Market Talk - 2022 march
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Energy Futures Are Moving Sharply Lower To Start The Last Trading Day In The Most Volatile Month On Record
After another strong rally Wednesday, energy futures are moving sharply lower to start the last trading day in the most volatile month on record. Reports that the White House would be announcing a major release of oil from the SPR is getting most of the credit for the early selloff, while the inverted yield curve and COVID lockdowns are also easy targets any time prices pull back.
It’s the last day for April RB and HO contracts, so watch the May futures (RBK/HOK) for price direction today if your region hasn’t already made the move to the new month. So far, despite a 15 cent drop, the April HO contract has not done anything too wild today, but given all the records that contract has already set in March, don’t be surprised to see some fireworks before today’s settlement.
If the rumored/reported SPR release of up to 1 million barrels/day for 6 months happens, it would be by far the largest drawdown in history, making previous releases such as during Gulf War 1, barely show up on the chart in comparison (see chart below). This move – IF all 180 million barrels of it happens – would also draw down SPR inventories to a 40 year low by the end of the year.
US refiners are running hard, increasing output past 92% of nameplate capacity last week, which is at the top end of the seasonal range. While these refiners are seeing the best margins in nearly a decade, after many barely survived the COVID/ESG combo the past two years, there is also a bit of a warning here that plants are reaching the top end of their sustainable output levels, while domestic demand may still be far from peaking this year unless there’s an economic slowdown.
Domestic oil output did tick higher for the first time in two months, but the DOE’s estimate was only up 100mb/day on the week, putting it on par with where the year started, and proving once again that restarting shuttered operations, and overcoming natural well decline, takes a lot longer than many would like. Still, with oilfield hiring and spending reaching new records in some markets, the supply increase does seem to be coming later in the year, and the big questions are just how long will it take to add back the 1.4 million barrels/day that were taken out of service during the COVID lockdowns, and will those barrels come back online just in time for the world not to need them, especially if the SPR release happens, and lead to the next bust in prices?
We don’t often talk about jet fuel prices in this note, but it’s worth mentioning that NY Harbor saw a new record for Jet A prices Wednesday with basis values getting close to $1/gallon over April futures, and more than $1.25/gallon over its Midwestern counterparts. Inventory charts at the end of the DOE chart list below show that PADD 1 inventories are well below their 5 year range, while PADD 2 stocks are above average, in another sign of how coastal markets are being influenced by the cargo chaos in response to the war in Ukraine, while inland markets are insulated.
Week 13 - US DOE Inventory Recap
Energy Markets Saw A Huge Bounce Off Of Tuesday’s Early Lows
Energy markets saw a huge bounce off of Tuesday’s early lows, as hopes for a de-escalation of the fighting in Ukraine quickly faded and the threats of a recession take a back seat to supply concerns once again.
After a big move lower that put some contracts near a technical breakdown Tuesday following reports of Russian troops shifting away from Kyiv, some people must have realized that Russia also claimed to have pulled troops back just a few days before invading in February and suddenly those big early losses evaporated heading into the afternoon.
In addition to the reality that the war in Ukraine is probably a long way from over, European countries made their next moves in their chess match over Russian energy supplies. Poland said it was working to end Russian oil imports by the end of the year, while Germany warned consumers to conserve energy as it may be cut off after refusing to pay for its natural gas supply in rubles.
It’s not just futures markets that are seeing more big swings this week, basis markets around the country are seeing large moves as traders react to rapidly evolving supply realities, refinery upsets and huge swings in calendar spreads. The West Coast continues to see the most dramatic moves, with gasoline differentials completing plummeting 80 cents or more over the past 2 weeks, after rallying 90 cents to start the month.
The API reported inventory draws across the board again yesterday, with crude oil stocks estimated to drop by 3 million barrels, gasoline down 1.3 million and diesel stocks down 215k for the week. The DOE’s weekly report is due out at its normal time this morning. Crude output and refinery runs should be watched in today’s report to see if the uptick in drilling activity over recent weeks shows up in increased production – which has been stubbornly stagnant so far in 2022 – while refinery runs will be tested as plants ramp up to meet increasing demand after the big drop in capacity over the past 2 years.
Speaking of which: A report Tuesday suggested that after a brief dip due to Omicron, US road traffic volumes have recovered to pre-pandemic levels, just in time for the global supply crunch. The report does estimate that record high retail prices may curb demand this summer, but unless job growth slows, there should still be more increases in demand as we enter the driving season.
Today Makes The 5th Biggest Drop On Record for ULSD, All Before 8AM
After one of the biggest sell-offs in history Monday, refined products were rallying overnight with 7 cent gains for RBOB and ULSD. Then, around 7am central, reports that Russia was pulling back some of its troops from Kyiv created another wave of selling, that would make today the 5th biggest drop on record for ULSD, all before 8am.
There seems to be a perfect trifecta now for the bears, with COVID lockdowns, the pullback in Ukraine, and the potential for an inverted treasury yield curve foreshadowing a recession. The big question now comes on the charts to determine whether or not all of those factors are enough to break the bullish trend-line that’s supported the largest price rally in history, or is this just another bit of volatility in the month that’s blown away all records for daily price swings.
Energy Prices Are Coming Under Heavy Selling Pressure To Start The Week As China Was Placed On Lockdown
Energy prices are coming under heavy selling pressure to start the week as the world’s 3rd largest city, home to nearly 30 million people, was placed on lockdown to try and slow the spread of the latest COVID wave. There is also an apparent shift in Russian strategy in Ukraine that some see as the first step towards the eventual de-escalation of the war which may be contributing to the selling.
Despite the pullback in futures, US product markets remain relatively tight, and periodic supply outages at terminals on the East and West coasts still ongoing as international buyers outbid each other for cargoes, throwing a wrench into the supply network.
The selling has not yet threatened the bullish trend lines on the weekly charts, and we’ll need to see another $4-5 drop in crude and 15-20 cents in refined products before getting too excited about this latest pullback.
Baker Hughes reported a net increase of 7 oil rigs actively drilling in the US last week, with Texas seeing a net increase of 6, and the Permian basin adding 3. The total rig count of 531 is a new 2 year high, as we approach the 2 year anniversary of when the first wave of COVID lockdowns had drillers laying down rigs at a record pace. While we’ve seen 359 rigs added since drilling activity bottomed out later in 2020, we’re still roughly 350 rigs shy of the 2019 peak, and more than 1,000 rigs less than what we saw before prices crashed in 2014.
High prices have brought back investor interest in oil and gas production, after years of high finance pretending to go green. That renewed interest shows up in the Dallas FED’s energy survey, with growth accelerating in Q1, even as supply and labor bottlenecks push costs to record highs. That report also notes that most energy executives in the survey believe capital discipline, not ESG has had more influence on the restrained pace of growth in the past year.
Money managers added to their net length (bets on higher prices) in WTI, Brent, RBOB and Gasoil contracts last week, jumping back on the bandwagon after it appeared safe to say prices found a short term bottom around March 15. The exception last week came in ULSD that saw a 15% decrease in length as new shorts were added and old long positions liquidated after prices had rallied more than $1/gallon from the mid-month low. Those new shorts look pretty smart today, assuming they held on to those positions since Tuesday when the report data was compiled.
ULSD Prices Down Almost 14 Cents On The Day After Being Up Nearly A Nickel Overnight
Energy futures saw a heavy wave of selling in the past hour that had ULSD prices down almost 14 cents on the day after being up nearly a nickel overnight, while RBOB prices dropped a dime from their overnight highs. But, as has come to be the March norm, if you don’t like those prices just wait 15 minutes and they’ll change.
Prior to this morning it had been another strong week for most petroleum contracts, and so far the wave of selling (and subsequent bounce) hasn’t threatened any trend-lines, so it’s too soon to say this is anything more than a brief pullback.
There are 5 more trading days for the April ULSD contract, which has already smashed the all-time record for highest price, and has now broken the record for the largest single month timing spread, trading 37 cents over the May contract earlier today. That extreme backwardation continues to wreak havoc on basis markets around the country, with some regions seeing record lows, while others are seeing record highs, depending on which side of that HO curve they’re trading.
A promise to ship more US LNG to Europe is getting the headlines, but really it’s more likely the lack of European sanctions on Russian energy that are contributing the selloff, as the actual capacity for more LNG shipments in the near term are limited.
Why are LNG shipments limited when the US has so much natural gas and has been expanding its export capabilities for years? The main reason is those LNG export facilities were already at or near capacity, as they signed long-term commitments with buyers in order to ensure the multi-billion dollar investments needed would pay off, and then a distant second because the FERC recently decided to make the process for approving new natural gas pipeline systems extremely challenging to protect the environment, which makes some yearn for the days of The Big Inch.
The US charged 4 Russian Government officials for hacking operations targeting US energy facilities and a Saudi oil refinery from 2012-2018. The timing of the charges is no doubt intended to add pressure to Russia, and to US companies that have been warned repeatedly of the potential for cyberattacks. Anyone in the refined products industry shouldn’t need a reminder of that threat as we approach the 1 year anniversary of the Colonial pipeline shutdown.
Meanwhile, in other refinery news, unconfirmed reports this week have surfaced that Russian forces accidentally bombed their own oil refinery this week, in what would be a nice bit of karma to end the week with, if it’s true.