News & Views
Energy Futures Are Back On The Move Higher To Start The Week
Energy futures are back on the move higher to start the week, after ending on a softer note Friday in what appeared to be a round of profit taking after a strong rally. The charts continue to point higher, although another big pullback is likely along the way as several short term indicators remain in overbought territory. The saber rattling on either side or Ukraine, volatile stock markets, the backside of the Omicron hill, and another attack on the UAE are all making headlines to start the week, and could each take their turn getting credit for whatever move the market takes that day. It does seem that a major selloff will be challenging until the Ukraine situation clarifies in one form or another, and as long as that’s lingering a spike to $100 for oil and $3 for products cannot be ruled out.
The East Coast is digging out from the weekend storm that dumped 2 feet of snow in places, but terminal disruptions appear to have been minimal and power outages not as widespread as feared. For those that can’t get enough of these events, you’re in luck as another major storm is set to sweep across the US in the back half of the week, which may bring the first big snow and ice event back to Texas since last year’s Polar Plunge crippled the state.
It’s the last trading day for February RBOB and HO futures, so make sure you’re looking to the March RBH/HOH contracts for direction if your market hasn’t already shifted. The Feb ULSD (HO) contract has been particularly volatile lately, rallying 26 cents last week, then dropping by a dime from its high on Friday, before moving higher again today. With just a few hours left for that contract, don’t be surprised if there are more fireworks today.
Money managers looked like they were taking some profits off the table in Crude oil and gasoline contracts last week, reducing their net length slightly as of last Tuesday after weeks of increases. The large speculative trade category continued to add length in diesel however, with both ULSD and Gasoil contracts seeing new longs added during the week, and ULSD saw a fair amount of short covering, which may help explain part of the recent spike in prices.
Baker Hughes reported 4 more oil rigs were put to work last week in the US, resuming the steady increase after last week saw the first net decline in 3 months. The Permian basin, which accounts for more than half of the total US rig count, has held flat on its total count of 293 rigs for the past month, even as the EIA predicts that the basin will set new production records this year as efficiency gains are expected to help offset the headwinds of a tight labor market and the supply-chain bottlenecks most people are tired of hearing about by now.
Brewing Storms, Both Literal And Figurative Are Stirring Up Energy Markets For A 4th Straight Day
Brewing storms, both literal and figurative are stirring up energy markets for a 4th straight day, sending refined products and WTI to yet another round of 7 year highs this morning.
A powerful winter storm is heading for the east coast, and the “Bomb Cyclone” warnings have sparked a round of panic buying that we haven’t witness since the dreaded Polar Vortex of 2014, which was (coincidentally?) the last time fuel prices were this high. Why gasoline prices are joining the run up this morning when so millions of cars will be unable to drive for days is always a bit of a mystery, but once the snowball effect of buying in energy markets gets rolling, all bets are off.
Speaking of which, the February Heating Oil contract – which expires Monday – is breaking free from the pack of surging energy prices, trading 9 cents higher than the March contract this morning north of $2.86, a gain of 26 cents since last Friday. With less than 2 days until expiration, don’t be surprised to see some even more volatile swings in that contract, and a spike to $3 in the next two sessions is a real possibility.
Meanwhile, the figurative storm brewing around the Ukraine continues, with more signs of escalation keeping markets on edge. The US is working with energy producers to come up with backup plans to supply Europe with supplemental fuel should Russia continue to use its Natural Gas and Oil exports as its most powerful weapon in this war.
Help is on the way? A big story over the past several months was the expectation that OPEC and other producers would regain the upper hand and global oil supplies would begin building again after an 18 month decline. So far that hasn’t proved true as various disruptions and supply chain bottlenecks have limited output. The EIA this morning published a note doubling down on the theory that OPEC’s production will have its largest increase in nearly 20 years despite the headwinds in Libya and elsewhere, which may eventually help prices to collapse back to more comfortable levels. The big question in the meantime is how high will they spike until the supply reinforcements arrive later in the year.
While the world anxiously awaits a solution to the lack of adequate petroleum supplies in 2022, the even slower supply race for a lower carbon energy solution continues with plenty of new ideas hitting the market daily, but little if anything that will change the outlook soon. Yesterday we saw word from Valero that Sustainable Aviation Fuels were still not economically viable, particularly given the competition for renewable feedstocks, and a report that Marathon was considering buying the idled P66 refinery in LA to convert it to renewable production, which will continue to add pressure on the feedstock market if it actually happens.
Another Strong Start For Refined Product Prices As Another Round Of 7 Year Highs Are Being Set Across The Petroleum Complex
It’s another strong start for refined product prices as another round of 7 year highs are being set across the petroleum complex this morning. Supply concerns seem to continue to outweigh nervous equity markets, even after the FED made it clear that the free money party is coming to an end.
Diesel prices are once again leading the charge, trading up nearly a nickel on the day, making a run at the $2.80 mark just 3 days after they traded down to $2.60. This $2.80 range could prove to be a significant technical barrier as it was a support layer for months back in 2014, and when it finally broke prices collapsed in a hurry. Old support often becomes new resistance on the charts, but if it’s treated as nothing more than a yield sign as most resistance has lately, then a run at $3 seems inevitable as the supply crunch continues.
The DOE’s weekly report continues to encourage the rampant buying in diesel futures, with days of supply down to 25, a number that’s more fitting of a major supply disruption. While racks across most of the country have recovered from the historically week levels in the front half of January, there’s no sign of any major supply issues in US physical markets.
Gasoline prices have joined in on the fun, finally reaching new 7 year highs even though the prompt futures contract is still a winter spec. This recent surge, well ahead of the normal spring rally, leaves a run at the $3 mark a possibility for summer gasoline grades as well, even though fundamentals in the US also suggest that this market may be outkicking its coverage.
The FED did not raise rates Wednesday, as was widely expected, but equities reacted harshly to the FOMC Chair’s news conference in which he made it clear that they were preparing to end the money printing and raise rates throughout the year. This was a harsh reminder that the current chair is one of only 2 in the past 40 years that did not come from the academic world, and seems to take inflation more seriously than his predecessors. Already fed fund futures are showing a higher probability of 4 or more rate hikes this year than they did yesterday morning.
Refined Products Are Leading The Charge Higher This Morning With 5.5 Cent Gains
Up, up and away? Energy futures have staged a big rally off of Monday’s lows and several contracts are now within a few ticks of reaching fresh 7 year highs. Refined products are leading the charge higher this morning, with 5.5 cent gains putting ULSD just 16 points away from its highest trade since October 2014 and threatening another technical breakout to the upside. Brent crude meanwhile is just a few ticks below the $90 mark, already reaching a fresh high for the year overnight.
Looking at the charts, if we see new highs set and held this week, there’s a strong case to be made for crude making a run at $100, and ULSD taking a shot at $3. Fundamentally, as long as OPEC and Friends are unable to meet their output quotas, the argument for that type of price spike continues to strengthen as well.
The FED and Ukraine continue to be the big stories roiling markets, with US equities having more huge swings in Tuesday’s session, and starting out Wednesday pointing to healthy gains, while volatility is at its highest for stocks in over a year.
The FOMC will make their first monetary policy decision of what’s expected to be a very busy year for the FED. The CME’s Fedwatch tool shows only a 5% probability of a rate hike today, but a 97% chance of an increase by March. In addition, the probability of 3 or more hikes by the end of the year has increased to 92%, from 65% a month ago as the FED has been foreshadowing a tougher stance on inflation.
The API reportedly estimated a small decline in crude oil stocks last week of less than 1 million barrels, while distillates drew down by 2.2 million barrels. Gasoline meanwhile continued its seasonal stock build with an increase of 2.4 million barrels, marking the 4th straight week of gains. The EIA report is due out at its normal time today, and if the seasonal trend holds we should continue to see gasoline stocks increasing for another few weeks before starting to draw down ahead of the spring RVP transition.
How’s that plan working out? The DOE last week announced the 2nd largest award ever from the SPR as 7 companies raced to take advantage of the steeply backwardated price curve and gladly pay the government back in 2-3 years where they can lock in prices 20% or more lower than what they’re receiving today, which should easily cover the “interest” payable on those loans. Meanwhile, energy products continue to push multi-year highs despite the political theater of this coordinated SPR release that was supposed to help lower prices.
Whiplash Is The Theme Of The Week As Stock Markets Had Their Biggest Daily Swings In Years
Whiplash is the theme of the week as stock markets had their biggest daily swings in years while energy futures are getting swept up in the confusion. After a busy Monday, we’ve already seen a nickel swing in ULSD prices today, with RBOB and crude oil contracts seeing similar back and forth action in the early going.
Looking at only the charts, and not the headlines, refined products have so far been able to find technical support around the trend-lines that have fueled their bull run over the past 6 weeks. If we see ULSD continue to hold a floor just north of $2.60 and RBOB around $2.40, there’s a good chance we end up seeing another run at 2014 prices levels, but if those levels break (and hold) there’s a good chance we’ll see a 10-15 cent drop coming soon.
The DJIA had its biggest daily swing since the onset of the pandemic, rallying from an 1,100 point loss mid-day to end the session up nearly 100 points, but is pointing to another weak start down nearly 400 points this morning. The Nasdaq 100 had an even bigger bounce, rallying more than 5% off of its lows for the day, the biggest daily reversal since the financial crisis in 2008, but it too is looking weaker again to start today’s trading.
Perhaps the biggest headwind for stocks is that the FED has been signaling that it will not be coming to the rescue to prop up financial markets, and in fact will be tightening its monetary policy and raising rates, taking the free put option out of the market. How this impacts energy prices can depend on the day, as often times the correlation between the two asset classes can be strong and they move in lock step, but currently are only moving together for short periods of time.
The VIX chart below shows that stocks are more “nervous” now than they’ve been since we first learned about Omicron, and while energy volatility is elevated, it’s nowhere close to what we saw 2 months ago.
The escalating tensions around Ukraine have become a double-edged sword for energy prices as they weigh heavily on financial markets, adding to the unpredictable nature of trading this week after helping fuel the rally for the past 2 months.
A new report from McKinsey & Company suggests that the transition to net zero will require an extra $3.5 trillion in spending per year through 2050, for a total of $275 trillion. Too bad the FED has closed down its printing press for the time being or that would seem like pocket change. The report also noted that while the transition to new fuels may cost 185 million existing jobs, it will create roughly 200 million new positions.
A Sell-Off In Equity Markets Seems To Be Outweighing Supply Concerns Again To Start The Week
A sell-off in equity markets seems to be outweighing supply concerns again to start the week as energy contracts have turned from 2 cent gains overnight to 2 cent losses this morning as US equities moved deeper into the red following their worst week since the start of the pandemic.
The pen is mightier than the sword? The selling seems to be largely driven by expectations that the FED and other central banks are ending the money printing party and will soon raise rates to combat inflation, which for the moment is outweighing concerns that armed conflict may soon disrupt the flow of global energy supplies.
The march to war in the Ukraine seems remains the biggest story with numerous threats to both lives and markets. Read here for a list of possible market impacts expected should the invasion take place.
The IEA last week made a case that Russia’s withholding of natural gas had more to do with the price spike last year than the conversion to lower carbon fuel alternatives, and urged the world to learn a lesson from this, highlighting the growing threat from limited lithium supplies as EV’s gain market share.
Meanwhile, the existing war between Arab nations and Houthi rebels continues to add another level of concern as another missile attack on the UAE this weekend reminded the world that some of the largest oil producers are still trying to kill each other.
Money managers continue to add to their bets on higher petroleum prices with 4 of the big 5 contracts all seeing net length held by the large speculative trade category increase again last week. Reuters’ John Kemp argues that chronically low inventories are encouraging these bets on higher prices, which suggests they may continue for some time. (see the Commitment of Traders Report table & charts below)
Baker Hughes reported a net decrease of 1 active oil rig working in the US last week, the first weekly decline since October. The EIA on Friday reported that its forecasts suggests oil and natural gas output in the US should continue to grow and reach record highs next year.
Today’s interesting read, from the WSJ: The flaws in CAFÉ standards that will continue contributing to strong fuel demand.
Supply Fears To End The Week With Both Energy And Equity Market Heading Sharply Lower In Overnight Trading
Look out below? Demand fears seem to be outweighing supply fears to end the week with both energy and equity market heading sharply lower in overnight trading.
The bulls haven’t thrown in the towel however as losses of 7 cents for refined products have turned into only a 1.5 cent decline for RBOB and less than a ½ cent for ULSD by 8am central. Those sharp bounces overnight set up some good short term chart support just under $2.40 for RBOB and $2.60 for ULSD to determine if we’re just correcting a stronger move higher or calling an end to the winter rally.
It would be easy to attribute some of the selling, especially in gasoline, to another large inventory build reported by the DOE Thursday, but that would be inconsistent with the timing of the selloff. In fact RBOB prices continued to rally Thursday after the DOE report, and didn’t start to pull back until equities started tumbling late in the afternoon.
That DOE report also gave the diesel bulls more to hang their hat on as the government’s demand estimate surged (which may mean they didn’t poll the western 2/3s of the US) and days of supply dropped to just 28 days, well below the low end of the seasonal range.
Sticking with the lookout below theme:
West Coast gasoline basis values have plummeted 30 cents or more in the past couple of weeks as refineries in the region seem to finally be getting healthy, just when the extra supply isn’t needed.
Ethanol RINs have been tumbling all week but seem to have finally found a bid around the 95-96 cent range, some 35 cents below their highs from less than 2 weeks ago.
Week 3 - US DOE Inventory Recap
The Record Setting Rally For Diesel Futures Looks Like It’s Coming To An End
The record setting rally for diesel futures looks like it’s coming to an end, as ULSD is trading 4.5 cents lower this morning, and is down 7 cents from yesterday’s high. Unless there’s a big reversal higher later in the session, this will end an unprecedented stretch of 12 straight trading sessions with increases, which happened to be the first 12 trading sessions of the new year.
While a drop of almost a nickel is noteworthy, given that we’ve seen prices increase 40 cents during this stretch, and 60 cents in the past month, it’s really not changing the technical outlook yet. The short term test comes in around the $2.63 mark (roughly 2 cents below current values) where the trend line that started on December 20th at $2.10 comes into play. It’s inevitable that that trend line will be broken (if not, we’ll be at $8 diesel by year end) but if it doesn’t happen this week, then the pullback over the past 24 hours looks like an overdue correction, not an end of the trend, and a run at $3 still seems to be a real possibility.
Another factor that may be taking away some upward pressure on diesel prices, natural gas prices in the US and Europe have fallen this week, even as another invasion of the Ukraine by Russia looks to be inevitable. Long awaited supply from Norwegian fields and an influx of LNG imports from China are both earning credit for the pullback in prices.
There has been an expectation for nearly 6 months that the crude oil market would see a similar recovery in supply this year, but with OPEC struggling to meet its quotas due to a variety of issues, and US output slower to return due to labor and financing challenges, that hasn’t happened yet. Whether or not we see crude make a run at $100 later this year likely depends on if crude oil producers can make up ground like we’re seeing with natural gas.
Ethanol RIN values continue to come under heavy selling pressure this week, and are now down 30 cents from a week ago when a story posing as news broke that the White House may pressure the EPA to rethink their 2022 ethanol blends to combat higher prices. Given the success the administration has had getting its agenda passed lately this makes perfect sense.
ULSD Is Showing Off Once Again, Rallying A Nickel Overnight To A Fresh 7 Year High
ULSD is showing off once again, rallying a nickel overnight to a fresh 7 year high in what would be its record setting 12th consecutive day of gains. The rally has cooled a bit in the early morning hours, with prices only up 2.5 cents as of 7:30 central. While the contract may soon outkick its coverage and see a large pullback in prices, there’s a growing concern that a number of factors could cause an even larger spike before cooler heads prevail and prices begin to cool.
The forward curve charts below show how futures prices are moving into a steep backwardation, which simultaneously leaves the market susceptible to an even larger spike in paper prices, even while physical markets are seeing heavy selling in basis values as most US regions don’t face the same near term supply crunch, and in many cases are seeing just the opposite today.
The strength in time spreads is consistent with a market concerned over a near-term supply crunch, which is currently being fueled by the ongoing saber rattling on either side of the Ukraine, along with attacks on a UAE oil facility on Monday. Back to back winter storms in the US that are causing a spike in supplemental heating demand are also factoring into the short term supply concerns on the East Coast, even though most of the country is swimming in excess inventory.
The good news for refiners is this latest rally has boosted crack spreads all along the curve, and with RIN values coming under pressure over the past week will also help their margins, assuming of course that the weakness in local rack markets across large parts of the country that we’re seeing eventually goes away as we move towards spring.
Combination Of Bullish Technical And Fundamental Factors To Push Oil And Diesel Prices To 7 Year Highs
The rally continues in energy markets as a combination of bullish technical and fundamental factors combine to push oil and diesel prices to 7 year highs. For ULSD, this would mark a record setting 12th straight trading session with gains, but since yesterday’s holiday means there was no settlement published, it will only count as 11.
“There’s no such thing as a triple top.” In October 2018 Brent crude reached a high of $86.74 before falling to $50 in December. In October of 2021 Brent topped out at $86.70 before dropping to $65 in December, and yesterday Brent topped out at $86.71. The old, and often disputed, trading adage proved true overnight, with Brent rallying north of $88, which now opens the door for another move higher, with a rally to $100 looking certainly possible. ULSD is looking similarly bullish on the charts, with a push towards $2.80 and even $3 looking more likely now that prices have enthusiastically followed through on their breach of technical resistance.
It’s not just the charts that look supportive of a sudden spike either, the escalation of tensions in Ukraine seem to be contributing to some panic buying as the risk of Russia using oil and gas exports as a weapon seems to be growing. In addition to the large amounts of natural gas which can indirectly push up oil and product prices when replacement options are needed, Russia exports roughly 2 million barrels/day of oil to other parts of Europe, that will no doubt be threatened if the conflict continues to escalate.
Cause or Effect? The combination of bullish factors has drawn large amounts of fund money back into the energy arena in recent weeks, which can create a snowball effect as bandwagon jumping begets more buying. So what might stop the rally? Short term there are plenty of overbought signals on the charts, so trading algorithms might start selling heavily at any sign of a pullback. Longer term, the stock market may be foreshadowing the end of the bull run as it continues to pull back under the weight of higher interest rates, and in some cases, higher fuel prices. Unfortunately, that sets up a scenario where a supply-fear price spike may lead to a longer term demand collapse and we end up seeing lower fuel prices because the economy starts to shrink.
Winter Storm Izzy Is Sweeping Up The East Coast After Battering Large Parts Of The Country Over The Weekend
WTI and RBOB prices are hovering near break-even while ULSD is holding gains of about a penny, which would mark its 11th consecutive increase if it settles in positive territory. It’s MLK Jr. day so physical fuel markets won’t be assessed, and many in the industry are taking the day off, although futures are trading.
Winter storm Izzy is sweeping up the East Coast after battering large parts of the country over the weekend. So far, supply disruptions appear limited to a few terminal power outages, while the demand impact seems much more widespread as drivers avoid the roads. If you haven’t had enough winter fun yet, don’t worry, there’s another storm expected to follow a similar path to Izzy later this week.
Money managers continue to add large bets on higher energy prices, with all contracts besides RBOB seeing healthy increases in net length added by the large speculative category of trader last week. While WTI saw heavy short covering in the latest COT report, its net length added lagged Brent, and with a slew of new competing oil contracts emerging in the US that could continue taking market share, that trend may continue.
Baker Hughes reported a net increase of 11 oil rigs drilling in the US last week, with the Eagle Ford basin accounting for the majority of that increase, adding 6 rigs to a basin with only 44 active a week ago. The EIA and IEA are both projecting that US Oil production will push to all-time highs by the end of this year, and this report suggests that drillers are well on their way despite the well-documented supply chain and financing challenges.
Petroleum Futures Higher After An Afternoon Sell-Off In Equity Markets Thursday
The bulls are at it again, pushing petroleum futures higher after an afternoon sell-off in equity markets Thursday seemed to temporarily limit the upward momentum.
ULSD futures are trading higher for a 10th consecutive session, and the bulls hold an undefeated record for 2022 so far. The February contract has added 30 cents in those 10 sessions since the NYE selloff, and if that pace of increase continues, will put diesel prices somewhere around $8/gallon by the end of the year. When you look at it that way, the flashing “overbought” signals on the daily charts make more sense, showing that ULSD is begging for a pullback, but the weekly charts still suggest now that $2.60 was broken, there’s a good chance we’ll see an attempt to rally to the $2.80 range, which happened to be a price floor back in 2014 before prices collapsed.
Most physical diesel markets continue to be much less enthusiastic than futures, with basis values sliding and rack spreads vs spot markets holding well below break-even levels in many markets. The collapse in Midwestern ULSD spreads has opened up the theoretical arbitrage window to bring diesel out of the midcontinent towards the gulf & east coasts, but then again, that would require a truck (presumably with a driver) and roads that aren’t covered in snow or ice, none of which look like a likely option over the next few days.
Winter Storm Izzy is expected to bring heavy snow and ice to a large part of the country this weekend and an extended stretch of cold weather behind it goes a long way to explain why ULSD futures look strong while physical diesel across most of the country that doesn’t need diesel for heating or electricity generation looks weak.
For the most part, the storm is going to hit parts of the US that have winter every year and should not be an unusual event. The biggest concern (for now) is that parts of TN, GA and the Carolinas all could get covered in ice, and they simply aren’t equipped to deal with it. In years past when we’ve seen this type of event, there were numerous terminal closures due to frozen pipes and other damaged equipment just in time for a surge in diesel demand as electricity companies need to supplement their output to keep up with the surge in demand.
Reminder that Monday is MLK Jr. day, so spot markets in the US won’t be assessed and banks will be closed. That means most rack prices will carry through from tonight to Tuesday, and most industry participants will hope that futures don’t have a repeat of the Black Friday or NYE selloffs.
Energy Futures Are Taking A Breather After Another Strong Day Wednesday
Energy futures are taking a breather after another strong day Wednesday that saw diesel prices trade north of $2.61 for the first time since October 2014, while WTI briefly traded north of $83 as US crude oil inventories dropped to a 3 year low. For a 2nd straight week, large builds in refined product inventories did little to slow the rally, as the market continues to act like the winter demand doldrums driving those increased stocks will soon be put in the rearview mirror.
Want a very simple reason diesel prices are trading at 7 year highs? Total US Diesel stocks started the year 10 million barrels below where they started the year in 2020, 20 million barrels lower than their 5 year seasonal average, and 35 million barrels below where they started off a year ago. You’d never guess that diesel stocks nationwide are far below average by looking at rack prices across most of the Gulf Coast, Midwest and Southwestern US as spot/rack spreads have collapsed, and in several cases are offered at multi-year lows as regional suppliers struggle to deal with a sudden glut of supply in markets that were extremely tight just 2 months ago.
RINs saw their first large sell-off in nearly 6 weeks after yet another mysterious Reuters exclusive citing unnamed sources suggesting the White House is considering yet another change to RVOs as pressure builds over higher fuel prices, and the environmental arguments for more ethanol continue to wane.
Rain, Snow or Ice? That’s the big question for millions of people along the east coast heading into the weekend with another winter storm sweeping across a large portion of the country. The difference in a few degrees may make a huge difference between an inconvenient rain storm and a crippling shut down as cold temperatures follow close behind the precipitation. There aren’t many refineries in the current path of the storm, but we are likely to see terminal disruptions from Tennessee to the Carolinas as several markets that aren’t used to seeing extended temperatures below freezing are forecast to do so over the next few days.
Week 2 - US DOE Inventory Recap
ULSD And RBOB Took Out Another Layer Of Technical Resistance In Tuesday’s Session
So much for the sideways pattern. ULSD and RBOB took out another layer of technical resistance in Tuesday’s session, and made short work of following through to their next targets with 10 cent gains in the past 24 hours. Just a few days after making a run at $2.50, diesel prices are now less than a penny away from reaching a new 7 year high at $2.6080, with another big move higher looking possible if that resistance can also be taken out.
Besides the technical strength, it appears that diesel prices are also getting a boost from winter storms hitting the East Coast, based on the strength in calendar spreads and natural gas prices in the past few days. That should provide some sense of relief to those hurt by high diesel prices that this won’t last for an extended period of time, but is also a sign that near prompt prices could see a severe spike if another polar vortex arrives, which could fulfill the technical targets closer to the $2.80 range. Short term indicators are also moving into overbought territory, so there should be a swift correction once this latest surge subsides.
So far the market continues to be able to shrug off some bearish fundamental indicators for both refined products as the API reported another huge build in gasoline inventories last week of nearly 11 million barrels, while distillates added another 3 million barrels. The DOE’s weekly report is due out at its normal time this morning, and based on the API and anecdotal evidence from fuel suppliers around the country, more large builds seem likely as last week marked the traditional trough of the winter demand doldrums.
You can also see signs of that weak demand in Midwestern basis markets that have seen diffs plummet over the past two weeks as those regions slog through their annual January temperature and demand freeze. In these cases, the strength we’re seeing in calendar spreads tends to push basis spreads even lower as cash markets will need to offset the relative increase in futures to attract incremental buyers. Rack markets around the country are also showing signs of capitulation with several major markets that were showing large premiums to their local spot market now offering discounts as suppliers appear to have forgotten (again) what happens in January every year. (see the charts below)
Reminder that Monday is MLK Jr. day, and while futures will trade throughout the day, there will not be a settlement posted for NYMEX contracts, and spot markets won’t be assessed, so most prices posted Friday night will carry through Tuesday.
Refined Products Are Trading Within ½ Cent Of Where They Were This Time Yesterday
Let’s try that again: refined products are trading within ½ cent of where they were this time yesterday, but – as they often do - have taken a roundabout way to go nowhere. At least some of the choppy action can be blamed on a rollercoaster in US equity markets on Monday, and while some of the back and forth looks like a market that’s going to consolidate and move sideways after a solid 2 week rally.
Besides technical indicators moving into a more neutral stance, fundamentals are looking less bullish now that they did just a few days ago. Oil production in both Libya and Kazakhstan appears to be coming back online this week, which takes away one of the arguments for the bulls to keep oil prices in the $80 range. So far the record setting pace of Omicron cases in the US is being taken in stride, even as it clearly starts to impact activity, which seems primarily due to the expectations that this variant will run its course relatively quickly, and not impact demand for very long.
The FED is once again taking center stage in the financial markets this week as yet another governor steps down for the perception of insider trading on the FOMC data, and the chair prepares to testify in front of congress as the markets are starting to behave like there will be 4 interest rate hikes this year.
Unlike the see saw action in products, RINs are continuing to march slowly but steadily higher this week, with D6 ethanol values approaching the $1.30 level for the first time in nearly 3 months. Ethanol spot prices meanwhile are trading roughly 80 cents lower than they left off in 2021. Why the disconnect between the two? As the forward curve chart shows, forward ethanol prices are actually higher today than they were trading a month ago, but the extreme backwardation we saw in November and December finally evaporated after the holidays.
A Reuters article this morning highlights the big changes on the table for the RFS this year as the original law included a clause requiring a reset in 2022. 17 years after the RFS first came into law, the program mandates roughly 21 billion gallons of biofuels to be blended in the US annually, vs a program target of 36 billion gallons, mainly because the cellulosic ethanol so many were relying on to make the RFS a reality nearly 20 years ago still doesn’t exist commercially. A shift away from traditional ethanol – which several studies suggest can be worse environmentally than gasoline – and potentially adding electricity to the RFS are two major changes some think could be announced this year.
Diesel Prices Attempting A Rally, While Gasoline And Crude Prices Are Moving Modestly Lower
It’s a mixed bag for energy markets to start the week with diesel prices attempting a rally, while gasoline and crude prices are moving modestly lower. There appears to be a bit of a technical tug-of-war happening at the moment after last week’s strong rally that quickly took out the near term targets on the charts.
There’s a similar fundamental dichotomy as disruptions to global oil exports give the bulls reason to cheer, while Omicron continues to shake up the demand outlook near term. In the US there’s a mismatch between a dramatic drop in demand over the past couple of weeks, offset by a rash of refinery problems, mainly focused on the gulf coast, and PNW markets. On the demand side, the recent rally seems to suggest that both the global impact from Omicron, and the US slowdown are seen as temporary issues, and on the supply side we will just have to wait and see how long they might last.
Money Managers are piling back into the energy arena, with a 2nd straight week of heavy increases to net length held by money managers in refined products. WTI was the only exception this week with a modest decrease, and RBOB was perhaps the most noteworthy as its speculative length reached the highest level in almost a year suggesting the hedge funds really don’t care about, or aren’t aware of, the winter doldrums for gasoline demand.
Baker Hughes reported a net increase of 1 active oil rig working in the US last week, with the gains coming in Louisiana and Colorado, while Texas saw a decline of 3 rigs. A Reuters article last week highlighted a new challenge for producers in Texas that may have to curb production because they don’t have a way to dispose of their waste water without causing earthquakes. Add that to the list of reasons why the recovery in US drilling is much slower vs the past two boom/bust cycles along with supply bottlenecks, labor shortages and more hesitant financing.
Petroleum Futures Are Working To Go 5 For 5 To Start The New Year As The Bull Run Continues
Petroleum futures are working to go 5 for 5 to start the new year as the bull run continues, pushing ULSD back to the $2.50 mark and WTI above $80 in early trading. Cash prices haven’t seen as dramatic a move as futures in most cases as they had to overcome the New Year’s Eve futures selloff that didn’t hit wholesale prices until Monday night, but are still pointing towards healthy gains, despite evidence that we’re experiencing the worst fuel demand in parts of the country since the 2020 lockdowns as a parade of winter storms has accentuated the typical seasonal slowdown.
While there’s no doubt the bulls took control of the energy markets this week, now that the short term technical targets have been reached, it looks like we could be due for a period of sideways trading, especially if we lose upward momentum in equity markets. Longer term, the bulls will need to find a way to make a run at the October highs in the next month or two – which is easier said than done this time of year – if they’re to avoid a longer-term bearish pattern on the charts.
The December Jobs report showed another healthy month of increases with 199,000 jobs created, while both the headline and “real” (U-6) unemployment rates continued their declines. In addition, the October and November estimates were revised higher by 149,000 jobs, adding to the overall feeling of strength in the labor market. Energy prices haven’t reacted much to the report, but equity prices are coming under pressure and interest rates are pushing higher again as we remain in a “good news is bad news” market since the strong job market just gives the FED another reason to shut down the money printing presses and start raising rates.
Back in the USSR: Russian troops have invaded intervened to quell deadly protests in Kazakhstan over the removal of fuel price subsidies. Those protests appear to also be interrupting crude exports from the country’s largest oilfield, which – combined with ongoing disruptions in Libyan - is likely to keep actual production from the OPEC & Friends cartel well below their target levels.
RIN prices have continued their steady march higher this week, and D6 (ethanol) values are now threatening the downward sloping trend-line that pushed prices from $2 in June to 80 cents in December. There doesn’t appear to be any “new” news driving the run-up in RINs, but the ongoing industry statements regarding the EPA’s proposed rules for 2020-2022 suggest that if those RVO’s become law, we’re destined to see another extended court battle.
Ethanol prices meanwhile continue to see a dramatic drop, with most US spot markets now trading $1.50/gallon or more lower than they were just 6 weeks ago the winter demand doldrums that are being felt by gasoline producers all over the country are spilling over into the alcohol fuel arena and helping alleviate the supply bottlenecks that drove the record setting backwardation last year.
Today’s interesting read: Climate Change mistakes and the influence of fuel prices in politics.
Yesterday’s DOE Report Had Some Of The Worst Demand Figures Of The Year For Refined Products
Yesterday’s DOE report had some of the worst demand figures of the year for refined products, and huge inventory builds, and yet the market seems to have dismissed those figures as seasonal/holiday anomalies that don’t change the outlook for 2022.
A 16% drop in the DOE’s demand estimate for gasoline on the week was certainly eye opening, but when you look at the seasonal charts and remember something like this happens every year, it becomes less worrisome. The 10 million barrel build in gasoline stocks was the 3rd largest weekly increase in the past 20 years, and the largest since the country went on lockdown in the spring of 2020. Despite that big increase, total gasoline stocks remain below their 5 year average for this time of year, which helps to explain the muted reaction to the dramatic numbers.
The DJIA had a 550 point reversal lower after reaching a new record high just shy of the 37,000 mark Wednesday as the FOMC minutes reminded the market that the money printing presses are shutting down. We did see a brief selloff in energy prices post-settlement in sympathy with the drop in stocks, but that move proved to be short-lived as the buyers stepped back in quickly overnight.
Week 1 - US DOE Inventory Recap
Bulls Have Taken Back Control Of The Energy Markets To Start The New Year
The bulls have taken back control of the energy markets to start the new year, with a 3 day rally pushing Brent crude back above $80, and ULSD above $2.40 for the first time since you first heard about Omicron.
With a settlement above $2.40 on Tuesday, diesel futures have broken through their short term technical resistance, and now have an open road on the charts to push north of $2.50 in the coming weeks, and are not wasting any time already adding 2.5 cents this morning. RBOB continues to lag behind the ULSD enthusiasm, and still has some work to do to make a similar technical breakout, and gasoline prices have more fundamental headwinds this time of year which could create a tug of war between the two products for control of the complex.
Refinery upsets along the Gulf and West coasts continue to plague the industry, and seem to be contributing to the strength in product prices. The PNW continues to be the hardest hit as multiple facilities in the region remain offline in part or entirely following a freeze that anyone working at a Texas refinery a year ago can empathize with, which of course came just a couple short weeks after those facilities were shut down due to flooding. Prices in the region jumped double digits Tuesday on word of the extended downtime caused by the freeze.
Don’t underestimate the influence of fuel prices: Kazakhstan’s government resigned today following protests over the removal of fuel subsidies. It’s interesting to note that these protest focus on propane prices, which had been capped for years, which encouraged many to convert their vehicles to run on LPG instead of gasoline. Apparently the protesters thought the removal of those price caps was not very nice.
Speaking of which, the Dallas FED today released a study that explains why another ban on US crude oil exports would not lower gasoline prices in the country.
A Healthy 2 Day Rally In Petroleum Futures Has Wiped Out The Heavy Losses Seen On New Year's Eve
A healthy 2 day rally in petroleum futures has wiped out the heavy losses you may or may not have seen on New Year’s eve. US stock markets are also pointing to fresh record highs as optimism about the overwhelming Omicron looks to be taking control.
Now that the downward sloping trend lines that pushed prices lower for 2 months were broken in the last 2 weeks of December, the charts for ULSD prices are looking bullish, with a test of the $2.40 range looking pivotal this week. Already this morning we saw an early run stall out at $2.3968, and $2.4059 marked the high set just before the Black Friday meltdown, so this resistance may not be easily broken, but if it is, the charts suggest we’ll see a run to $2.50 or higher in short order.
The RBOB charts aren’t quite as bullish as ULSD, but have a similar setup now that the bearish trend-line that saw prices drop 65 cents in 7 weeks has been wiped out. $2.30 looks to be the pivotal level for RBOB, with a break here opening the door for a counter-seasonal rally during the weakest fundamental time of the year.
Refinery hiccups continue to lend support to futures and cash prices, with 2 more gulf coast facilities taking FCC units offline over the past few days, adding to the setback from the 2nd largest plant in the country reducing rates after a fire two weeks ago. While the winter demand doldrums make it unlikely that we’ll see widespread gasoline shortages from this rash of issues, it is another reminder (or, if you prefer, warning) that the supply network is stretched more than it’s been in decades after numerous plant closures in the past 2 years, meaning there’s less cushion for the supply chain to absorb this type of disruption.
Ethanol prices are continuing their return to earth so far this week, with Chicago spots reaching a 2 month low around $2.40/gallon, about $1.35/gallon less than what they were going for at Thanksgiving. New York and LA values still command hefty premiums to the Chicago hub as logistical bottlenecks with railcars and trucks remain, but both are trading more than $1/gallon below where they topped out about a month ago.
RIN values meanwhile have had diverging paths depending on the contracts. After the D4/D6 spread blew out to a record north of 60 cents/gallon in the wake of the EPA’s new RVO suggestions, the gap between bio and ethanol RINs has shrunk dramatically in the past 10 days. Adding to that, there was 20+ cents of backwardation between 2021 and 2022 values for D4s, which has caused a big drop in current year values now that the calendar has flipped.
US Stock Indices Are Poised To Start The New Year With Fresh Record Highs
While US stock indices are poised to start the new year with fresh record highs, energy prices are not acting nearly as optimistic, already wiping out an attempted rally overnight and starting to add to the heavy losses we saw for futures on New Year’s Eve. Since spot markets weren’t assessed Friday, we won’t see the impact of Friday’s prices until tonight, so even if you see small gains in futures today, cash prices are still moving lower for the day.
OPEC & Friends are meeting again this week, and besides officially naming a new secretary General, not much else is expected to change with the cartel.
The weekly Commitments of Traders report is delayed by the holiday but we do get a sneak preview courtesy of the ICE contracts. Both Brent and Gasoil contracts saw money managers add a large amount of new length, and reduce an even larger amount of short positions heading towards year end, which means those funds did not have a great NYE celebration.
Baker Hughes reported no net change in the total number of rigs drilling for oil in the US last week. For the year, 213 rigs were added in the US, 118 of which were added in the Permian basin. While the increase of nearly 80% in total is noteworthy, we’ll still need to see another 190 rigs added before reaching pre-pandemic levels.