in its monthly report released this morning, citing the slowdown in Q2 GDP that we won’t call a recession. The report held supply forecasts steady, and noted that a lack of liquidity in energy commodities is adding to the price volatility we’re experiencing. The cartel’s output increased by 216mb/day in July, led by increases in Saudi Arabia, UAE and Kuwait, which were partially offset by declines in Venezuela, Libya and Iran.
A new $5.5 billion greenfield refinery project is being proposed in Texas, which would be the first new large refinery built in the US in nearly 50 years should it move beyond a pipe dream. The pitchers of the plan claim the new facility would reduce carbon emissions by 95% compared to traditional refineries, and would begin operations as soon as 2025 IF the project can clear the same major financing and permitting hurdles that have doomed every other new refinery project proposed in the past half century.
Week 32- US DOE Inventory Recap
Energy Prices Were Seeing Another Healthy Selloff Overnight
9:30 am update
Gasoline prices have jumped since the weekly DOE report, and our emails seem to be back up finally, both of which are exciting.
Import/export flows are factoring heavily into the weekly stats with Gasoline exports accounting for half of the inventory draw down, while a decline in distillate and crude oil exports on the week explains why those products gained. Refinery runs increased in every PADD, with PADD 1 rates jumping 10% on the week, no doubt due to PBF restarting the crude unit at their NJ facility that had been shuttered due to weak economics last year.
From the 8am market update:
Energy prices were seeing another healthy selloff overnight, after a big Tuesday rally, but have since cut those losses following the latest reading on inflation in the US.
Gasoline and crude prices both turned positive, Diesel nearly wiped out 10 cent losses and stock markets rallied sharply this morning after the July CPI reading came in unchanged for the month, a sign that US inflation has peaked, and that the FED can take it easy on free money crowd. The drop in gasoline and other fuel prices was the main driver of cooling inflation in July, while prices for food and shelter both continued to increase.
Another large part of the yo-yo action in prices the past couple of days is being blamed on flows of Russian oil to several land-locked European nations. Tuesday, Russia’s pipeline company Transneft announced that flows on that pipeline were being cut since sanctions prevented payment for that fuel, and that coincided with the strong price rally. This morning, Hungary announced it was paying fees to allow shipments to resume temporarily, and prices are moving lower once again.
Another factor stirring up the action in Diesel prices this week: Low water levels on the Rhine river are disrupting one of Europe’s most crucial arteries for transporting energy supplies, right when the continent can least afford another supply snag.
Speaking of which, NY Harbor gasoline prices continue to trade 40 cents or more above their Gulf Coast counterparts, with a steeply backwardated curve hanging on for another week. This unusual phenomenon was highlighted in the DOE/EIA’s Short Term Energy Outlook this week, noting how refinery shutdowns along the East Coast of Canada and the US and reduced imports from Europe due to their energy crisis are both contributing to this phenomenon.
The monthly STEO also highlighted the tight global market for distillates, with the major supply centers in the US, Europe and Asia all holding 30-40% less inventory than their 5 year averages. The report does predict that rising output in the US should help inventories to heal modestly in the coming month, but highlights the threat that the looming hurricane season pose to those estimates.
Speaking of which, the area of storms moving across the Atlantic currently known as Invest 97L was downgraded overnight and now has only a 30% chance of getting a real name this week. If that system is named, long range projections peg it moving towards the East Coast, rather than into the Gulf of Mexico, which is good news for oil producers and refiners, but bad news for the beleaguered region that’s been struggling to get fuel supplies caught up ever since the start of the war in Ukraine.
The API reported builds in crude oil and distillate inventories last week of 2.1 and 1.4 million barrels respectively, while gasoline stocks drew by 600,000 barrels. The DOE/EIA’s version of the weekly status report is due out at its normal time this morning.
Have Fuel Prices Found A Floor?
Have fuel prices found a floor?
After dropping 60 cents in a week and a half, diesel prices have bounced 17 cents in the past 24 hours, and gasoline prices are up nearly 20 cents since bottoming out last Thursday. While crude oil prices have also bounced, WTI is up $5/barrel from Thursday’s lows, they’re not keeping pace with the recovery in refined products, suggesting this move may be driven by spread buyers as we head into the fall maintenance & storm seasons with a refinery network that’s more vulnerable than it’s been in decades.
There isn’t much in the way of a headline to pin the sudden reversal in diesel prices on, and in fact European natural gas prices are pulling back as inventories have recovered in recent days, which would tend to act as a drag on diesel prices. This suggests the move may be more technical in nature, as trading programs and some humans see the latest wave of selling as a good buying opportunity after the head and shoulders and descending triangle patterns that foreshadowed lower prices have now been completed. The first big test for the bulls to decide if they’re serious about this rally is to get diesel prices back north of $3.50, and gasoline prices back above $3.
The latest round of negotiations with Iran over its nuclear ambitions ended without any sign of progress, reducing the odds that Iranian oil exports will legally re-enter the world market.
The national hurricane center still gives a 40% chance the storm moving over the Atlantic will get a name this week, and the long range forecasts suggest there will be more storms coming soon as the hurricane season reaches its peak a month from now.
HF Sinclair proved that the previous year was a great time to be buying refineries, joining its US peers reporting huge profits for the 2nd quarter. While the company’s newly acquired facilities netted nearly $30/barrel after operating costs, the renewable diesel operations showed heavy losses for the quarter, suggesting that turning soybeans into motorfuel may not be the field of dreams many have been hoping for, even with nearly $5/gallon in various government tax credits and subsidies and diesel prices at elevated levels.
Speaking of which, the spending bill passed in the Senate this weekend includes the extension of several existing biofuel credits, and the addition of several new credits to encourage more production. One detail that’s already expected to have unforeseen consequences is that Sustainable Aviation Fuels (SAF) will get $.25-$.75/gallon more credits than Renewable Diesel, which will likely mean a shift by some producers away from on-road fuels given the limited feedstocks available to make fuel out of food.
Gasoline Prices Are Trying To Find A Floor, Rising For A 2nd Straight Day After Hitting A 6 Month Low Last Week
Gasoline prices are trying to find a floor, rising for a 2nd straight day after hitting a 6 month low last week, while distillates continue to fall, hitting their lowest levels since March this morning.
ULSD futures took out the April low just under $3.19 overnight and promptly dropped another nickel, before bouncing back to that level later in the morning. That layer of support looks to be about the only thing on the charts standing in the way of a drop to $3 for ULSD, and it’s worth noting that most futures and cash contracts for 2023 are already trading below that level. If you’ve been waiting to lock in diesel prices to meet or beat your budget for the next 12-18 months, this is looking like a good time. Be assured that prices could absolutely go lower from here (in 2008 they dropped from $4.15 to $1.19) but at some point, the market is going to remember that the world is still short on distillate supplies, and the long term trend in place for the past 2 years is still pointing higher.
Some money managers are probably looking for a do-over after making large increases in long positions in RBOB and ULSD contracts last week, just in time for the big price drop. Funds did reduce their long positions in WTI, Brent and Gasoil contracts however, so they weren’t all wrong. The combination of extreme volatility and concerns over the looming economic slowdown seem to be keeping the big money bettors on the sidelines. The net length held by large speculators in WTI is at its lowest since April of 2020 (also known as the time when WTI went negative) while open interest in RBOB dropped to its lowest level since 2015, and open interest in Brent dropped to its lowest since 2016 last week.
Baker Hughes reported a net decrease of 7 oil rigs active in the US last week, while natural gas rigs increased by 4. New Mexico led the drop in oil drilling activity, with 6 fewer rigs active. It’s hard to say if last week’s count will become a pattern as natural gas has become the commodity of choice globally, or just a small dip on the chart as rig counts approach pre-pandemic levels.
After a 2 month lull, the tropics are starting to heat up as we approach the interesting part of Hurricane season. The NHC is giving 40% odds of development for a system moving across the open Atlantic. It’s too soon to say where this storm (which will be named Danielle if it develops) is headed, but a path into the Gulf of Mexico is possible at this point so we’ll need to keep an eye on it for a while.
Crude Oil And Gasoline Prices Are Lower This Morning Than They Were On The First Day Of The Russian Invasion Of Ukraine
Crude oil and gasoline prices are lower this morning than they were on the first day of the Russian invasion of Ukraine, as a breakdown in technical support and sentiment for consumption both seem to be pushing prices lower. RBOB and WTI were attempting to make small gains this morning after trading in negative territory overnight, but if the attempt to bounce doesn’t accelerate soon, the charts suggest we’re in for another wave of selling.
Gulf Coast and Midwestern gasoline spot prices dipped below $2.50 on implied values overnight, which could mean retail prices below the $3 mark in some markets if values hold around this level for another week or more. Unless the market reverses course, more markets may join the sub $3 retail club in another 6 weeks as the transition to winter-spec gasoline ensues, and producers can once again start blending more butane, which is $1.25/gallon or more cheaper than gasoline.
Diesel prices resisted gasoline’s pull lower for the start of the week, but are catching up now that the bottom end of the descending triangle gave way, and quickly dropped another 12 cents after taking out that chart support before finding a temporary floor just above $3.20 overnight. Fundamentally, it’s difficult to make a case for diesel prices continuing to fall, especially with demand destined to ramp up in the fall. Read here for another argument on why now may be a good time to buy ULSD.
One headline that may explain why diesel prices are down more than a dime this morning even as gasoline prices were able to move into positive territory: Germany said it could keep its nuclear power plants operating this winter, which will help ease the shortage of natural gas and distillates needed to power the region.
The July payrolls report knocked stock prices, along with gasoline and WTI, back into negative territory as another strong reading on the US job market seems to have spooked the machines that base their bets on easy money from the FED, which is sure to be encouraged by the fact that their first 4 interest rate increases haven’t hurt the labor market. Adding more than 550,000 jobs to the government estimate since the last report will also help the argument of those that say the US is not in a recession, despite 2 straight quarters of negative GDP growth.
The tropics remain eerily quiet as we approach the busy part of the Atlantic hurricane season. Officially, the NHC says no new tropical cyclones are expected in the next 5 days, but longer range models are already tracking 2 potential systems moving over Africa, that could develop as they move out to sea next week. Colorado State’s latest forecast for the season was reduced by 2 named storms, but still suggests we’re in for a busy year with 16 more storms yet to come. The weather channel forecasters seem to agree noting yesterday that 90% of the storm activity is yet to come.
Week 31- US DOE Inventory Recap
Gasoline And Oil Futures Are Approaching 6 Month Lows This Week
Gasoline and Oil futures are approaching 6 month lows this week, following a harsh reminder Wednesday that slowing demand may be the only way to deal with the global energy supply shortage.
According to the DOE’s weekly report, gasoline consumption in the US has been weaker than the COVID summer of 2020 in 3 out of the past 4 weeks. While the weekly demand estimates are notoriously volatile, and in many cases unreliable in real time, there is no mistaking the market’s reaction to that data point as futures have dropped 25 cents in the past 24 hours.
Wednesday’s wipeout for RBOB futures, trumped Tuesday’s turnaround and has moved the technical outlook back into clearly bearish territory with a good chance we could see another 30 cent price drop in the next few weeks. It’s not just futures that are falling either, as NY Harbor gasoline prices have started their inevitable slide down an impossibly steep backwardation curve, with cash values down more than 40 cents as basis values start their return to reality. The selloff in both futures and cash markets assures that the streak of consecutive days of lower retail prices across the US will continue past 50.
If you’re still wondering why California retail prices are more than $1/gallon higher than many other states, take a look at the state fuel tax charts below (courtesy of the API), and then remember California ends up adding another 40-something cents per gallon in LCFS and Cap & Trade program costs on top of these official taxes.
Diesel inventories remain 24% below their average seasonal levels. PADDs 1 & 2 continue to have the lowest inventory levels relative to prior years, and the Midwest looks particularly vulnerable in the coming months as harvest demand ramps up, and Gulf Coast refiners have their hands full sending Barrels out to sea, rather than north as they’ve done for decades during this time. Speaking of which, Diesel exports have averaged north of 1.5 million barrels/day over the past month, meaning nearly 2 billion gallons of distillates have been sent overseas during this time. Remember that the next time someone asks why gasoline is so much cheaper than diesel in the next few months.
OPEC & Friends announced the smallest output increase they’ve ever made yesterday, .1mb/d for September with some reports suggesting this move was a political slap in the face to the US President, while the official press release suggests it was because of “severely limited availability of excess capacity”. It seems there’s a good chance they’re both right.
Chart Support Survived A Big Wave Of Selling To Start The Week
Chart support survived a big wave of selling to start the week, and petroleum prices are now moving higher as buyers (or more likely the algorithms they’ve programmed) gain more confidence that a price breakdown is unlikely in the near future. RBOB gasoline futures are up more than 20 cents from Monday’s low trade, and back in the July trading range. ULSD prices are up 15 cents from Tuesday’s low, but need to get back above the $3.55 mark to break the descending triangle pattern that still threatens to push prices to $3 in the coming weeks.
Early (and unofficial) reports from the OPEC & Friends meeting suggest the cartel will make a modest increase of 100,000 barrels/day to its quota in September. Oil and product prices actually moved higher following those rumors as the increase is the smallest on record for the cartel, and is essentially meaningless given that actual output has lagged behind the allowed quotas for the entire year.
The API reported a build in crude stocks of 2 million barrels last week, while refined products were estimated to have small declines of less than ½ million barrels each. Keep in mind the build in oil stocks includes the ongoing drawdown of oil from the SPR, and all else being equal, would equate to a nearly 5 million barrel decline in US stocks if those barrels weren’t being released. The EIA’s weekly status report is due out at its normal time of 9:30 central.
While the shortage of refining capacity to meet fuel demand in the Western hemisphere has been well documented this year, the EIA on Tuesday published a note highlighting 9 new refinery projects slated to come online in the next 18 months, that will add nearly 3% to global refining capacity…all of which are in Asia and the Middle East, which will further shift the global flow of oil and its various products.
While backwardation remains a major theme in global energy markets, for the first time in many months 2 US regions have actually slipped into a contango price curve for distillates. Both Group 3 and Chicago ULSD prices are now trading higher for September delivery than they are for prompt barrels, which is a reflection of the lull in regional demand prior to the harvest season. This compilation of recent articles suggests you shouldn’t bet on this trend expanding to other markets.
Refined Product Prices Have Dropped To Their Lowest Levels In 4 Months As Fears Of A Slowing Economy
Refined product prices have dropped to their lowest levels in 4 months as fears of a slowing economy, and new tensions between the world’s two biggest economies, seem to be weighing heavily on various assets. The big drops this week have put the energy complex on the verge of a technical breakdown, but so far buyers continue to buy the dip, and keeping the chance of a continued sideways summer trading pattern intact.
Monday’s ISM Manufacturing survey got some of the credit for the big selloff in energy prices. Even though the survey showed that manufacturing in the US continued to grow, the pace was the slowest in 2 years, despite strong growth in energy production. The survey also suggested that post pandemic inventory restocking was winding down, which is likely to weigh on purchasing in the coming months. Right on cue, a Reuters article this morning notes that the country’s largest warehouse market is running out of room as consumer purchasing slows and inventories swell.
Retail fuel prices are set to continue dropping, and will soon be $1/gallon less than their June peak, which will be a key component to inflation readings decreasing. Perhaps the big question for the US economy, and energy prices for the rest of the year, is whether or not that drop in retail prices is enough to keep consumers from tightening their purse strings any further.
Diesel futures are potentially setting up a bearish descending triangle pattern on the charts, with a floor just below the $3.30 mark that could lead to a drop below $3 in the next few weeks should it break. Given the lack of diesel supplies globally, it’s hard to imagine this chart pattern could trump fundamentals, but relatively weak basis values across large parts of the US suggest we’re seeing at least a temporary reprieve in most of the inventory shortages, now we’ll just have to see if that lasts through the hurricane and harvest seasons.
The price to lease space on Colonial pipeline’s main gasoline line reached a 7.5 high this week as shippers race to take advantage of the huge premiums for gasoline in NY Harbor vs the US Gulf Coast. These premiums are yet another reminder of how the world’s supply and transportation network has been upended in recent months, after years of Colonial’s main line being unallocated and space trading for negative values since Europe was able to supply the excess gasoline consumed on the US East Coast. The forward price curve suggests the double digit premiums for line space will be short lived, but values could stay positive through the winter as that’s typically the strongest time of year as producers need to find new homes for their gasoline.
It’s Been A Busy And Choppy Start To Trading In August As The Energy Complex Tests The Lower End Of Its Summer Trading Range
It’s been a busy and choppy start to trading in August as the energy complex tests the lower end of its summer trading range, creating some big swings in the early going. RBOB gasoline was down almost a dime around 7am central, but has cut those gains in half in 30 minutes. ULSD prices were down 8 cents at 7, rallied to down 3 as of 7:30, then were down almost 7 again by 7:45.
RBOB faces an immediate technical test to start the month, with the contract roll bringing prices from a high of $3.71 on Friday, to a test of $3 today. The $3 range has 3 layers of chart support, marking the July low of $3.02, the psychologically meaningful $3 mark, and the 200 day moving average at $2.99. IF these layers of support break, it looks like we’ll see another 15 cent drop in short order, with a move into the $2.70s possible. Speaking of which, the September RBOB contract is the last summer-spec contract of the year, and the October contract is already trading in the high $2.70s this morning thanks to the combination of steep backwardation and RVP transition. Cash markets are adding to the bearish feel for gasoline prices, with several regional values already around $2.65 this morning, which will mean retail prices below $3.50 coming soon for many consumers if the trend holds.
WTI is also facing another test at its 200 day moving average, after bouncing off of that level in 6 of the past 8 trading sessions. If US oil prices don’t find a way to rally soon (as in this week) it looks like we’ll be talking about oil in the $80s some-time in August.
While gasoline and oil prices look weak on the charts, ULSD is looking relatively strong, with a more neutral outlook. The roll from the expiring August contract did move prompt prices into the lower half of the summer trading range, but there’s still more than 12 cents to fall before chart support gets tested for diesel.
The CFTC’s commitment of traders report shows that money managers continue to have mixed feelings on energy price bets, with the only consistency seen in recent weeks being a lack of open interest outstanding. The open interest for refined products is holding at its lowest levels since 2015, which was when the US fracking boom helped petroleum prices go bust. Here too ULSD looks the most bullish with new speculative longs entering the market last week, while other funds covered short positions, leading to large increase in net length held by money managers on the week.
Baker Hughes reported a net increase of 6 oil rigs and 2 natural gas rigs last week, ending a 2 week lull in new drilling activity. Texas led the increase with 6 new rigs added last week, 2 each in the Permian and Eagle Ford plays. The total US oil rig count surpassed 600 for the first time since April of 2020 (you might remember this as the month when WTI traded negative) and leaves the possibility that the rig count could reach pre-pandemic levels by year end.
It’s been almost a month since we saw a named storm in the Atlantic, and the NHC suggests this will be another quiet week. Despite the calm waters, forecasters are still calling for an above average hurricane season, and it’s not just the Gulf Coast refining complex that seems extra vulnerable this year: A WSJ article highlights how a shortage of transformers could spell trouble for turning the lights back on after a storm hits.