Market Talk - 2022 august
Sign up to receive market talk updates in your inbox each day.
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.