News & Views
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.
Refined Fuel Prices Seem To Be In A State Of Quiet Confusion This Morning
Refined fuel prices seem to be in a state of quiet confusion this morning after Tuesday saw 15 cent morning gains wiped out in the afternoon, and Wednesday saw 15 cent morning losses turn into gains. Adding the uncertainty, the DOE announced it would not be releasing its weekly status report due to system issues this week, and the White House is trying to change the rules of the game to lower prices.
Equity markets are also finding a bit of calm after a bout of volatility, but it seems unlikely that these quiet hours of trading will last for long given the daily moves in the Western World’s chess match with Russia. Germany warned that Russia’s move to cut off natural gas to European nations could spark a “Lehman effect” on the energy system, which obviously isn’t helping to calm any nerves.
The API reported a large build of 5.6 million barrels of US crude oil last week, while gasoline stocks increased by 1.2 million and diesel declined by 1.6 million. That will have to suffice for weekly inventory given the DOE’s system issues, but you might still keep an eye on prices during the originally scheduled release time of 10am central today so see if anyone forgot to train their trading robot to not try and trade around the release of the report.
Major US refiners are meeting with the White House today to discuss the supply crunch, with little expectation of progress on either side, simply because there’s not a whole lot that can be done short term to deal with a long term problem.
The National Hurricane center is tracking a potential system moving over the Atlantic this week, but gives that storm low odds of development. As is often the case early in the Atlantic Hurricane season, dust from the Sahara has been limiting development of storm systems, but forecasters note those dust plumes are dissipating which will open the door for more development in the coming weeks.
Energy And Equity Markets Are Pointing Sharply Lower This Morning
So much for that rally. Energy and equity markets are pointing sharply lower this morning, after Tuesday’s big rally ran out of steam in the afternoon. For refined products, 15 cent morning gains were largely wiped out heading into Tuesday’s close, an ominous technical signal that encouraged more follow through selling overnight. For stocks, those that suggested Tuesday’s rally was a dead cat bounce are looking like they know what they’re talking about (for now) as the world continues to try and figure out what happens when we stop giving money away for free.
The US President is expected to call on congress to suspend federal gasoline & diesel taxes for 3 months today, and ask states to provide similar relief on their own taxes. If congress agrees on this plan (which seems almost comical) and the states follow suit, the average retail fuel price could drop by around 50 cents/gallon, which is a meaningful amount for consumers. That (theoretical) price drop could help spur demand, which given the tight supply situation may actually lead to higher prices later in the year than if they allowed high prices to heal themselves as they tend to do.
The IEA’s head warned that Russia could cut off natural gas supplies to Europe completely this winter, when that supply is most needed, in an effort to continue using the energy weapon to win the war in Ukraine. Those remarks coincided with the agency’s World Energy Investment report, which highlighted a record amount of spending on renewable fuels in 2022, while stating that the amount is still not nearly enough to reach the climate pledge goals around the world. The report also noted the near record refinery capacity retirement over the past 2 years and the impact it’s having on global supply/demand balances.
A drone attack on a Russian refinery overnight was another reminder that it’s a lot easier to destroy a refinery than it is to build one, which is a big reason why there are no short term supply solutions to the current situation.
The Dallas FED released a study on high fuel prices Monday and highlighted the expected drop in demand they will bring later this year.
Pent-up demand for travel (particularly foreign travel) amid easing COVID-19 restrictions could be a reason U.S. fuel consumption remains sticky. This may provide only a temporary uplift through August, when the summer travel season winds down. At the same time, a proliferation of work-from-home options gives many workers the ability to reduce their commuting fuel use—which is roughly 30 percent of gasoline consumption—relative to pre-COVID-19 levels. All told, fuel prices may be closer to consumers’ pain threshold than inflation-adjusted prices might suggest. And if prices climb higher, expect consumers to respond by cutting back on fuel consumption and overall spending sooner than later.
Energy And Equity Markets In The US Are Taking Back Most Of Friday’s Heavy Losses
Energy and Equity markets in the US are taking back most of Friday’s heavy losses as buyers search for a floor after a week of heavy selling. The rally puts the risk of a technical breakdown in energy futures on hold for the time being, although many are warning that this rally in equities is nothing more than a dead cat bounce.
Gasoline prices were up 15 cents this morning, rendering the President’s potential plan to push a Federal Gasoline Tax holiday (which would save 18.4 cents a gallon) pretty much meaningless.
Other political possibilities to deal with the impossible supply puzzle include a ban on some refined product exports, and waiving some summertime anti-smog rules to allow more fuel to be produced. The export ban seems particularly challenging given the previous promises to support European countries in their attempt to wean themselves from Russian energy supplies.
Speaking of which, a note this morning is a good reminder that we haven’t seen the worst of the Russian oil supply decrease as the bans by European countries are just about to start, and the latest Russian warnings to Lithuania suggest the fallout from this war still may get worse before it gets better.
While much has been made of the lack of refining capacity in the US, South America and Europe lately, a Bloomberg article today highlights the large amount of idle capacity in China as the country tightly controls the industry, and even perhaps may use the energy sword like Russia has to strengthen its position in any number of standoffs with the US.
The Dallas FED’s Texas Employment Forecast highlighted another strong month of job growth in the state in May, but also flashes signals of a slowdown ahead with its leading indicators dropping for a 2nd straight month. (Charts Below)
Reminder that since there were no settlements for RBOB and ULSD futures Monday (and spot markets weren’t assessed) today’s price movements are from Friday’s settlement levels.
Energy Futures Are Trying To Find A Bottom, While U.S. Stock Market Is Closed For The Day Along With Spot Markets For Refined Fuels
Energy futures are trying to find a bottom this morning in an abbreviated holiday session while US stock markets are closed for the day along with spot markets for refined fuels. Last week’s big selloff pushed gasoline prices down nearly 70 cents from their June 10th highs, but so far the weekly trend lines are still holding up, making it too early to call an end to the huge 7 month rally. WTI is also in a precarious position on the weekly charts, threatening a drop below $100 if support fails to hold around $109, while ULSD looks the strongest both technically and fundamentally, keeping the door open to another rally despite the concerns of a widespread economic slowdown.
Reports that Ukraine has struck Russian natural gas drilling platforms in the Black Sea this morning are adding to the numerous concerns over natural gas supplies across Europe, and seems to help diesel continue to find a bid as a key replacement option, particularly in the winter months ahead.
Money managers continue to show signs of hesitation in making wagers on energy prices with net length and open interest remaining low across the board for petroleum contracts. ULSD did see a healthy uptick in its open interest last week as the producer/merchant category added to its short position which could be some refiners looking to hedge their output at lofty levels.
Baker Hughes reported an increase of 4 oil rigs and 3 natural gas rigs drilling in the US last week. In an unusual twist, the report showed all 7 of those rigs were put to work in New Mexico but none were reported in the Permian basin, which accounts for more than half of the total US activity.
The Energy Complex Is Drifting Lower This Morning
The energy complex is drifting lower this morning, with the prompt month gasoline futures contract leading the way, trading 7.5 cents under yesterday’s settlement. Diesel futures are down around 3.5 cents and the American crude oil benchmark is trading 60 cents per barrel lower so far this morning.
Oil prices were firmly in the red for most of yesterday’s formal trading session until news broke detailing a new wave of US sanctions targeting Iranian petrochemical companies and their brokers. The latest round of crackdowns on the theocracy will likely further curtail their oil exports, and put more pressure on an already strained global supply shortage.
French, German, and Italian leaders visited the capital city of Ukraine yesterday as the war-torn nation is in talks to join the European Union. Putin responded by cutting natural gas exports to European countries, causing regional prices to surge. It will be interesting to see, when/if this war ends, if Gazprom will restore natural gas supplies to their former trade partners, or keep a tight lid on exports and continue to enjoy disproportionately higher profits.
Equity markets were sent reeling yesterday as traders wrestle with the largest interest rate increase in nearly 30 years and recession fears take center stage. It seems that another hike is on the way in July, in an effort to tame the rampant inflation we’ve enjoyed for the past few months. Analyst forecast the interest rate to be about 3.4% by the end of the year and 3.8% by the end of 2023. The S&P 500 is poised to close with the largest weekly loss since 2020.
It’s Been A Wild 24 Hours For Energy And Equity Markets Around The World
It’s been a wild 24 hours for energy and equity markets around the world with central bank action creating ripple effects far and wide, while the war in Ukraine takes a back seat in the headlines, but continues to roil the global supply chain. Gasoline futures hit $3.81 overnight, marking a 50 cent drop from Friday’s high trade, but have since bounced by more than 7 cents off of that support and managed to keep its bullish chart pattern intact for now. Diesel prices meanwhile surged 15 cents during Wednesday’s session, but are giving back most of those gains this morning, seemingly following the lead of the stock market short term.
The FED raised its federal funds target rate by 75 points Wednesday, the first time in 28 years they’ve made an increase of that size. The FED Chair also made it clear that another move of that size in the near future may be necessary to tame inflation that admittedly was worse than the central bank thought possible not long ago. Fed fund futures now show an 80% probability that we’ll see at least 125 points or more of increases in the next 6 months, and several other central banks are following the FED’s lead on raising rates, with the Swiss notably surprising many today with their first increase in 15 years.
After some wild back and forth Wednesday saw stocks finish on a strong note, most equity indices have given back those gains and more overnight, and are threatening a technical breakdown that could lead to much lower prices and many more news photos of the head in hand trader.
The White House sent letters to US refiners, placing blame on them for high gasoline prices and asking them to add back the capacity that was taken offline since the pandemic, which the letter notes several times happened prior to this administration taking control.
The industry responded quickly with numerous letters detailing the hundreds of millions spent in recent years just to maintain the lower capacity levels we see today, and laying out their own plans for the government to help debottleneck parts of the supply chain.
Yesterday’s DOE report showed that US Refiners continue to run at their highest utilization rates of the past 5 years, and several continue to struggle with operational upsets before or after required maintenance, leaving essentially no room to increase further.
So can any of the refineries shut over the past 2 years come back from the dead? Theoretically some can, and the current margin environment is giving the potential for some to consider it, but the complexity of restarting a facility after a long-term shutdown, and the long-term prospects for a world that just a few months ago wanted no more fossil fuels to be processed makes these options a big of a long shot . Certainly not impossible for some, but even if they said yes today, it would be months before any could be making fuel again. See the table below for those that in theory could try to restart.
Week 24-US DOE Inventory Recap
Gasoline Futures Continue Their Slide Lower To Start Wednesday’s Trading Session
Gasoline futures continue their slide lower to start Wednesday’s trading session, falling 40 cents from Friday’s highs, and getting closer to bringing some technical support levels into play that could make this pullback more than just a routine correction.
Given the incredibly steep slope of the gasoline rally (from $1.87 to $4.32 in 6 months) there could be a 20 cent or more difference in where the bullish trend line falls today depending on how broad of a brush you choose to use. A range between $3.70 and $3.90 and s looks like it might be the next stopping point if this pullback continues, with a drop back to $3 possible if that range doesn’t hold. If you’re looking for a more precise number to watch for an early warning sign that the top could be in for the year, peg $3.89, which marked the high in March before prices dropped $1/gallon. That former resistance could become new support, or it could be nothing more than a speed bump in a market that’s been smashing records left and right this year.
While gasoline prices are suddenly looking fragile technically, diesel futures are holding strong, and could be poised for another strong rally near term if they can take out the June high of $4.51. Longer term, the diesel chart continues to look like it could be forming a head and shoulders top that could ultimately see prices drop back below the $3 mark later this year IF prices stall out in the next few weeks. Natural gas continues to lend fundamental support to diesel prices, with today’s news that Russia had cut 15% of its gas supply to Italy seeming to help ULSD be trading up 4 cents while gasoline is down 4.
The API reported small builds in Diesel and Crude oil inventories last week, while gasoline stocks dropped by 2.1 million barrels. Given that diesel is up and gasoline down, it’s clear the market isn’t too worked up about that report, and may also shrug off the DOE’s weekly report this morning with many focusing on the FED instead.
A week ago, traders in FED Fund futures were only giving 8% odds of a 75 point rate hike in today’s FOMC announcement, but today those odds are up to 95% which seems to coincide with a lot of the selling we’ve seen in equities during that stretch. That big change in sentiment in a relatively short time could be setting the stage for another bout of extreme volatility if the committee surprises the big money bettors again.
Reminder: Monday June 20th is a new Federal observance of Juneteenth in the US. Energy Futures will trade in an abbreviated session but there will not be a settlement Monday, and spot markets will not be assessed.
After A Heavy Sell-Off Monday, Gasoline And Diesel Futures Are Both Up 7 Cents Or More
After a heavy sell-off Monday, gasoline and diesel futures are both up 7 cents or more in early Tuesday trading as OPEC reminded the world that it’s still not coming to the rescue, and the tight refining capacity situation may get worse before it gets better. Stock markets are also showing signs of stabilizing with modest gains in the early going after another big selloff yesterday, which seems to be keeping the “risk off” sellers at bay.
OPEC’s monthly report lowered estimates for global GDP growth this year, but increased forecasts for fuel consumption in the back half of the year, predicting strong demand during the summer holiday and driving season in spite of record high prices. Despite the cartel’s plans to increase output every month, their actual crude oil production decreased in May as losses in Libya and Nigeria offset additional barrels pumped by Saudi Arabia and the UAE.
Bad news on refinery row? Lyondell announced in April that it was planning to shut down its 268mb/day Houston Refinery by the end of 2023, and last week a report suggested that closure would happen earlier if there was a disruption that required significant capital to fix. Today there are reports of a fire at that facility, so we may soon take yet another US refinery off the board if the damage is significant.
The NHC now gives 40% odds of development for a storm system in the Western Caribbean, but odds are much lower that this system will become a threat to refining country even if it does get a name.
Energy And Equity Markets Around The World Are Seeing Another Wave Of Heavy Selling To Start The Week
Energy and equity markets around the world are seeing another wave of heavy selling to start the week, after Friday’s session ended on a bearish note. Gasoline prices are leading the way lower this morning, and while they’re some 25 cents lower than the high trade Friday, the pattern we’ve seen lately suggests we shouldn’t expect the weakness to last too long.
Equity indices look much more bearish than energy futures, with their May lows taken out in the early going this morning, which leaves the door open to another big move lower. Energy futures meanwhile still have a ways to go before threatening the bullish trend lines that have helped refined product prices more than double since December. That global “Energy Shock” is center stage in the financial market fallout as a key driver of the inflation that’s holding at 40 year highs and forcing both the FED and the average consumer to consider change their behavior.
Before Friday’s inflation reading, fed fund futures were only pricing in a 3% chance of a 75 point rate hike at this week’s meeting, and now they’re pricing in a 23% chance of an increase greater than 50 points. The outer months are seeing similar moves, with the odds that the FED won’t continue with a series of 50 point or greater hikes in July and September dropping rapidly as the inflation battle realities sink in.
The expectations for a more hawkish FED seem to be contributing heavily to an inversion in the 2 year vs 10 year treasury yield curve, an indicator that is often pointed to as a precursor to most US Recessions. As the chart below shows, a major difference in that yield curve vs what we saw in 2000, 2007 and 2019 is that the shorter term treasury rates have not come anywhere close to inverting, which highlights just how dramatic the FED’s upcoming moves are vs what we’ve seen so far this century.
Money managers continue to show mixed feelings about energy contracts, adding to net length in ULSD, WTI and Brent, while reducing their exposure to RBOB and Gasoil contracts. Open interest for all contracts remains at noticeably low levels, as both hedgers and speculators seem to be waiting to jump back in.
Baker Hughes reported a net increase of 6 oil rigs and no change in gas rigs drilling in the US last week. New Mexico accounted for 5 of the 6 added rigs, which could be a sign that drillers are starting to work through the large amount of federal leases signed in the past couple of years, and affirms recent reports that growth in the Permian could outpace that of just about every country in the world.
The National Hurricane Center is monitoring a system in the Western Caribbean this week, and giving 30% odds this morning of development. While we’re still 3 months away from the peak of the season, and usually storms this time of year don’t pose as much of a threat to the US Gulf Coast as they do in August and September, any potential system will need to be monitored closely this year given how tight the refinery network is already.
Pain At The Pump Is Dominating The Headlines As Gasoline Prices Push Record Highs
Pain at the pump is dominating the headlines as gasoline prices push record highs, while soaring transportation costs are less noticeably hammering large parts of the global economy, and contributing to the latest slide in equity markets. For those that remember the 2008 boom and bust cycle, there is an eerie similarity creating concerns of what might happen this fall as prices keep climbing relentlessly into the summer.
Gasoline futures came within ½ cent of the record high they set Sunday night, completing the recovery round trip after dropping 27 cents Monday and Tuesday. The US average retail price is currently just a couple of cents away from $5/gallon, and with the late week rally, we are likely to see that mark broken in the next few days.
While ULSD futures are still a long way off from their record high set during the April short squeeze that saw NYH prices trading more than $1.20/gallon above most of the country, several regional cash markets are seeing new record highs set this week, which is pushing the national retail average towards $6 which will only make inflation go from bad to worse.
Speaking of which, with both food and fuel seeing huge price increases in recent months, biofuels are caught in the middle as multiple types of buyers compete for feedstocks. One area this is particularly noticeable is in the price of B100 biodiesel, which is approaching $8/gallon, and causing blenders to cut back on non-mandated levels, and add surcharges in places where they’re legally obligated to blend.
The EIA expects US Refinery runs to hold near maximum levels this summer due to the high margin environment caused by the global disruptions and large drop in refinery capacity. The concern among many in the industry is that another busy hurricane season could interfere with that prediction.
Refined Products Are Trading Higher For A 2nd Day, And Have Now Wiped Out The Heavy Losses We Saw Earlier In The Week
Refined products are trading higher for a 2nd day, and have now wiped out the heavy losses we saw earlier in the week, putting the bulls back in control after a short break. Yesterday’s DOE report was a good reminder that despite most US refineries running all out, inventories remain very tight in most markets and demand is still holding relatively steady despite record high prices.
Adding to the bullish tone for refined products over the past 24 hours, reports that a Gulf Coast refinery heading for the scrap heap next year could close early if there are disruptions (like from the busy hurricane season that’s forecast) while a major East Coast supplier is apparently experiencing complications with its turnaround that started last month.
One bright spot for those looking for some easing of the supply problems: PADD 1 diesel supplies rose 20% off of record low levels in 1 week, helping to alleviate the extreme tightness we’ve seen across the East Coast. Still, regional stocks are some 20 million barrels (roughly 40%) below average levels for this time of year. Then again, a fresh natural gas supply squeeze my interfere with the resupply of the East Coast just as it looked like we may get to catch our breath.
Some European natural gas prices are trading up by 30% or more this week after an explosion and fire at a major US LNG export facility. US prices are actually trading lower following that news, and may see more selling near term as barrels that would have otherwise gone overseas will now have to find a domestic home, while European markets simply won’t have a replacement for those barrels any time soon. The plant is expected to be closed for 3 weeks, which certainly won’t help ease the global shortage near term, but is not nearly as bad as it could be and the plant should be back online well before the European winter where the shortages will really become a challenge. As we’ve seen over the past year, the shortage of natural gas in Europe can create more diesel demand as a replacement option, which will mean more competition for cargoes heading to the East Coast of the US.
Today’s interesting read from Bloomberg: Why algorithms used by schools, police and HR departments need a babysitter. Something fuel traders that have watched the rise of algorithms trading in futures markets know all too well.
Week 23- US DOE Inventory Recap
Energy Prices Were On The Move Higher To Start Wednesday’s Trading
Energy prices were on the move higher to start Wednesday’s trading despite increases in weekly inventory levels after another attempted sell-off proved short lived, and buyers seem to be quite content to buy the dip.
A late day rally cut Tuesday’s losses dramatically, with RBOB bouncing 10 cents off of its low for the day, while ULSD rallied by 7 cents. Despite that big bounce, which managed to keep the bullish trend comfortably intact, ULSD prices did snap their 10 session winning streak that had added a casual 66 cents to prices over the past 2 weeks.
The EIA’s monthly Short Term Energy Outlook followed the pattern of several major bank reports in the past week, raising its forecast for energy prices for the next year due to the ongoing fallout over Russia’s invasion of Ukraine, even though the forecast suggests global oil supplies should outpace demand in each of the next 6 quarters.
The report predicts that Russian oil output will drop 2 million barrels/day over the coming year from 11 to 9 million, while US output will increase from 11 million to 13 million by the end of 2023. The report also highlights the drop in operable US refining capacity over the past 2 years, as a harsh reminder that this isn’t so much a global lack of oil, it’s more a shortage of transportation and refining capabilities. See the notes and charts below.
The API reported inventory builds across the board last week with US crude and gasoline stocks each up 1.8 million barrels, while distillates increased by 3.3 million. The DOE’s version of the weekly stats is due out at its normal time this morning.
Excuse me: New efforts to curb carbon emissions this week include New Zealand putting a pricing mechanism on sheep and cow burps and a Wisconsin fuel marketer shipping processed cow waste to California. (insert Texans making a “is that why they’re all moving here?” joke) Meanwhile, as new and more creative ways to take advantage of California’s Low Carbon Fuel standard emerge, that market-based program is seeing the value of its credits plummet to 5 year lows.
Open Interest: The STEO also noted the dramatic drop in open interest for energy contracts, stating that, “Fewer futures contracts held by these traders suggest some producers or end users could be reducing their hedging activity, in part, because higher commodity prices and higher volatility are likely making it more expensive to hedge. In addition, higher interest rates may be increasing the costs of opening a futures position, such as higher margin rates.” Keep this in mind the next time oil prices crash.
East Coast Shortages: “By the end of April, gasoline inventories on the East Coast were 14 million barrels below their five-year (2017–2021) average levels (Figure 6). At the same time, combined Gulf Coast and Midwest inventories were almost 2 million barrels above their five-year average level. In May, East Coast gasoline inventories remained low and did not decrease much further, while Midwest and Gulf Coast inventories drew down substantially. On May 27, combined Gulf Coast and Midwest inventories were down by 6 million barrels from their end-April levels while East Coast gasoline inventories were down by almost 1 million barrels”
Tight Diesel Supplies: We estimate distillate imports, which would normally increase to help rebuild low inventories and moderate prices, were below the five-year average at 145,000 b/d for the four weeks ending May 27. If confirmed in monthly data, this recent decrease in distillate imports would signal that global demand remains strong as markets continue to adjust to sanctions on Russia’s exports, reduced export quotas in China, and overall lower global refinery capacity.
Refinery crack spreads: Inventories for gasoline and diesel in the United States are low at the same time that they are similarly low in Europe and elsewhere in the Atlantic Basin, contributing to broad increases in crack spreads for both products
Gasoline Futures Have Dropped More Than 20 Cents Since Reaching A Record High Monday Morning
Gasoline futures have dropped more than 20 cents since reaching a record high Monday morning. While a 20 cent swing used to be a big deal, these days it’s less than a 5% move, and barely raises an eyebrow unless it happens in a couple of minutes rather than a couple of days.
There are signs across the country this past week that demand may be tapering off – some of which is no doubt caused by high prices - but it’s too soon to know whether this is just a normal holiday hangover for demand, or if staycations here to stay.
Despite the sharp pullback this week, gasoline prices remain comfortably above their bullish trend lines for the time being, and we won’t get too excited about a potential end of the rally until we see that support – some 30 cents below current values – finally break down.
ULSD meanwhile filled the chart gap at $4.40 that was left behind by the May contract’s record smashing backwardation, which could actually spark some short term profit taking now that that target has been fulfilled. There’s still a chance that we are about 2/3 of the way into a major head and shoulder reversal pattern that could eventually see diesel prices drop by $1/gallon or more this fall, but for now ULSD charts are also comfortably pointing higher even though they’re in the red this morning, leaving the door open for a run at the March high of $4.67.
Perfect timing:While the US may never build a new petroleum refinery again, Kuwait and Saudi Arabia are ramping up operations at two new large facilities just in time to earn record setting margins as the world struggles with a shortage of capacity.
A major factor in the global supply/demand (im)balance over the coming weeks will be how Chinese demand bounces back with 50 million people let out of lockdown, and perhaps more directly how Chinese refiners can respond after many had to drastically cut runs due to the plunge in demand. Just-released export quotas remain well below 2021 levels, but are increased somewhat which should help alleviate current inventory overhangs, and encourage those plants to start ramping up operations again once they clear the tanks.
Gasoline Prices Are Down About A Nickel This Morning After Reaching A Fresh Record High Overnight
Gasoline prices are down about a nickel this morning after reaching a fresh record high overnight, while the rest of the complex is trading close to unchanged to start the week.
The EPA released its final volume mandates for the RFS from 2020-2022 Friday, which raised the ethanol mandate for this year beyond previous estimates, and helped RIN prices continue their rally. The ruling also defined a pathway for bio intermediates, which are biofuels that require processing at multiple facilities, to qualify for the RFS program, which could add to the supply of both advanced biofuel and cellulosic fuels. In addition, the agency also denied 69 petitions for small refinery hardship waivers to the RFS.
Money managers added to their net length across the energy complex last week, with new long positions and some heavy short covering both contributing to the increase. While the large speculators seem to be getting more comfortable betting on higher prices, the positions are still small in comparison to previous years, and open interest remains near multi-year lows, suggesting the ongoing volatility is still too hot for some to handle.
Baker Hughes reported no net change in the count of rigs drilling for oil and gas in the US last week. A Rystad energy report last week forecast that the Permian basin will outpace the rest of the world in production growth in the coming year, even though the rig count remains well below pre-COVID levels.
The US has made a small concession on Venezuelan sanctions, allowing 2 European companies to take delivery of previously off-limits oil, so long as that oil is delivered in Europe and not sold in the open market. While this is a big step in terms of the US state department acknowledging the global shortage of energy supplies, the actual volumes in play so far are quite small and shouldn’t impact prices much.
Today’s interesting read, from the Financial Times: The end of the term ESG.
Gasoline Prices Continue To March To Fresh Record Highs This Week
Gasoline prices continue to march to fresh record highs this week as the world got a harsh reminder Thursday that OPEC can’t replace Russian exports, and US inventories continue to slide. RBOB gasoline futures smashed their previous record in Thursday’s session, then broke it again by 3 cents overnight, with essentially nothing on the charts standing in the way of an extended move higher.
While diesel prices are still well-below the chaotic records set back in March and April, they are now within striking distance of the $4.40 chart gap, with little technically standing in the way of a push to that next layer of resistance. If diesel prices do move into that range however, there’s a potential head and shoulders forming on the charts with March’s rally to $4.67 creating the left shoulder and April’s spike north of $5.85 as the head. That pattern could ultimately mark the end of the bull market in ULSD, but it still could take months before that plays out, IF it happens at all.
OPEC announced it would accelerate its output restoration to pre-COVID levels, which did bring about a brief round of selling, only to see those losses turn to gains when multiple reports reminded people that this was in no way a replacement of the Russian barrels that are lost or redirected by sanctions.
RIN prices saw a big rally Thursday following another rumor report that the EPA would increase the 2021 renewable volume mandates, rather than easing them to help lower fuel prices as had been rumored over the past few weeks. The agency is under a court order to release its long overdue blending requirements for 2020-2022 later today.
The DOE’s weekly report showed a large draw in crude oil inventories despite the ongoing SPR release, and refiners struggling to keep up with the product demand both domestically and abroad. Refinery hiccups continue to hamper the efforts, with the system stretched tighter than it’s been in decades with so much capacity taken offline in the past 2 years. The one notable exception in refinery activity is seen in PADD 1 where the plants that had been knocking on death’s door for years have now been able to increase run rates for 5 straight weeks to their highest levels since the start of the pandemic.
Tropical Storm Alex is expected to be named later today, but fortunately is steering far south of the Gulf Coast refining network as it heads towards Florida. The other good news with this storm is that it’s moving forward quickly which should minimize the impacts on land.
The May payroll report showed an estimated increase of 390,000 jobs in the US last month, while the headline unemployment rate held steady at 3.6% and the U-6 rate ticked up to 7.1%.
Week 22 - US DOE Inventory Recap
For A 2nd Straight Day, Reports That Saudi Arabia May Be Working A Plan To Offset Russian Oil Markets Has Caused A Wave Of Selling In Energy Markets
For a 2nd straight day, reports that Saudi Arabia may be working a plan to offset Russian oil markets has caused a wave of selling in energy markets. For a 2nd straight day that selling has proved short-lived however, as the realities of supply shortages that will only get worse with sanctions has pushed gasoline prices to new all-time highs in most US regions.
OPEC & Friends are meeting today, and the US President is planning to fly to Saudi Arabia to try and cut a deal that would help him get reelected lower fuel prices both of which will provide plenty of headlines and likely keep the volatility elevated as the trading machines try to react to each rumor or bit of news.
The API reported small inventory declines in oil and gasoline stocks last week, while distillates saw a small build. The DOE’s weekly report is due out at 10am central today. Watch refinery runs and exports to see how US plants are struggling to keep up with supplying markets both domestically and abroad.
Yesterday marked the official start to the 2022 Atlantic hurricane season, with another above-average year for storms forecast. Right on cue, the first storm of the year may hit Florida this weekend as remnants from a Pacific hurricane may reform. That hurricane FKA Agatha when it was setting records in the Pacific is now given an 80% chance of developing into a tropical storm named Alex in the next 2 days. While that storm is staying far away from US refineries, it did knock a major Mexican refinery offline when it made landfall.
May Trading Ended With Some Fireworks As Refined Products Saw 20 Cent Price Swings In Tuesday’s Session
May trading ended with some fireworks as refined products saw 20 cent price swings in Tuesday’s session, and June is starting off with double digit gains pushing some gasoline prices to fresh all-time highs this morning.
The partial embargo of Russian Oil announced by the EU, and subsequent retaliation from Russian energy companies, had prices soaring for most of Tuesday’s session, only to see a sharp pullback in the afternoon following reports that OPEC may exempt Russia from their output agreement, which would pave the way for the very limited amount of spare capacity globally to come back online without undermining the cartel.
Read here to see how Russia is evading sanctions by shipping more oil to Asia, how that’s disrupting the tanker market, and why the EU’s insurance sanctions may matter more than the oil embargo itself.
Last, if you’re still scratching your head as to why prices continue to push north of $4 even as clear signs of demand slowing are appearing, read this note on why refiners are simply unable to keep up.
The best cure for high prices is high prices: New York harbor diesel prices started May trading $1/gallon or more above most other US markets, but ended the month trading near the low end of the regional range as the insane backwardation that had kept some shippers on the sidelines melted away and encouraged more barrels to move up the Colonial pipeline. For markets across the south eastern US, the question now is whether or not regional diesel supplies will recover in similar fashion over the next week or two now that the regional spreads have come back inline.