News & Views
Diesel Prices Ran Into A Wall At The $3.80 Mark Thursday And Quickly Dropped By 16 Cents In An Emphatic Demonstration Of Technical Resistance
Diesel prices ran into a wall at the $3.80 mark Thursday, and quickly dropped by 16 cents in an emphatic demonstration of technical resistance, leaving the energy complex in its sideways trading range. RBOB initially followed that pattern, dropping more than a dime after hitting the top end of its trading range, but then the expiring August contract decoupled from the rest of the energy train and continued moving higher, and setting a new record premium vs the 2nd month contract.
Today is the last trading day for the August RBOB and ULSD contracts, and the lack of volume on expiration day is already causing fireworks that look impressive on the charts, but won’t matter to almost everyone who buys fuel, since the September contracts will determine tonight’s pricing moves. For example: As of 8am central, August RBOB prices are up 15 cents/gallon, but most cash markets are following the September RBOB contract which is “only” up 6.
The extreme backwardation in gasoline prices is not just showing up in the futures market. Prompt RBOB values in the NYH are trading some 40 cents above values for barrels delivered 2 weeks from now, and 68 cents higher than RBOB on the Gulf Coast as a short squeeze for summer gasoline grips parts of the East Coast, even while other parts of the country are having trouble finding buyers. This seems to be a less extreme example of what we saw in April and May when New York Harbor diesel prices spiked to premiums of $1.20/gallon or more compared to its neighboring cash markets. The forward pricing curve suggest that this spread will collapse in August, just as we saw diesel premiums collapse in May (see charts below).
One extra challenge for the East Coast, there were several forecasts when the war in Ukraine started that European refiners would run full out to make as much diesel as possible, and end up with excess gasoline to be sent to the US, but some of those facilities are now running well below capacity as soaring natural gas costs (and/or limited supply) make operations uneconomical for some and unfeasible for others. For those that remember last year’s freeze induced natural gas price spike and shortages that led to every refinery in Texas to cut operating rates, this scenario playing out in Europe is easy to understand, as is the potential fallout from the lack of output.
Right on cue, PBF announced it is bringing its idled crude unit in Paulsboro NJ back into operation after shutting it down to try and avoid bankruptcy during the depths of the COVID demand slump.
In other earnings news, Pemex announced that they made $862 million in EBITDA in the first 6 months of operations at the Deer Park refinery, which is $150 million more than they paid for their interest in the facility. Still no word from Shell if they’d like a do-over on any of the refineries they dumped in the past two years.
Valero joined most other refiners, smashing its records for profitability during the quarter, increasing run rates to 94% of capacity, up from 74% 2 years ago. The company also had record renewable diesel production, and expects its next RD expansion project to be completed by the end of the year. In a sign of the market’s skepticism over the forward outlook of fuel demand, the company’s stock dropped after the announcement even though earnings surpassed most published expectations.
The senate spending deal that surprised many this week has good news for biofuel producers in that the $1/gallon blenders tax credit is expected to be extended for another 2 years. One potentially painful mistake however is that the bill also includes a $1.25/gallon tax credit for sustainable aviation fuels, which means producers will get an extra 25 cents/gallon to make SAF instead of BIO or RD, which could heat up the feedstock wars once again and send fuel that had been used over the road for the past decade into the skies. The bill includes numerous other potential credits and incentives for both renewable and traditional fuel production, and capturing the carbon created by those projects.
Diesel Prices Are Trying To Drag The Rest Of The Energy Complex Higher This Morning
Diesel prices are trying to drag the rest of the energy complex higher this morning as their weekly rally has now surpassed 40 cents in less than 4 days. Gasoline prices are resisting the pull higher so far, despite some positive demand signals in yesterday’s DOE report, and remain range-bound for now, while WTI is facing a big test near $100.
We said yesterday morning that the ULSD contract looked like it was ready to make a run at $3.80 after breaking through resistance on the charts around $3.60 and it didn’t waste any time already reaching that mark this morning. The last time ULSD touched $3.80 3 weeks ago, it dropped 20 cents the next day, so today’s tug of war with gasoline could prove pivotal. A break and hold above $3.80 opens the door for another 40 cent run higher for diesel, while a failure sets up a drop to the lower end of the July trading range.
All sorts of news out of Washington that may influence markets as the Senate has made a surprise breakthrough on a bill that includes nearly $370 billion in energy and climate change programs, while the commerce department just reported it’s GDP estimate showing the US is now “not officially” in a recession with a 2nd straight quarter of contracting GDP.
Bad news is good news when it comes to the stock market reaction to FED policy, and it seems like the Chairman’s statement that the US economy shows signs of slowing yesterday was enough to send stocks rallying once again, as it implies that the pace of increase for interest rates is going to slow down after their largest increase in over 40 years. The big rally in stocks following that announcement seemed to spill over to the energy arena in the afternoon, but could also create more volatility if today’s confirmation of that economic slowdown sends the big money funds to the sidelines.
If you’re an energy bull, you may note that we’ve already lived through the recession, and yet yesterday’s DOE report showed a healthy recovery in fuel consumption which could mean the worst is behind us…not to mention that the world still doesn’t have a solution to replace Russian natural gas and distillate supplies.
Notes from yesterday’s DOE Report:
US crude oil exports surged to an all-time high last week north of 4.5 million barrels per day. That means a total of roughly 32 million barrels of oil (more than 1.3 billion gallons) were sent overseas last week, which makes the inventory drop of 4.5 million barrels in total for the week suddenly less impressive.
Refinery output dropped for a 2nd straight week, with 4 out of 4 PADDs declining, with the Midwest (PADD 2) leading the way with another major decline in run rates. Given the weakness in Group 3 and Chicago basis values, it doesn’t seem like anyone is worried about declining output in the middle of the country - most of which is unable to be exported – although this could spell trouble in the fall if rates don’t pick back up as Gulf Coast facilities seem to have their hands full trying to keep up with demand from Europe and the rest of the Americas.
Demand for gasoline and distillates were estimated to have climbed for a 2nd straight week putting both products back close to their seasonal 5 year averages after dropping below their seasonal range earlier in July. A big drop in gasoline imports, and the decline in refinery run rates are combining with that tick higher in demand to draw inventories lower after more than a month of gains.
The inventory declines are most pronounced on the East Coast, which helps explain why RFG gasoline in New York is worth 50 cents more per gallon today than it is in Houston, and nearly 70 cents more than its conventional counterparts in the Midwest.
See charts below.
Week 30 - US DOE Inventory Recap
The Choppy Action In Energy Markets Continues This Week
The choppy action in energy markets continues this week after a large reversal in gasoline and natural gas prices over the past 24 hours.
RBOB prices made a 45 cent run from the bottom end of their July range to the top in just 4 days, but were greeted by stiff resistance that knocked prices down 18 cents from their Tuesday morning high. The buyers are giving it another go this morning, with inventory draws, stronger equities and a weaker dollar all getting some of the credit for the early buying.
WTI has traded down to its 200 day moving average in each of the past 5 trading sessions, but has always managed to settle above that level. If sellers fail to break that mark (currently just above $94) that could be a springboard to the next push north of $100, while a break sets up a move below $90. ULSD is looking the most bullish of the NYMEX contracts, with the early move north of $3.60 making a run at $3.80 look more likely.
The API reported that US Oil stocks (outside of the SPR) dropped by 4 million barrels last week, while gasoline and distillates had small draws of 1 million and ½ million barrels respectively. The crude oil number seemed to have surprised many who estimated stocks would continue to hold relatively steady thanks to those SPR releases. The DOE’s weekly report is due out on its normal schedule of 9:30 central.
US Strategic Petroleum Reserve (SPR) stocks have dropped to their lowest level since 1985, with nearly 1 million barrels/day being released in recent months to prop up US and global supplies. The non-SPR inventories in the US are just barely hanging on despite these consistent injections, which has brought the combined total of US oil inventories down to its lowest level since 2004.
While much has been written about the boom in profits for refiners who were able to survive the fallout from COVID lockdowns and the global push to villainize fossil fuels, the global refining story is much more complex as some Asian facilities are now seeing their lowest margins since the early days of the pandemic.
A big reason for the plunge in profits in the Eastern hemisphere is China unleashed its refineries to ramp up their utilization and exports just in time for a major slump in regional gasoline and plastic-production demand. Another contributing factor is new refineries in Kuwait and Saudi Arabia are also now competing in the export market. In other words, while the Americas and Europe are struggling to keep supplied due to a lack of refining capacity, Asia is facing the opposite problem.
That phenomenon may be a key contributor in West Coast cash markets trading below most of their counterparts in the eastern half of the US, which is a relatively rare occurrence given the more stringent specs and limited shipping infrastructure west of the Rockies.
Gasoline Futures Have Rallied 43 Cents Since Setting A Low Of $3.02 Last Thursday
Gasoline futures have rallied 43 cents since setting a low of $3.02 last Thursday, and diesel prices are up 20 in less than 2 days after the low end of the July trading range held support and now the bulls look like they’ll make a test of the top. This type of action is common in a sideways pattern, where the path of least resistance is a big move higher when sellers fail to breach chart support, and the reverse is also true if this rally fails to break resistance.
The $3.50 range looks like it could be a pivotal test for RBOB futures, with a run at $3.80 likely if that layer of resistance fails to hold. The outlook is less clear for ULSD, but a sustained move above $3.60 should be enough to get another 20 cent rally in the near future. Some good news in the rally for consumers: Most US markets are resisting the pull higher from futures, with basis values continuing to decline. The exception is the NY Harbor market which continue to outpace futures by 20 cents or more, and holding 50 cents above its Gulf Coast counterparts, which has caused values for space on Colonial’s line 1 to jump this week.
Russia’s latest move in the global energy chess match is getting much of the credit for this week’s rally, with natural gas prices spiking on news of yet another reduction in flows to Europe on the Nordstream pipeline, and the rest of the petroleum complex going along for the ride. European countries have agreed to a 15% gas supply cut this winter in their counter-move, but that announcement has done little to calm prices so far. This WSJ article explains why the clean fuel push of the past few years made Europe more susceptible to Russia’s energy weapon with the current result that coal usage is rapidly increasing with other options holding somewhere between slim to none.
It’s the busiest week of the quarter for earnings releases, and refiners are expected to smash profitability records after crack spreads spiked during the second quarter. Even though margins have dropped over the past month, and the forward curve has them priced in lower than current levels, the outlook remains strong for those companies that were able to get their facilities through the pandemic. See charts below.
The CME’s FedWatch tool shows the market pricing in a 75% chance of a 75 point hike in its target interest rate tomorrow, and an 80% chance that they’ll increase an additional 1% by year end. With so much certainty that the FOMC will continue its most aggressive monetary tightening in decades this year, the big bets now seem to be whether or not those rates will start to ease again in 2023.
Given that the two most influential groups for energy markets globally are OPEC and the US Federal Reserve, it’s not too surprising that the CME is now publishing an OPEC watch tool along with its FedWatch tool. That tool estimates an 83% chance of the Cartel keeping its production plans “as is” at next week’s meeting, while 13% are betting on additional increases, and 3% are betting on a lower output agreement.
Energy Futures Are Attempting To Rally To Start The Week
Energy futures are attempting to rally to start the week, after surviving a test of the low end of their July trading range. Both RBOB and ULSD futures had moments in the past few days of looking like they’d break down on the charts and spark another big wave of selling, but both contracts managed to find enough buying to keep them in a sideways pattern for a while longer.
It’s not just gasoline futures that have been dealing with heavy selling in July. Most regional basis values in the US have dropped 20 cents or more since the July 4th holiday, suggesting that the demand slowdown is not just a theoretical issue anymore. Severe backwardation in the futures market also seems to be contributing to the negative values in prompt basis, as prices will drop 20 cents or more once the September RBOB contract takes the pole position, incenting sellers to discount barrels to the August contract while they can, and taking a big bite out of refinery margins that hit record highs in the past few months.
Baker Hughes reported that the US oil rig count held steady last week, while the natural gas rig count increased by 2. With supply & labor bottlenecks keeping the pace of drilling relatively subdued compared to previous booms in the energy market cycle, the global thirst for US natural gas may suddenly be influencing the amount of oil production as drillers have to compete for workers and other assets. The Dallas FED predicts that Texas Job growth will hold north of 4% this year after surging north of 7% in June, with new well permits and other energy related activities a key indicator of strong job growth continuing in the state.
The EIA reported this morning that the US became the world’s largest LNG exporter this year, as new capacity came online at the (only) 7 facilities in the country equipped to freeze and ship natural gas overseas. US natural gas prices have surged from $5.50 July 5th to $8.50 this morning, with the record setting heatwave hitting large parts of the country getting the blame. Those prices are still less than a third of what European and Asian spot markets are trading at, which will most likely keep the export demand high for years to come.
Money managers seem to be getting more comfortable betting on higher petroleum prices, increasing their net length across the board for a 2nd week. European grades are seeing the most activity, with Brent net length held by large speculators increasing by almost 50% last week alone, while Gasoil contracts increased by 37% on the week. Open interest remains near 5 year lows, so if the big money funds continue to pour money into these contracts, it could have a larger influence on prices than when liquidity is higher.
Are We Already Experiencing The "Summer Doldrums"?
Futures are taking a breather this morning with the entirety of the energy complex drifting slightly lower to start the day. The lack of any new information to drive headlines and/or prices might keep this Friday fairly quiet, highlighting the reason for the term “summer doldrums”.
Is driving season over already? Two weeks of seasonally low demand figures from the DOE seem to suggest so, and futures prices definitely reacted yesterday. The August RBOB contract dropped over 12 ½ cents yesterday, outpacing a lagging diesel contract which only dropped 1.4 cents. Gasoline futures are on track for their 7th consecutive week of lower prices and drivers are seeing it at the pump.
Again, not surprising: the EIA let us know that oil producers saw elevated profits in Q1 this year, despite elevated costs. Even while high energy costs likely contributed to the increase in operational costs, oil production companies certainly didn’t hate when WTI peaked at over $120 per barrel.
It seems the market is in a wait-and-see state, balancing returning output from Libya with the ongoing war in Ukraine. While the American gasoline benchmark seems poised to drop further in the short term, crude and heating oil futures are less enthused. Both look to be in a sideways trading pattern, looking to news on global market changes for price direction.
Prompt Month Gasoline Futures Prices Set A New July Low As The Energy Complex Sees Heavy Selling So Far This Morning
Prompt month gasoline futures prices set a new July low as the energy complex sees heavy selling so far this morning. Confirmation that Russia has resumed natural gas deliveries to Western European countries seems to be driving prices lower today. The EU is unconvinced the supply is back for good, warning its members to cut 15% of their usage from now until March in case the Moscow decides to stem deliveries when the weather gets colder.
The counter-seasonal build in gasoline inventories, as reported by the Department of Energy yesterday, is adding to the bearish sentiment this morning. The nation added 3.5 million barrels of gasoline to its stockpiles last week, but total inventory levels still remain below the 5-year seasonal range. The other headline values weren’t as exciting with diesel stores pulling back 1.3 million barrels while crude oil drew down 445 thousand barrel.
The European Central Bank has decided to raise its interest rates by half a percentage point this morning. This is the first rate increase made by the ECB in over a decade and the latest move by state banks to ward against runaway inflation.
The Energy Information Agency published a not-so-surprising note this morning, reporting that energy consumption in the US fell a record 7.5% during 2020. While the headline might not be of particular interest, the Agency noted that Hawaii had the largest decrease in energy use in 2020 due to its high jet fuel/motor fuel demand ratio.
Several technical indicators are flashing red and if the sundry chart studies are to be believed, lower gasoline prices are coming in the near future. There doesn’t seem to be much in the way to keep prompt month RBOB futures from trading down to the $2.85 level in short order.
Week 29- US DOE Inventory Recap
Another Wave Of Selling Hit The Energy Complex After A Pair Of Potentially Bearish Headlines Hit The Wires Overnight
Another wave of selling hit the energy complex after a pair of potentially bearish headlines hit the wires overnight, but already those losses have been cut in half, suggesting another choppy day of trading ahead. On the supply side, the market seems to be breathing a sigh of relief after Russia announced it would honor its supply commitments to Europe and restart the Nord Stream natural gas pipeline Thursday, along with the customary threats against more sanctions. On the demand side of the equation, rising COVID rates in Asia seem to be contributing to a bearish outlook for fuel consumption over the coming months.
The drop so far does not change the neutral technical outlook, and we’ll need to see another 15-20 cents taken off of refined product prices before the lower end of the July range comes under threat, and based on the back and forth action we’ve seen so far this week it wouldn’t be surprising to see these early losses wiped out in the afternoon. Longer term, IF we do see the July lows taken out, there’s a good chance we could see sub $3 prices later this year, but if the sideways pattern can hold on for another few weeks, there’s a good chance we see another rally heading into the fall.
Natural gas continues to have an outsized impact on the rest of the petroleum complex, particularly ULSD, as distillates are one of the few short term options to supplement electricity generation when gas-burning facilities can’t keep up. A Rystad Energy report this week estimates that the US will surpass previous estimates and shatter production records this year and next as producers are finally able to utilize much of the supply they’ve been sitting on impatiently for the past decade.
The explosion and fire at the Freeport export facility is certainly complicating the movement of that new supply as that plant accounted for roughly 20% of US exports and 10% of European imports, keeping the spread between US and natural gas prices in other parts of the world at elevated levels. A political showdown between environmental and low-price energy advocates may be looming, following reports that the PHMSA could delay restart at the facility due to “safety concerns”.
The API was scheduled to release their weekly inventory statistical bulletin as normal Tuesday afternoon, but as of this writing that data has not been reported. That could mean the API is cracking down on news services publishing it’s subscription only data, or perhaps they’re struggling with IT issues like the EIA did for several weeks, delaying their reports. The EIA is scheduled to release its weekly status report at 9:30 central.
Gasoline Prices Tried To Drag The Petroleum Complex Higher Monday And Diesel Prices Are Trying To Drag Them Lower Today
Gasoline prices tried to drag the petroleum complex higher Monday and Diesel prices are trying to drag them lower today. ULSD futures were down 14 cents at their low point this morning, pulling RBOB down a nickel – wiping out its gains from yesterday - and WTI briefly back below the $100 mark. Expect more of this back and forth action as long as prices remain stuck consolidating within the range set the past two weeks.
Force Majeure has become a theme this week around the world. Keystone pipeline declared Force Majeure after a nearby power substation was vandalized and forced the line to reduce operating rates. The relative lack of reaction in US crude markets suggests that this event is expected to be short-lived.
The last functioning refinery in South Africa meanwhile was forced to declare Force Majeure due to delays in crude oil deliveries, sparking fears in a country that’s already heavily reliant on imports of fuel which are much harder to come by this year.
Last, and certainly not least, much of Europe is nervously awaiting news on whether or not Russia will reopen the Nordstream natural gas pipeline in time to restock for the winter after Force Majeure was declared. Interestingly enough, Canada is playing a central role in the Nordstream drama as it exempted sanctions on Russia to allow repairs to a turbine that may allow the pipeline to come back online, and take away one of Russia’s excuses for turning off the gas.
Currency swings are also having a heavy influence in the price action for energy and other commodities recently, with the inverse correlation between the US Dollar and WTI prices strengthening in recent weeks after going dormant for a while. Expect that trend to continue at least through next week’s FOMC announcement, which is all but assured to see at least a 75 point rate increase. With the FED doing its best to telegraph its moves to try and avoid shocking the market into a recession as it shuts down the money printing presses, questions over the European Central Bank’s plans seem to be creating some volatility this week and getting some of the credit for the choppy action in commodity markets.
After disappointing results in trying to get more petroleum production from OPEC and US refiners, and a failure in the Senate to move forward on climate initiatives, the White House is reportedly considering declaring a climate emergency this week in an effort to thread the needle between lowering energy prices, and lowering energy emissions to appease voters ahead of the election. That said, the recent Supreme Court decision restricting the EPA’s authority on such issues may make any declarations largely meaningless.
Gasoline Futures Are Attempting To Lead The Energy Complex Higher This Morning
Gasoline futures are attempting to lead the energy complex higher this morning, trading up more than 9 cents/gallon, after finishing a 3rd straight week with heavy losses that have brought some much-needed relief at the pump. Crude oil contracts are trying to join the gasoline rally with WTI briefly rising back above the $100 mark, while diesel prices are resisting the pull higher so far with prompt ULSD futures down 2 cents in the early going after rallying overnight.
Weekly charts suggest we may now be in the early stages of a sideways summer pattern, which would be marked by choppy back and forth action that ultimately does little to change prices until the range is broken. With few options to solve the global fuel supply shortages save for a slowdown in demand (aka a recession), there’s a good chance we see prices ultimately rebound heading into the fall.
Money managers seem to have agreed with that assessment last week, drastically reducing their short positions across the board, driving a large increase in net length after heavy liquidation in the past several weeks. So far that change in speculative interest looks like profit taking by those that bet on the recent price fall, but we’ll need to see open interest pick back up from the current 5-year lows before we can say that the big money funds are truly back in the energy game.
The stare-down between Russia and Europe continues to be the big story on the supply side of the energy equation, with daily changes to various product flows, and guesses as to their impact continuing to influence prices. A Rystad Energy report this morning takes a closer look at various scenarios for European natural gas supplies, and recaps the other options in the works to replace Russian imports. An EU official indicated the region could end Russian fuel oil and coal imports in the next few weeks, well ahead of the agreed-upon deadline. European tanker companies are racing to move as much petroleum as they can to China and India before EU sanctions kick in.
Baker Hughes reported a net increase of 2 oil rigs working in the US last week, while natural gas rigs held steady for a 2nd straight week. Oklahoma gets credit for most of the oil increase last week, while Louisiana and New Mexico both saw declines.
After dominating headlines through much of the pandemic, concerns over “clean” energy supplies have taken a backseat to concerns over energy supplies. The latest casualty: Several companies combining two things people only pretend to understand, carbon credits and cryptocurrencies, have stalled out due to the crash in digital currency markets.
Refined Petroleum Products Survive Another Technical Cliff Thursday
Refined products survived another trip to the technical cliff Thursday, and have rallied 16-20 cents off of yesterday’s lows. Reports that Saudi Arabia will not be increasing output, even though the US President flew all the way there to ask nicely, are getting some of the credit for the move higher so far this morning.
That said, a Reuters report yesterday highlighted that Saudi Arabia was importing more Russian Fuel Oil – much of which previously went to Europe – which will allow it to export more of its own oil, another shining example of how the war in Ukraine has upended the normal fuel transportation routes.
After a month of heavy selling knocked more than $1/gallon off of gasoline prices, and pushed most petroleum contracts to 3-month lows, the charts are now looking to favor a period of sideways trading as traders consolidate positions. A sustained drop below the July lows would erase that pattern and set up another 30-40 cents of downside for gasoline and diesel, while they’ll need to rally another 20-30 cents in order for the bulls to regain control.
Colonial Line 1 (gasoline) shipping values have spiked this week as the spread between NYH and USGC RBOB approaches 40 cents. Even though PADD 1 gasoline stocks climbed to 3-month highs last week, they still remain far below their seasonal range (see yesterday’s DOE charts), and buyers have pushed prompt NY Harbor basis values to a 5-year high.
As the forward curve charts below show, even though prices have dropped sharply in the past month, steep backwardation remains a constant theme across the petroleum complex, making efforts to resupply tight markets much less profitable, and in many cases riskier, than the prompt values suggest.
Yesterday The Department Of Energy Reported An Across-The-Board Build In Energy Inventories Last Week
Yesterday the Department of Energy reported an across-the-board build in energy inventories last week, spurring on bearish sentiment that’s carried over this morning. Despite another increase in refinery utilization, which is nearing 95% of the nation’s current refining capacity, crude oil stockpiles increased 3 ¼ million barrels last week. National gasoline and diesel inventories also saw sizable builds, each adding 5.8 and 2.7 million barrels, respectively.
Despite the bearish DOE report, it’s the rise of inflation and the anticipated reaction by the Fed that is taking credit for the recent selloff. The CME Group’s FedWatch tool puts the probability of July’s target interest rate at 2.5-2.75%, which would be a fully percentage point over June’s target rate.
The US President is visiting the crown prince of Saudi Arabia this week on the pretext of discussing the global oil situation. While everyone seems to have an opinion on the meaning behind the meeting, the most anyone can say about its impact on the oil market is it might result in a “token increase in oil production” by the Kingdom.
The prompt month WTI futures contract is down below $95 this morning and is hovering around its 200-day moving average. Some believe it is decision time for the American crude oil benchmark. Breaking the ~$93 level leaves very little technical resistance to keep prices from dropping to $70, but a failure to breach that level leaves the door open for crude prices to jump back above $100 in short order.
Week 28 - US DOE Inventory Recap
It’s A Mixed Bag For Energy Futures So Far This Morning
It’s a mixed bag for energy futures so far this morning. American diesel and crude oil benchmarks are trading higher to start the day while gasoline futures seek to extend yesterday’s heavy selling. The prompt month RBOB contract, the main driver of national gasoline prices, has dropped over 25 cents from Monday and over a dollar since setting highs back in June.
Rumors of a very hot Consumer Price Index headline figure circulated news outlets yesterday afternoon. If confirmed to be correct, the CPI, used as a measure for how much general goods and services cost to the average consumer, has risen another 1.1% in June, bumping the annual inflation rate to 8.8%. The Bureau of Labor Statistics is set to release their report at 8:30 Eastern, and we’ll find out of the leaked figured were in fact fake.
The Energy Information Administration published an article today highlighting the continuation of lofty RIN prices last month. The EIA mentions it’s the increase in blend stock prices that is driving the credit prices higher, as a part of a story we are not unfamiliar with. It looks like it might be a different case this month as we see edible oils, wheat, and corn prices plummet as countries shift policies/strategies to cope with the shortages caused by the war in Ukraine.
Well the rumored CPI numbers ended up being fabricated, but the lie seems much more palatable than the truth. Inflation costs for consumers raised by 1.3% last month, compared to the 1.1% “estimated” yesterday, solidifying the annual inflation rate as the highest its been in 41 years. It won’t come as a surprise to anyone that commutes: the increase in the cost of gasoline was the largest month-over-month percentage point increase.
From the Bureau of Labor Statistics
Yesterday’s Early Selling Gave Way To Buyers Later In The Day
Yesterday’s early selling gave way to buyers later in the day and both gasoline and diesel futures contracts ended Monday’s formal trading session with (relatively) modest gains. The sellers are back this morning however, citing fresh Chinese oil demand concerns and a stronger US dollar as reasons enough to continue pushing the energy complex lower to start today. US crude oil and gasoline benchmarks are leading they way lower this morning, both coming down around 4%, the prompt month diesel contract is lagging behind, trading only 2% lower.
OPEC’s monthly report released this morning said the cartel expects a slowing in oil demand growth for 2023. The report listed a couple of key assumptions in their figures: no escalation of the war in Ukraine and no significant deceleration on global economic growth from inflation. While economists are continually monitoring the impact from inflation, trying to figure out what the Kremlin will do feels more like reading tea leaves.
While certainly not driving the price action, Austria’s announcement that they will be releasing some of their diesel reserves surely isn’t hurting today’s bearish sentiment. This product release comes after the country sent gasoline and diesel to the market on June 4th in an effort to ease supply constraints caused by its largest refinery suffering some unexpected downtime.
A disorganized group of storms are currently churning off the Louisiana coast this week, largely serving as rainmaker around the New Orleans area. The National Hurricane Center gives the system a low 30% chance of cyclonic development over the next five days. Not enough to worry, but enough to be wary, especially this year which is expected to have a busy Atlantic hurricane season.
Oil and Gas Prices Are Seeing Another Healthy Selloff To Start The Week
Oil and gasoline prices are seeing another healthy selloff to start the week, with more COVID restrictions in China taking credit for much of that move, while Diesel and Natural gas prices are moving higher after Russia shut the Nord Stream 1 pipeline for maintenance, and some doubt it will come back online.
Adding to the bearish sentiment in crude oil this morning, a Russian court lifted its suspension on the Caspian crude pipeline, which transports 1.2 million barrels of oil per day.
The $1/gallon drop in gasoline futures over the past month is trickling its way to the pumps, with the national average retail price falling for 24 straight days, and having its largest single-day drop since 2008 on Friday.
NYMEX contracts saw heavy liquidation of long positions by money managers early last week, and a large amount of new shorts enter the market that no doubt contributed to the heavy sell-off we saw early in the week. Open interest for crude and refined product contracts remains near 5-year lows, which is also contributing to the volatility with a lack of liquidity to buffer the daily price swings.
Baker Hughes reported 2 more oil rigs actively drilling in the US, while the natural gas rig count held steady. At the current pace, we should see the total US rig count reach pre-pandemic levels by year-end.
The National Hurricane Center is tracking a potential storm system in the northern Gulf of Mexico this week, giving it a 30% probability of becoming a tropical storm in the next 5 days.
Even with the low odds of developing into a named storm, this system could further disrupt barge traffic on the intra-coastal waterway and create more terminal outages at locations along the Florida panhandle that have already had more than their share of runouts this year.
An EIA note this morning highlighted the surge in US LNG exports in recent years, well before Russia’s invasion of Ukraine made Natural Gas the world’s most important commodity. A WSJ article last week noted how Europe’s race to find new LNG sellers may be choking off supplies to poorer countries around the world.
Energy Rollercoaster Showing Signs Of Manic Behavior
The energy rollercoaster is in full effect this week as a huge reversal Thursday rally wiped out Wednesday’s heavy losses, only to see another round of selling to start Friday’s trading. If futures settled at current levels they’d still be down more than 30 cents for gasoline and 35 cents for ULSD for the week, even though we had a 20+ cent recovery in Thursday’s session.
This type of manic behavior can be a sign of a market that’s changing direction, as the “weak hands” give way to the “strong hands” who are in the market for the long haul, but the big question is if these huge swings are marking an end to the 7-month bull rally that more than doubled fuel prices, or an end to the 1-month pullback that cut them down by more than $1? For now, short-term charts continue to give slight favor to prices moving lower – even though it’s tough to make a fundamental argument for more selling when you look at the inventory charts below.
US fuel inventories and days of supply for both gasoline and diesel are below the low end of their seasonal ranges, despite refineries running near their max in most regions. Refined products saw a big increase in demand last week, which is largely expected leading up to a major US holiday, but total US petroleum demand is still holding below the levels we saw this time of year in 2019 and 2021.
The West Coast is bucking the trend of the other US regions, with supplies for both gasoline and diesel above their seasonal averages, even though refinery runs remain well below year-ago levels.
Want to know why Group 3 diesel markets went from the weakest in the country for months to one of the strongest this week? Take a look at the PADD 2 diesel chart below.
Equity markets gave up their overnight gains after the June payroll report, which showed another strong month for job growth in the US. For those that remember the QE years of a decade ago when bad economic news was good for the stock market because it meant the FED would print more money, it’s easy to understand why good news on the labor front is bad news for markets because it all-but assures the FOMC will continue raising rates aggressively. While energy markets were already in the red prior to the report, they’ve given up another couple of cents afterward in sympathy with stocks.
Charts from the DOE’s weekly status report included.
2 Days Of Heavy Selling That Rank Top 5 All Time For Refined Products
After 2 days of heavy selling that rank top 5 all time for refined products, we saw a quiet overnight session as a different kind of Brexit dominated the news, followed by a modest rally attempt just before 8am.
The summer price drop has been severe, wiping out half of the 7 month rally in less than a month, and leaves the complex susceptible to more selling short term even though there are signs that we may be setting up for a period of consolidation after the rally finally broke.
The first test for gasoline and diesel prices will come in the early hours of trading to determine if the modest overnight gains can hold, or if another wave of selling will hit after trading activity picks up as we’ve seen the past couple of days.
The API reported a build in crude oil inventories of 3.8 million barrels (thanks in large part to another 6 million barrels released from the SPR) while gasoline and diesel inventories both had small declines last week.
The EIA is still catching up on its data releases after 3 weeks of delays caused by hardware issues with its servers. The weekly status report should be back to normal this morning, and the weekly gasoline and diesel price update (which many companies use for their fuel surcharge tables) will be released later this afternoon with 3 weeks’ worth of data, before resuming its normal schedule next week.
The big pullback in product prices has knocked nearly $20/barrel off of basic crack spreads after they reached record highs 2 weeks ago. The good news is that despite a pullback of nearly 50 cents/gallon, current margin levels are still plenty high to encourage US refiners to keep running full out with most averaging north of $30/barrel, which is more than double the average for this time of year.
The Los Angeles spot market has seen the worst of the selloff this week, with spot values for CARBOB gasoline down 67 cents in 2 sessions, compared to “only” a 45 cent drop for RBOB futures as West Coast inventories sit above the top end of their seasonal range. In addition, China has increased its export quotas, which should allow its underutilized refineries a chance to cash in on the big margins globally, and could end up meaning more options for West Coast buyers.
Group 3 diesel prices have resisted the sell-off, rallying to a 40 cent premium over futures – the after months of being one of the weakest values in the country left shippers with an easy choice to send their barrels to other parts of the world instead of the Midwest.
Gasoline Prices Are Trying To Stage A Recovery This Morning After The 4th Biggest Daily Price Drop On Record
Gasoline prices are trying to stage a recovery this morning after the 4th biggest daily price drop on record, and the largest since the early days of Russia’s invasion of Ukraine 4 months ago. Oil prices are also seeing a modest recovery this morning, following news that Russian ordered one of the world’s largest crude oil pipelines be closed, while diesel prices continue to slide lower.
That Russian court appears to have taken a page out of the Keystone XL prevention playbook, ordering the pipeline be shut-down due to “documentary irregularities” on how to prevent oil spills, rather than a political stunt, retaliation for sanctions or to try and drive prices higher. We’ll have to wait and see if Putin later regrets this decision and asks oil companies to produce more in an effort to lower prices in another year or two.
Gasoline futures have dropped $1/gallon from their high set on June 10th, while some cash markets have fallen more than $1.20/gallon during that span. That drop is already bringing relief to consumers as they trickle down to the pump, while retailers should enjoy some record margins on the way down, unless of course we get another big bounce in the next few days. Keep in mind that in an average year we’d expect to see about a 30% pullback in gasoline prices from their spring price peak, which this year would bring RBOB down about another 30 cents/gallon from current levels, which is awfully close to the $3 mark.
Yesterday’s update highlighted the chance that ULSD would slide to $3.50 if support at $3.81 broke, but I wasn’t expecting that it would happen in a single day. The $3.50 range now becomes a more serious support layer that needs to hold in order to prevent a slide to $3.
Renewable fuels have been caught up in the recession-fear selling as well, with both ethanol and biodiesel prices reaching 3 month lows yesterday as grain prices got hammered along with energy commodities.
For those looking for a reason for prices to bounce after Tuesday’s technical breakdown, just look to equity markets that staged a big intra-day reversal, with several major US indices finishing Tuesday’s session with gains after heavy morning losses. There’s also that issue of the world being woefully short on things like diesel fuel and natural gas that the fears of slowdown haven’t fixed.
The Choppy Trading Continues In Energy Markets
The choppy trading continues in energy markets with another round of selling welcoming US traders back after the holiday, after a big Friday rally managed to salvage the bull market, temporarily at least. For now the energy complex seems trapped in a conundrum with Supply shortages keeping prices elevated while recession fears preventing them from running rampant.
ULSD futures look the weakest on the charts, still trading below the weekly trend-line that carried them from the $2 level in December despite Friday’s big bounce. Peg last week’s low just above $3.81 as must-hold support to prevent a slide to $3.50. RBOB prices look less bearish after Friday’s big recovery rally, but are still teetering on the edge of their weekly trend-line, with a slide to $3 a possibility if the buyers don’t step back in soon.
Money managers were liquidating long positions in ULSD, Gasoil and Brent contracts last week, but adding to positions in RBOB and WTI. A large number of new short bets were placed on RBOB contracts, suggesting that funds are starting to see the potential for an end to the gasoline price rally, although there are still nearly 8 to 1 bets on higher prices vs lower prices in the large speculator category. Open interest across the petroleum complex remains at 5+ year lows.
Baker Hughes reported a net increase of 1 oil rig drilling in the US last week, while natural gas rigs declined by 4. That marks the largest weekly decline in Natural Gas rigs since August of last year, and is a bit surprising given the renewed interest in US natural gas to try and help ease the energy supply crunch in Europe and other parts of the world. Speaking of which, a Bloomberg article today highlights why the global natural gas trade is more important than ever.
Bonnie made landfall in central America as a tropical storm, but has reformed as a Hurricane in the Eastern Pacific, adding another odd phenomenon to the weather history books. Speaking of which, tropical storm Colin came and went off the Carolina Coast over the weekend, surprising the National Hurricane Center which had been tracking 3 other systems, but not that one until it was already formed. No other storms are on the NHC radar for development in the next 5 days, which is good news for Gulf Coast refiners who are running at their hottest pace in 3 years.
Energy Prices Starting July With A BANG
Just when it looked like energy prices were collapsing at the end of June, they start July off with a bang and move sharply higher. ULSD prices are leading the move higher this morning, up 17 cents and trading back above the $4 mark. There’s not a smoking gun headline to pin the rally on, so it could be more about money flows from funds to end one quarter and start another than anything that’s changed the fundamental outlook of tight global supplies vs expectation of slowing demand…even though the US is expected to break travel records this weekend.
The big sell-off to end the first half of 2022 trading did leave refined products in rally-or-else status on the charts, with the $4 mark for ULSD and $3.65 for RBOB looking like pivotal levels to determine direction for the coming weeks. If this rally fails to hold, there could be much lower prices ahead, but if prices can climb back above the bullish trend lines then this week’s sell-off looks like a bear trap.
Russia is now doing its best Venezuela impression in the latest move in the ongoing global energy chess match, seizing control of the giant Sakhalin oil and gas project and forcing the international investors (who weren’t already leaving) out. That project accounts for roughly 4% of global LNG, and will be a major blow to Japanese firms that rely heavily on Russian exports.
OPEC and Friends agreed to maintain their planned production quotas in their meeting yesterday, which really doesn’t mean much as the cartel’s actual output lags far behind their targets as their COVID-related output cuts officially come to an end.
The DOE continues to struggle with system issues and is still unable to publish some of its weekly reports as a result. The agency was able to catch up on its weekly inventory stats Wednesday, and put out its Monthly Energy review yesterday, which is always exciting reading.