News & Views
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.
After Another Big Rally Wednesday, Energy Prices Are Seeing A Quiet Start To Trading Thursday
After another big rally Wednesday, energy prices are seeing a quiet start to trading Thursday, with little news so far to give us the expected 20 cent swings we’ve become accustomed to in March. There are multiple summits taking place in Europe this week that will decide the next steps in the efforts to end the war in Ukraine, and the (relative) lack of price movement so far today seems to be the market taking a wait and see approach to those meetings.
Yesterday’s DOE report continued to provide evidence that there simply is not a good short term solution to the global supply crunch, but also that the US is in a much better position than most other countries these days.
Gulf Coast refiners are doing their part to make up for a lack of refined products in other markets, increasing run rates for a 5th straight week, and surpassing 8.7 million barrels/day for just the third time since the COVID lockdowns forced plants to reduce rates, and helped drive the biggest decrease in refining capacity in 40 years. How many would like to ask for a do-over on shuttering those plants in light of recent events? The other notable phenomenon is that PADD 3 run rates surpassed 55% of total US throughput rates as the Gulf Coast states continue to grab market share from those that have declared war on their refiners and are now paying a huge price as a result.
Speaking of which, take a look at the huge drop in diesel imports over the past two weeks in the charts below to see a good graphical representation of the scramble for importers to find distillates on cargo ships to replace barrels coming from Russia, regardless of their original destination. The US still produces 10-15% more diesel than it consumes every day, but domestic markets have to compete with international buyers in the coastal markets, and for the Gulf Coast refiners, it often is more cost effective to send diesel to parts of Europe and South America than it is to some parts of the US thanks to the Jones Act and CARB regulations.
Damage assessments are underway at the Black Sea Oil port that transports roughly 1% of global supply after Russian officials claimed it was shuttered after a storm. It’s hard to know (even before they invaded Ukraine) what’s real and what’s propaganda, but there are signs that the pipeline feeding the port is still operational.
An EIA note this morning predicts that US renewable diesel production will surpass biodiesel production this year, as new plants come online, and the feedstock wars are won by RD as it is not only a drop-in replacement for ULSD, but also commands more environmental subsidies. The report also shows that production growth for both RD and Bio is expected to slow dramatically after the race to convert during the aforementioned COVID refinery shuttering, and the combined total of the two products will only reach 8% of total distillate output in 2050, vs 6% today. So much for Net Zero.
Week 9 - US DOE Inventory Recap
Week 12 - US DOE Inventory Recap
Oil Prices Are Leading The Energy Complex Higher This Morning, After Weeks Of Diesel Prices Leading That Charge
Oil prices are leading the energy complex higher this morning, after weeks of diesel prices leading that charge, following a disruption at a major oil port and another weekly inventory decline.
It’s not just the war that’s hampering oil supplies, as one of the largest pipeline networks that moves more than 1 million barrels/day through Russia was damaged by storms on the Black Sea and may take months to repair. That crude transported by that system (CPC) was exempt from US sanctions as it was predominantly of Kazakh origin, but was also seen as a potential loophole to allow Russian crude to reach foreign buyers because those certificates of origin could be falsified. It’s also expected that Russia will use this as another leverage point, as it controls the timeline of the repairs to the port.
The Dallas FED published a study on the Russian Oil Supply Shock Tuesday, noting several factors that are preventing their oil from reaching the market even without official sanctions, and why a global recession is likely if this persists. A Bloomberg note this morning seems to contradict that idea, noting how millions of barrels of Russian oil are still managing to find their way to the market, even though it’s much more difficult than before.
Chevron meanwhile has made a push to lift sanctions on Venezuelan oil, pledging that it can double the country’s output in just a few months if it’s allowed to resume operations. After sitting on the sidelines for years as its operations were idled, the oil major may have just played the strongest hand of all, offering to help lower gasoline prices in an election year.
The API reported inventory draws across the board last week, with small decreases in both gasoline and diesel of less than 1 million barrels each, while crude oil stocks drew by nearly 4.3 million barrels, which adds another reason for crude prices to outpace products today. The DOE’s weekly report is due out at its normal time this morning.
Energy Futures Saw A Big Pullback Overnight Turn Into Modest Gains This Morning
After a strong Monday session, energy futures saw a big pullback overnight turn into modest gains this morning. It’s been another wild ride for diesel prices, which have already seen a 24 cent price swing in the overnight session, as concerns over a systemic shortage of diesel globally keeps buyers engaged, while disagreements over European fuel sanctions seems to be giving some reason for prices to pull back after rallying 95 cents in the past week.
The overnight pullback may also have to do with reports that the US had sent patriot missile systems to Saudi Arabia to meet an “urgent request”. That delivery may serve to both protect energy infrastructure that’s been attacked by Houthi rebels, and to encourage the Saudi’s to play nice with the US and perhaps increase oil output where it can.
Time for a do-over? The FERC seems to be re-considering the policy changes it published just a week before Russia invaded Ukraine that made the approval process for natural gas pipelines nearly impossible. A WSJ article from a former FERC counsel argues why the agency should take on a war-time stance to promote natural gas shipping, not hinder it.
The SEC has proposed new corporate disclosures that would require companies to report their direct carbon emissions, and estimate the indirect emissions from their operations, and estimate the risk of global warming on their operations. While the intent of this proposal is apparently to provide investors a gauge of the risk they’re investing in, it sounds like we’ll end up seeing more generic disclaimers in financial reports, like the forward Looking statements and other boiler plate risk disclosures included in most SEC filings already.
Is this why they’re moving to Texas? As retail gasoline prices in California approach $6/gallon, new attention is being put on the state’s LCFS and GHG programs that add 40-50 cents to each gallon of fuel. Meanwhile, one of the dwindling number of refineries still operating in the state is now dealing with a worker strike. So far that doesn’t seem to be impacting local spot prices, which are easing after a huge spike last week as another refinery returns units from unplanned maintenance.
It’s Another Strong Start For Energy Markets Monday, Diesel Prices Once Again Leading The Charge Higher
It’s another strong start for energy markets Monday, with diesel prices once again leading the charge higher. ULSD futures are up 20 cents on the day, and roughly 87 cents above their March 15 low, and 87 cents below their March 9 high. There are still many more questions than answers for the two big stories of the war in Ukraine and another COVID wave, but clearly supply concerns are winning out vs demand concerns in the early going.
Baker Hughes reported a net decline of 3 oil rigs actively drilling in the US last week, while natural gas-focused rigs increased by 2. The slower-than-normal recovery in drilling over the past year has been well documented as banks are hesitant to lend to fossil fuel producers due to ESG pressure, leaving the smaller independent firms as big winners with oil over $100. A big question for the next few months is whether or not the warn on Russian oil will give the banks a reason to side step environmental pressures and go back to chasing the real green deals they’re interested in, and if so, how quickly can new projects bring oil and gas to market.
The surge in petroleum prices brings with it several different consequences, including a jump in retail fuel theft, and economic viability of several alternative fuels. A Rystad energy report this morning highlights the improving economics of Green Hydrogen production in Europe, although capacity remains limited. The flip side to this phenomenon is that LCFS credits in California plunged to a 4 year low in the past week as increasing renewable diesel and natural gas production are adding more supply to the market. See chart below.
Great or terrible timing? Money managers saw a big increase in short positions for WTI, ULSD and Gasoil contracts last week, which may mean some big funds feel like heroes if they sold the prior Wednesday before diesel prices dropped $1.75/gallon, or like goats if they sold later and were run over by the 80 cent rally of the past few days. Brent crude meanwhile saw the opposite with short positions dropping while new longs were added along with a jump in open interest, which makes sense given the relative lack of options for Europe vs the US.
Refined Products Are Seeing A wave Of Selling This Morning As Another Volatile Week Winds Down
After a huge Thursday rally, and a strong overnight session, refined products are seeing a wave of selling this morning as another volatile week winds down. The trading ranges already today are around 12 cents for both gasoline and diesel contracts, which would have been eye catching a few weeks ago, and now seems pedestrian in comparison to the March Madness we’ve experienced so far.
Speaking of which, ULSD futures rallied 38 cents yesterday, which would have set a daily record before March, and now it barely warrants a mention after 2 weeks where 30 cents moves became the norm.
The back and forth action this week seems to boil down to two issues: There is still no good answer to dealing with a shortage of Russian commodity supplies in the near term, while global demand may be setting up for a steep fall.
The IEA released a 10 point plan to reduce oil demand and avoid a global energy crisis that looks like it was a fun project for a class in middle school. In short, they’re encouraging everyone to go nowhere slowly.
Unfortunately, it looks like Europe and China have their own plans for reducing energy consumption known as the BA.2 COVID wave is forcing new restrictions, and there are early indicators that the latest wave is already spreading in the US.
Net 56? Despite so many Net-Zero by 2050 pledges, the EIA is projecting that renewables will make up just 44% of US Electricity supply in 2050. The report estimates fossil fuels will drop from around 60% today to 44% in 28 years.
Oil Prices Surged Back North Of $100/Barrel This Morning
Just when it seemed like maybe things were calming down a little, Oil prices surged back north of $100/barrel this morning, and distillates rallied 32 cents on the day, an increase of more than 50 cents from Tuesday’s lows, despite clear warnings that another COVID wave is coming.
The latest price spike could be caused by fading optimism for a cease fire in Ukraine, or more signs that the world hasn’t seen the worst of the diesel supply crunch as cargoes purchased before sanctions crippled Russia’s exports are still offloading. It could also be driven by technical factors after the weekly trend-line that’s held prices up for 4 months survived the manic meltdown we witnessed last week.
While diesel stocks didn’t increase by much last week, they did mark the first time so far in 2022 that inventories haven’t declined. The increase seems due to a huge drop in the DOE’s implied demand estimate, which went from above the 5 year seasonal range in last week’s report, to below that seasonal range yesterday. Given the notorious inaccuracy of the weekly estimates, it seems plausible that we’ll see a big bounce back in consumption next week, along with another drop in inventories which remain well below their normal range, and may help explain part of why ULSD prices have bounced so sharply the past two days.
Also note the substantial drop in refined product imports in the charts below and it’s easy to see why the East and West coast markets are both struggling with supply as cargoes have been diverted to other countries since the start of the war.
Gasoline inventories are continuing their seasonal drawdown as they normally do during the spring RVP transition, with West Coast inventories seeing the biggest weekly drop, and helping explain the huge spike in basis values over the past week.
Week 11 - US DOE Inventory Recap
Energy Prices Are Bouncing After 2 days Of Heavy Selling To Start The Week
Energy prices are bouncing after 2 days of heavy selling to start the week. While the moves so far are mild compared to what we’ve been used to so far in March, technical and fundamental factors are hinting that there may be more room to move higher in the weeks to come.
RBOB futures closed the chart gap left behind by the roll to the summer spec contract at the end of February during Tuesday’s melt-down, but held above its bullish trend-line on the weekly report, both of which are bullish factors leaving room on the charts for more upside just in time for the seasonal jump in demand. ULSD also managed to hang onto the upward sloping trend line despite dropping 30 cents on Tuesday, and was rewarded with a 10 cent bounce so far today.
The IEA is reducing its global oil demand estimate by 1.3 million barrels/day for the rest of the year, and its refinery throughput by 1.1 million barrels/day both due to the war in Ukraine, which it says, “…could turn into the biggest supply crisis in decades.” The report also notes that only Saudi Arabia and the UAE have the capacity to bring more oil to the global market quickly, and the other options will take several months at a minimum, IF agreements can be made.
OPEC left its global demand estimate “under assessment” in its March oil output, acknowledging that the fallout from the war in Ukraine will lead to a decline in consumption, but not willing to make an official guess by how much given the chaotic and rapid nature of the changes taking place in the global economy.
Speaking of which, the chaotic trading of the past couple of weeks is also creating concerns of a repeat of the 2008 liquidity crisis, with billions of dollars in margin calls putting some companies on the brink of insolvency. Since 2008, banks have been finding new ways to circumvent the laws put in place to keep them acting like banks and not the biggest oil traders in the world (which is why the actual traders have to rush their EFP orders to the exchange in 15 minutes or less) and now Barclays has announced it was suspending its ETN tied to crude oil after it realized that pushing these contracts on its customers is not a good idea when prices are moving this quickly.
For those that remember the oil price spike that killed Semgroup in 2008, and its “bank’s” alleged role in that short squeeze, it’s not hard to imagine the fallout that could still come from the whipsaw action we just witnessed over the past two weeks.
If you think that’s a little dramatic, just look at what happened in the Nickel market again this morning.
Speaking of dramatic, West Coast gasoline markets are doing their diva impressions once again, with basis values in both northern and southern California soaring to nearly $1/gallon over futures as refinery disruptions and a lack of replacement options thanks to the state’s boutique grades hammer those markets while other regions have enjoyed a bit of relief as prices have pulled back sharply over the past week.
The API reported a draw in gasoline stocks last week of nearly 3.8 million barrels, while distillates had a small build of less than 1 million barrels. There is plenty of evidence of a spike in demand over the past couple of weeks as consumers panicked over rising prices and potential supply shortages, which could manifest as large inventory draws in today’s DOE report.
The FOMC announcement is expected at 1pm central. According to the CME’s fedwatch tool, just about everyone expects a 25 point rate increase today (the first increase in 3 years) and just about everyone is planning that this will be the first of at least 6 rate hikes for the year.
The March Rally In Energy Prices Has Been Erased, With RBOB, WTI And Brent All Trading Lower This Morning
The March rally in energy prices has been erased, with RBOB, WTI and Brent all trading lower this morning than where they started the month. ULSD prices haven’t quite given up all of their gains for the month yet, but they have dropped $1.70 in less than a week, which apparently is a lot.
After weeks of supply fears dominating the discussion, demand declines are suddenly taking over as 50 million people were placed on lockdown in China over the past 2 days, as the country deals with its worst COVID outbreak since the start of the pandemic 2 years ago.
Unlike two years ago however, a lockdown like this is viewed as another possible inflation driver as factories are forced to close, adding another challenge to the beleaguered global supply network, which means central banks (probably) won’t be coming to the rescue this time. That reality seems to have equity and bond markets nervous, with 10 year treasuries moving near a 3 year high and the yield curve tightening again ahead of the FOMC meeting.
Reports of progress in peace talks in Ukraine are also getting credit any time the market drops, even though there seem to be plenty of other headlines suggesting little progress is being made, which will come in handy whenever prices rally again.
Likewise, reports of new negotiations between oil producing countries like Saudi Arabia and Venezuela, and consuming countries like China and the US are easy headlines to pin a move lower, and then to blame if they fail and prices rally.
From a chart perspective, refined products survived their first test of the weekly trend lines that have been in place since early December, which could give the bulls a reason to buy this very large dip.
Speaking of buyers: You may not even know there’s a pullback happening if you live on the West Coast as CARBOB basis values have spiked this week, offsetting the drop in RBOB futures. While Midwestern fuel prices continue to trail their coastal counterparts in most cases, we’ve seen a rally of 20 cents or more for both diesel and gasoline differentials in Chicago and Group 3 trading over the past week as calendar spreads for futures have come back closer to reality, and the winter demand doldrums look to be in the rearview mirror.
OPEC’s monthly report and the API weekly report are both due out later today, while the DOE and FOMC announcement will be out tomorrow.
It’s A Relatively Quiet Start To The Trading Week, With Only 14 Cent Price Swings for Refined Products in Overnight Session
It’s a relatively quiet start to the trading week, with only 14 cent price swings for refined products in the overnight session. The past two weeks smashed records for price swings in both the ULSD and RBOB futures contracts, giving today’s early sell-off a feel of calm before another storm.
80 cent swings in gasoline prices would be the lead story in most cases, but they pale in comparison to the wild action we just experienced in the ULSD (HO) contract last week, with a $1.50 trading range that nearly tripled the largest weekly range prior to the war in Ukraine. The HO contract had its single biggest daily gain ever adding 52 cents/gallon on Tuesday, but still lost 35 cents, making it the 5th largest weekly loss on record.
The new form of diplomacy? Iran fired missiles into Iraq over the weekend, claiming it was retaliation against Israel, who had apparently killed Iranian fighters in Syria, and allegedly meddled in the nuclear negotiations that fell apart last week. Based on the market reaction today, nobody is too scared of Iran right now.
The FED’s much anticipated FOMC meeting kicks off tomorrow and just about everyone expects a 25 point hike in interest rates to be announced Wednesday. The CME’s Fedwatch tool shows a 96% probability of a 25 point hike, whereas a month ago before Russia’s invasion sent global markets into chaos, 60% thought there would be a 50 point hike. 10 year treasury yields are trading near a 3 year high this morning ahead of the meeting.
The EIA this morning took a closer look at where Russian energy exports were going, highlighting the well-documented struggles for Europe to replace oil and gas supplies, and not-well-documented amounts of coal that traditionally moves to countries in Asia.
Commodity Futures Has Created Whipsaw Action In Physical Markets For Refined And Renewable Fuels
This week has already seen record high prices, the biggest daily increase, biggest daily decrease and biggest trading ranges ever for refined product contracts, so it’s not too exciting to say that we’ve already seen double digit moves both higher and lower in the overnight session.
Just like most people say about their own state’s weather (as if they’re the only ones that experience this) if you don’t like the market move, just wait 15 minutes.
The chaos in commodity futures has created whipsaw action in physical markets for refined and renewable fuels, RINs and carbon credits, not to mention little things like global stocks and currencies. There’s not much signaling an end to the volatility yet, and the traditional March Madness tips off next week.
See below for a short list of factors that have kept the volatility at extreme levels this week.
Blow-off Top this week keeps speculators at bay
High prices will hurt demand
US Supplies were already low before the war
Diesel Prices Smashed Their All-Time Record By 50 Cents/Gallon In The Overnight Session
Gasoline prices were already up more than 12 cents this morning, and diesel prices were up more than 25 cents, and yet it feels like a nice calm day compared to the chaos we’ve just experienced.
Diesel prices smashed their all-time record by 50 cents/gallon in the overnight session Wednesday, trading as high as $4.67 (vs the 2008 high of $4.15) before plummeting more than $1.30/gallon on the day, and settling down 97 cents. That’s a pretty volatile year for diesel prices, and to have it happen in a day is a good lesson for the bandwagon jumpers who have been trying to find new ways to “invest” in energy contracts in recent weeks.
It’s ironic that diesel prices dropped $1/gallon on the day that the DOE reported some very bullish inventory data for distillates. US diesel inventories have been tight, well below the seasonal ranges in most markets, for some time, and now we’re seeing a big drop in imports and surge in exports as the global supply chain races to reconfigure. Add to that demand levels that are above the seasonal range and you it’s easy to understand why diesel stocks dropped to an 8 year low yesterday, and the extreme backwardation that we’ve been dealing with the past few weeks. Currently the US is sitting on approximately 26 days’ worth of diesel supplies, vs a seasonal average of 35 days, and with refining capacity dropping sharply the past two years thanks to COVID and race to “go green” there’s much less cushion to absorb a supply shock like we’re experiencing.
RINs and Carbon credits saw a recovery rally as refined products plummeted Wednesday, in what appears to be some hope that prices cooling may prevent an extreme demand shock like we saw in 2008.
From a chart perspective, we’ve never seen anything like what we’ve witnessed in the past two weeks, but despite yesterday’s huge pullback, the bullish trends on the weekly charts are still intact and pointing to higher prices ahead.
Week 10 - US DOE Inventory Recap
Another Day, Another 60 Cent Swing In Diesel Prices
Another day, another 60 cent swing in diesel prices. Last week, ULSD futures set a record with a 34 cent price increase and a 45 cent trading range in 1 day, and this week, we’ve already seen a 51 cent increase followed by an 60 cent drop this AM. To put that in perspective, there had only been 3 months since 1999 that have experienced a 70 cent trading range, and we’ve already had an 87 cent swing this morning.
Gasoline futures haven’t been quite as volatile as ULSD, but still the past 7 trading days all rank in the top 10 all time for biggest swings on the gasoline contract. West Coast physical gasoline has surged well beyond futures as a rash of new refinery hiccups, and the loss of a crude import option from Eastern Siberia seemed to combine Tuesday to send spot values north of $4/gallon, nearly 80 cents above priced in the middle of the country.
While East Coast gasoline prices are 50 cents or more below their West Coast cousins, there have been multiple terminal outages reported in the past 24 hours as cargoes destined for the US have been diverted to Europe, putting strain on the NYH barge system. These extremes on the coasts create the first real test for US consumers that have railed against receiving Russian crude and product imports, and now are getting their wish.
The API reported a large decline in US diesel inventories last week of nearly 5.5 million barrel, which seemed to help ULSD continue surging to a fresh all-time high late Tuesday afternoon, but is an afterthought this morning as diesel prices now are experiencing their biggest single day drop in history (47 cents) 1 day after they experienced their biggest daily increase of 51 cents. The DOE weekly report will be released at its normal time this morning, and you’ll be forgiven if you don’t pay attention to it.
Another Day, Another 40 Cent Swing In Diesel Prices As The Parabolic Move Higher In Energy Prices Continues
Another day, another 40 cent swing in diesel prices as the parabolic move higher in energy prices continues. ULSD prices reached a new record high this morning at $4.3437. Prior to yesterday, the record was almost 20 cents lower. Prior to March, the most severe 12 month backwardation in HO futures for a 12 month span was just under 50 cents/gallon. Today, prices 12 months forward are more than a $1.10/gallon cheaper than prompt values.
The rest of the energy complex are having huge weeks on their own, but are failing to keep pace with the runaway diesel prices. RBOB futures set a record high Sunday night, and although they’re up 16 cents on the day, they’re still 16 cents below that high trade of $3.89. Similarly, WTI is up $6/barrel today but remains more than $5 below yesterday’s high trade of $130/barrel.
After another night of big price swings, it looked like perhaps futures were calming down for the day with RBOB “only” up a nickel and ULSD only up 13 cents on the day, then news broke that the US president would ban Russian oil exports and another big rally was on. Perhaps later this morning people will realize that Russian oil was already effectively banned a week ago when companies stopped buying it voluntarily and prices will cool off, but then again, it’s another reminder that there is no short term replacement globally for Russian crude, and that we could still see prices move much higher as a result.
While pain at the pump is real as retail gasoline prices will smash all-time highs this week, the impact of diesel prices on the economy should not be overlooked. This $1.50 increase in diesel prices in 2 weeks is going to create huge cost increases for commercial and industrial users, which will trickle down into the cost of good and transportation. Worst of all, for airlines just climbing out of the COVID hole, that may not have had a hedging program in place – or had a program priced on crude instead of distillates - a spike in prices like this could end in bankruptcy.
Start thinking of the trickle down impact of those soaring diesel prices and it’s easy to see why the stock market hates this price spike so much, and why the end of this spike may be caused by a collapse in demand.
Speaking of lower diesel demand, the White House announced new plans and funding to reduce emissions from trucks and buses in the US by handing out money to convert to electric or hydrogen powered vehicles. The timing couldn’t be better as anyone who didn’t hedge their diesel spend this year will be looking for options.
The First 4.5 Trading Days Of March Have Smashed Records For Daily Price Swings And Increases
Good news: gasoline prices are down 28 cents and diesel prices are down 33 cents from where they were trading last night.
Bad news: both contracts reached record highs last night in the first few minutes of trading, and are still showing large gains from Friday despite the pullback.
The first 4.5 trading days of March have smashed records for daily price swings and increases as the world comes to grips with the idea that there is no short term solution to replace Russian petroleum supplies, making the risk of both volatility and government intervention higher than ever. For both ULSD and RBOB, these would be the largest monthly gains on record if prices hold, and we’re not even through a full week yet.
For ULSD, we’ve already seen the biggest monthly trading range ($1.30/gallon) in just 4.5 days of trading, while the RBOB range of $.95 ranks third all-time behind the March 2020 and December 2008 market meltdowns that both surpassed $1/gallon.
An official Russian oil embargo (vs the current unofficial and voluntary embargo) was floated over the weekend, while renewed negotiations to reduce sanctions and increase oil output with both Iran and Venezuela seem to be going nowhere, and both seem to be factors in the latest price spike.
Already, even though energy products aren’t officially sanctioned (yet), we’re seeing dramatic signs of the impact a lack of international buyers is having on its refining operations, as plants are forced to cut run rates and halt crude intake due to a lack of storage for their production. Refinery maintenance and upgrades are also expected to be hampered without access to foreign technology.
Regional supplies in the US have been disrupted over the past two weeks by a pair of Kinder Morgan pipeline issues, and a handful of (so far minor) refinery disruptions. The coastal markets remain tight in general, while inland markets remain well supplied, and lacking transportation to help alleviate their glut, and/or take advantage of the record spreads from the middle of the country to the edges.
RIN values pulled back on Friday, even as Corn, Soybean (and refined product) prices continued to spike. A “news” article suggesting the White House was considering a biofuel waiver to help curb food inflation seems to have been the driver of that selling. Other non-food-based environmental credits like the European EUA’s, and California’s LCFS and CCA credits are all seeing heavy selling as expectations rise for both demand destruction, and a change of heart from governments that just a few weeks ago still thought having clean energy was more important than having energy.
Short covering was the theme of the week for money managers, that saw large reductions in the short positions held in energy futures. WTI and Brent saw some modest new length enter the market, but the lack of “piling on” at least in the first two days of the week when the CFTC data is collected, suggested these huge swings may be too hot to handle, even for the big speculators.
Baker Hughes reported a decline of 3 oil rigs working in the US last week, snapping a 5 week streak of increases. Natural gas rigs increased by 3, the 9th straight week of gains for natural gas focused drilling.
Another Day, Another 20 Cent Swing In Energy Prices In The Overnight Hours As The War In Ukraine Continues To Get Worse
Another day, another 20 cent swing in energy prices in the overnight hours as the war in Ukraine continues to get worse, and there’s little hope for a resolution on the horizon.
The past 4 trading days each rank in the top 11 all-time for the largest daily price swings in ULSD futures dating back to the early 1980s, and there were entire years where we didn’t see prices swing like we have the past couple of days. So, if you’re feeling a little worn out after this week’s market chaos you have good reason, and also a good reason to be thankful your biggest concern is big swings in fuel prices.
Basis markets around the country have had some big swings of their own as both the US Gulf Coast and NY Harbor are seeing multi year highs for ULSD spreads.
The phenomenon of tight coastal markets and well supplied mid-continent markets shows up well on the Diesel basis chart below as Group 3 and Chicago values are trading 25 cents below the Gulf Coast and 35 cents below NYH values as anything that can hit the water has found a strong bid to (theoretically) supplement the supplies no longer being exported from Russia. Meanwhile, the landlocked barrels are dropping to offset the spike in cash spreads, as Midwest supplies are ample and don’t command the extreme backwardation we’re seeing elsewhere.
The February jobs report showed strong growth in the US, with an estimated 678,000 increase in payrolls for the month, and the estimates for January and December were both revised higher. The headline unemployment rate dropped to 3.8%, which is getting close to where it was prior to COVID hitting 2 years ago. The U-6 (aka real) unemployment rate actually ticked slightly higher from 7.1 to 7.2%.
Wednesday Saw The Largest Single Day Increase In The 40+ Year History Of The HO Futures Contract
Wednesday saw the largest single day increase in the 40+ year history of the HO futures contract. The top 10 single day increases are listed below.
So, what does the contract do the day after rallying 35 cents? In this case, it rallied another 35 cents overnight spiking to $3.84, which marked a $1/gallon increase from where prices were last Friday, only to pull back by 33 cents to trade up only 2 cents on the day as of 7:37 central. By the time you read this it will probably have moved another dime in one way or another.
RBOB futures weren’t quite as dramatic as ULSD, “only” rallying 22 cents on the day, but they did come within 11 cents of reaching their all-time high overnight, meaning record high retail prices are coming just in time for driving season and there will be no shortage of news stories asking experts what they think prices will do next while they fill up their tanks.
The DOE released its weekly status report Wednesday, and pretty much nobody cared. Perhaps most noteworthy from the report is that the coastal markets were already tight, and the inland PADDs were long heading into this week, and the fallout from the war in Ukraine will only make that phenomenon more pronounced. This has opened huge arbitrage windows to truck fuel from inland markets to the coast, with the problem being that still requires drivers to operate those trucks. Charts are below.
Energy Futures Contracts Are Up 70-80% As The Explosive Rally Has Gone Parabolic
Yesterday we said energy futures were up 60% since Early December, and today we can say that those same contracts are up 70-80% as the explosive rally has gone parabolic.
While Russian energy exports have not been explicitly targeted (and in fact have been explicitly left off of official sanctions to try and avoid this exact type of price behavior) the reality is Russian commodities are seeing de-facto sanctions as buyers (and oil majors) around the world avoid any association with the country.
Unfortunately, the reality is that in the near term the only solution to high prices without a rapid de-escalation in Ukraine is demand destruction as consumers become unable, or unwilling, to pay the higher prices.
That expected demand destruction is visible in the forward pricing curve for WTI where 3 year forward values have actually moved lower over the past week even as prompt values have skyrocketed. The concern over future demand is also visible in environmental credits which plummeted Tuesday as it appears that not only will energy consumption drop, but so too will the environmental movement as a priority compared with energy security.
ULSD highest since August 2008, on its way down from $4.15 in July 2008 to $1.13 in February 2009. Hopefully the demand destruction this time around won’t be nearly as bad as it was then.
WTI highest since May 2011, as prices cooled following the “Arab Spring”. WTI prices are now more than $150/barrel higher than they traded April 20 of 2000 when prices went to negative $40.
RBOB: Highest since September 2012, after prices spiked following Hurricane Isaac.
Brent: Highest since June 2014, just before prices collapsed as OPEC decided to have a price war with US Shale producers.
Oil Prices Are Now Up 60% Since Early December
Energy prices are surging again Tuesday as a resolution to the war in Ukraine that minimizes the damage to human lives and the global economy look less likely by the hour. Oil prices are now up 60% Since early December, and refined product prices have increased by more than $1/gallon in that time.
The playbook for international relations since the end of WWII is being rewritten this week, with countries on both sides of the war taking drastic measures that were unthinkable just a few months ago. In addition to the coordinated sanctions targeting the Russian economy, BP and Shell have walked away from their partnerships with Russian oil and gas majors Rosneft and Gazprom, leaving billions of dollars in investment behind along with many questions about how the global supply chain will replace Russian exports.
Fortunately for those in the US, supply challenges are still measured in allocations and not physical outages or forced curtailments in consumption. While the price volatility has suppliers changing prices much more rapidly than normal, and supply allocations tightened down across the country, actual outages are rare even though petroleum inventories are below normal levels across most of the country.
The Plantation pipeline was reported to come back online Sunday night, which gave suppliers across the South East a few minutes of relief that there would not be a major physical supply disruption adding to the chaos in financial markets.
The IEA is holding a meeting today to discuss a coordinated SPR release, which may provide a short term pullback in prices, but does little to alleviate long time fears as long as the world’s 2nd largest energy supplier is threatening everyone else.