Market Talk - 2022 june
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Refined Products Are Teetering On The Edge Of A Technical Breakdown To Wrap Up Trading For The First Half Of The Year
Refined products are teetering on the edge of a technical breakdown to wrap up trading for the first half of the year. While two days of heavy selling has the energy complex in a defensive stance, support on the charts has not yet completely given way, meaning it’s still too soon to call a top in prices even though we’ve had a major pullback in the past two weeks.
RBOB prices are trading 62 cents below their June highs this morning, but still need to break and hold below $3.64 before the technical breakdown can be confirmed. Keep in mind that today’s expiration of the July RBOB contract will knock about 10 cents off of prompt values, which adds to the bearish outlook on the charts. IF the trend support and June lows break today, don’t be surprised to see prices make a run at $3 later this summer.
ULSD prices are in a similar spot, trading 64 cents below where they were less than 2 weeks ago, but they’ve rallied more than 6 cents from their overnight low at $3.95, giving the bulls a chance to hang on to the trend that’s pushed prices up from $2 in December. If prices drop and hold below $4, that trend will be officially broken which opens the door to a run at $3.50 in the next few weeks despite the well-documented fundamental issues with distillates.
Yesterday’s long-awaited DOE report, which provided a rare 2 weeks’ worth of data due to system issues seemed to be a catalyst for some of the selling in products, as inventory levels for both gasoline and diesel saw healthy increases in both of the past 2 weeks, while demand estimates slumped well below average levels for this time of year. Those data points also coincide with the latest slide in equity markets as some traders seem to be convinced that high prices may have already started to cure themselves, and the solution to the imbalance in fuel markets will come from a big drop in consumption.
US refiners are running at 95% capacity, but an EIA note suggests that in reality they’re effectively maxed out due to the normal operational constraints on those facilities that are much more complicated to operate than many believe. That report also highlights that US capacity is expected to decline for a third straight year in 2022 with 2 more plants scheduled to be shut down or converted, unless the record high margin environment convinces someone with a few billion dollars to reopen those plants.
Reminder: Today is the last day for July RBN and HON futures contracts, so for those in the NYH and Group 3 markets that haven’t already transitioned to an August price reference will need to watch the RBQ and HOQ contracts for direction today. The backwardation in products is not nearly as extreme as we’ve seen over the past few months, but there will still be a noticeable drop when August futures take the prompt position that will confuse some tomorrow when cash markets don’t follow.
Week 26-US DOE Inventory Recap
It’s Another Day Of Crude Oil Moving Higher
It’s another day of crude oil moving higher, while refined products are trading modestly lower to start. We’ve seen a drop of $12/barrel for diesel cracks already this week as WTI has rallied while products retreat, but so far the entire complex is holding on to a bullish technical outlook.
Even though cracks have come under heavy pressure after reaching record highs north of $75/barrel earlier in June, ULSD futures passed their first big technical test Tuesday, bouncing 15 cents off of Tuesday’s low, and keeping the weekly bullish trend-line intact for now.
Ethanol prices meanwhile have dropped to 2 month lows this week and their charts show a good chance those prices will slide another 40-50 cents in the coming weeks if buyers don’t step in soon. Some good news for ethanol bulls yesterday in that corn and D6 RIN prices were able to manage a rally after facing heavy selling the past two weeks.
2 for 1: The DOE finally fixed the glitch with their servers and will be releasing their weekly status report today, which will include the data from last week that was not released. The API reported another healthy draw in crude oil stocks of 3.8 million barrels last week, despite another 7 million barrels released from the SPR on the week. Refined products saw inventory builds of 2.8 million barrels of gasoline and 2.6 million barrels of diesel last week, which helps explain why products are down and crude prices are up for another day.
The tropics remain active with an increased chance the storms off the Texas Coast may become a tropical depression or storm, but odds remain low that that system will become anything more than a rainmaker. Hurricane Bonnie is still expected to develop later in the week but will hit Central America and not threaten the oil production or refining centers in the Gulf of Mexico.
That should fix the problem: California is floating a new law that would require the few remaining refineries in the state to disclose their profits monthly, another brilliant idea from the state that will soon cut $1,000 checks to drivers of gasoline-powered vehicles that it intends to outlaw.
Oil Prices Are Heading Higher While Diesel Prices Are Facing Heavy Selling Pressure This Week
Oil prices are heading higher while diesel prices are facing heavy selling pressure this week, setting up some potentially pivotal technical tests that could shape the pattern of summer trading.
ULSD prices are currently down 19 cents since Friday’s settlement, while WTI has rallied more than $3/barrel, knocking more than $10/barrel off of the record high diesel crack spreads in less than 2 days. Don’t worry though, despite the pullback, most plants in the US are still looking at margins for a 5/3/2 ratio (5 barrels of crude producing 3 barrels of gasoline and 2 barrels of distillates) north of $1/gallon despite that drop.
The recovery in oil prices while refined products have stumbled seems to be due at least in part to reports that the Saudis and UAE are both pumping at current capacity and will need 6 months or more to bring their additional “spare” capacity on line.
Hurricane Bonnie is expected to be named this week, with a landfall projected in Central America this weekend. The system churning off the Texas coast is still given low odds of being named, but is expected to bring heavy rainfall to parts of Texas and Louisiana, with towns inland like Shreveport and Texarkana expected to see 8-12 inches of rain based on the European forecast model.
The DOE continues to struggle to restore its servers after a hardware failure last week, and delayed its weekly gasoline and diesel fuel update that many companies use as a benchmark for freight surcharges Monday. No word yet if the weekly status report will be delayed again, but they do plan on publishing retroactively as they continue to collect data through this outage.
The agency did publish a brief note highlighting the increased flow of fuel from the Gulf Coast to the East Coast noting that 2.8 million barrels/day (117 million gallons daily) flowed between pipeline, tanker and barge from PADD 3 to PADD 1 this year.
BP released its annual statistical review of world energy, noting the largest annual increase in demand ever last year, which pushed global consumption higher than 2019 levels, even though oil & products demand remains slightly below pre-pandemic levels. The report also noted the first global decline in refining capacity in more than 30 years, while a resurgence in coal usage by countries looking to avoid energy crises is driving a sharp increase in global emissions.
Speaking of which, 3 oil majors announced plans to create a giant carbon capture hub in China this week, something they estimate could capture as much as 10 million tons of CO2 annually.
Why let the details spoil a party? Mexico’s president will inaugurate a new refinery this week, even though reports suggest it’s still several years away from being completed, and is going to cost around $4 billion more than the earlier estimates of $8 billion.
Energy Markets Are Starting The Week On A Quiet Note
Energy markets are starting the week on a quiet note as the market seems to be trying to figure out the latest geopolitical dramas like a Russian debt default, more sanctions (that could include a Russian oil price cap) and the restart of negotiations with Iran.
Hedge funds look like they may be throwing in the towel on the petroleum price rally, with money managers making large increases on short positions and reducing their long bets last week. The net length held by the large speculators in WTI dropped to a 2 year low last week, while open interest for the contract reached a 5 year low. While funds pulling out could help explain the price pullback we’ve seen in the back half of June, this change does also leave the complex susceptible to a sharp rally if these new short positions are forced to cover.
Activity in the tropics is increasing after a relatively quiet start to the Atlantic hurricane season. The NHC is tracking 3 potential storm systems this week, and gives high odds that Bonnie will be named in the next few days. The good news for refining country is that storm looks like it will stay well south of the Gulf of Mexico. Another potential system is being tracked off the Texas coast, but so far it’s given low odds of becoming much more than a rain maker that would be welcomed by drought stricken areas.
Baker Hughes reported 10 more oil rigs and 3 more natural gas rigs were put to work in the US last week. That increase brings the oil rig count to a fresh 2 year high but there are still 99 more rigs to add before the total reaches its pre-pandemic levels.
If you’re still wondering why it’s taking so long for oil production to ramp up with prices north of $100, read the Dallas FED’s Energy Survey that was released last week. The report shows that while production activity is at a 6 year high, costs and lead time for materials are both reaching records as supply chain bottlenecks continue to disrupt operations. While supply chain issues are slowing the pace of production, a FT article notes that the US may be the ultimate winner of the energy war.
The Energy Complex Continues To Bounce Back And Forth This Week And Have A Mixed Outlook Going Forward
The energy complex continues to bounce back and forth this week and have a mixed outlook going forward, with Crude Oil falling well below its weekly trend-line, while refined products have managed to stay above theirs.
The technical breakdown in crude, while refined products have managed to hold above their trend lines has sent crack spreads to fresh record highs in some areas, with even the low end estimates putting margins for plants north of $1/gallon. If you think that kind of margin isn’t enough incentive for a refiner to pull out all the stops to run full out, you’ve probably never met anyone in the refining business.
Speaking of which, we didn’t get a DOE status report this week due to a systems issue, but we did get the agency’s annual refinery capacity report. That report highlighted the decline in operable capacity over the past two years that marks the most severe decline since the early 80s and has led to all sorts of straw grasping to try and solve the problem of high fuel prices in an election year.
The EIA this morning published a note on Global Crude Oil production capacity, showing both the relatively large excess in place today, and predicting a drop in that amount as producers race to bring output back online, something that’s proven difficult this year. That excess crude production capacity goes a long way to explaining why we saw oil prices top out well below their 2008 highs (so far) while the lack of refinery capacity goes a long way to explain why refined products have smashed their previous records.
The National Hurricane Center increased the odds of development for a system churning across the Atlantic to 60% yesterday, but that system still may not pose a threat to the US unless it’s able to shift north before approaching South America. The 2022 season is still expected to be a busy one for hurricanes, even though it’s off to a slow start vs the last two years.
RIN Prices continue to slide this week, and have now given back all of the gains made earlier in June when the EPA revised their blending requirements for refiners. Plummeting grain and palm oil prices are getting credit for the slide in RIN and ethanol prices.