News & Views
Confirmation Of A Partial Ban On Russian Oil Imports Throughout The EU Has Lit A Fire Under Energy Futures Prices This Morning
Confirmation of a partial ban on Russian oil imports throughout the EU has lit a fire under energy futures prices this morning. In a last-minute compromise to pass the embargo, the Union decided to block all Russian imports except those which arrive by pipeline, which make up somewhere between 15%-30%. Energy prices reacted to the news of less supply in the market as expected with the prompt month WTI futures jumping 3% to over $118 per barrel.
The July RBOB contract, being referenced by the majority of physical markets since the June contract expires today, is exchanging hands at over $4 per gallon, a dime over Friday’s settlement. July HO futures are outpacing their counterparts, adding 20 cents so far this morning, likely due to news that the Netherlands is the latest addition to the list of countries Russia has cut natural gas supplies to. Poland, Bulgaria, and now the Netherlands were all cut off for refusing to pay in rubles, while Finland had their supplies shuttered for applying to join NATO.
The first hurricane of the season, Agatha, made landfall as a category 2 storm on the west coast of southern Mexico. While causing flash-floods and mudslides in the area it initially hit, there it is a chance the diminished-but-still-organized storm could redevelop in the Gulf of Mexico and threaten the south US. Right now the National Hurricane Center gives 10% odds that Agatha can reorganize in the next 48 hours to become the first storm in the Atlantic basin this year.
The Energy Complex Is Taking A Breather Today With ULSD Futures Leading The Way Lower
The energy complex is taking a breather today with ULSD futures leading the way lower. Prompt month heating oil futures are down about 1% this morning, with gasoline and crude oil contracts posting minor losses.
While not really news, its come to mainstream attention that the US hasn’t built a new refinery in over half a century in the public’s latest round of trying to figure out why we are paying so much at the pump. Other salient, and likely more relevant, points that aren’t mentioned are retail gasoline pricing strategy (up like a rocket, down like a feather) and the slew of permanent refinery closures over the last few years.
American crude oil futures are looking to post the largest weekly gain in prices for over a month this week. Seasonal lows in stockpiles and increased refining thruput seems to be taking credit for move.
It will be interesting to see if this year’s driving season will be as busy as anticipated or if the nominally record high gasoline prices will result in a sharp decline in demand. Even if the latter proves to be the case, futures price action may not follow the prescribed path of dropping, given inventory levels are sitting around where we’d expect them to be in the fall, when refineries aren’t running at >90% utilization.
The Smaller-Than-Expected Drop In Gasoline Inventories
The energy complex opened mixed this morning with prompt month gasoline futures sinking ~.0150 while diesel trades on the green side of flat. The American crude oil benchmark, West Texas Intermediate futures, are changing hands 70 cents over yesterday’s settlement.
The smaller-than-expected drop in gasoline inventories, as reported by the Department of Energy yesterday, kept a leash on RBOB futures in Wednesday’s trading. While stockpiles are still at seasonal lows as we head into the busiest travel time of the year, the June RBOB contract pulled back from +7 cent gains yesterday to end the formal trading session only 2 cents higher.
Back to reality? Diesel premiums in the New York market dropped below 2 cents yesterday, leading some to believe the trip that took us as high as $1.20 over futures, just 13 days ago(!), to be done. ULSD inventory levels in PADD 1 remain at seasonal lows but the collapse of the prompt-second NYMEX HO futures spread seems to be the main driver for the drop in basis differentials in the region.
Nationwide refinery run rates continued their trek higher last week, reaching over 93% utilization for the first time since 2019. The drop in production levels on the West Coast and the scarcely populated PADD 4 were drastically outpaced by the increase in throughput at plants east of the Rockies.
Week 21 - US DOE Inventory Recap
RBOB Gasoline Futures Are Leading The Energy Complex Higher This Morning
RBOB gasoline futures are leading the energy complex higher this morning, despite more selling in equity markets as recession warning signals flash around the world. For this morning at least it appears that actual low inventory levels are outweighing the rumors of government intervention in fuel markets.
Gasoline prices have bounced 26 cents from Tuesday’s rumor-driven lows as it appears that whatever plans the White House has to ease pollution controls to lower prices may go the way of the SPR release, E15 waivers and other straw-grasping to deal with the supply shortage.
The API reported another large weekly draw of more than 4 million barrels of gasoline last week, which has helped RBOB futures lead the complex higher overnight. Diesel inventories saw a small decline of less than 1 million barrels, while crude stocks increased by only 567,000 barrels even though more than 6 million barrels were released from the SPR last week. The DOE’s report is due out at its regular time today, and will be delayed a day next week due to Memorial Day.
Speaking of which, futures will trade in an abbreviated session Monday, but the spot benchmarks (Argus, Platts, OPIS) will not be published. Those that remember the Black Friday meltdown in futures 6 months ago will be forced to keep an eye on things Monday morning.
The return trip to reality for New York Harbor ULSD is nearly complete, with basis values dropping more than $1.20/gallon over the past 2 weeks, and outright values off more than $1.30. Feast to Famine: After the crazy spike in New York Jet fuel markets a little over a month ago, Colonial pipeline is hosting a surplus auction of Jet Fuel as apparently some shippers sent product north without a place to store it. It seems unlikely that we could see a similar situation with ULSD given the global tightness, but this industry does have a remarkable way of overhealing itself, especially when there are dollars, and not points, per gallon at stake.
So THAT’s why they’re based in Switzerland? Glencore has agreed to pay nearly $1.2 Billion to settle charges around the world of bribery and price manipulation in energy markets. The commodity price manipulation case centered around traders manipulating the Platts 30 minute trading window for fuel oil products. Platts was not a target of the investigation and maintains its methodology is sound. Meanwhile, people who get their car stolen out of their own driveway can still get a ticket if they left the vehicle running unattended in several states.
The Rumor Mill Is Hard At Work This Week With Multiple Reports Of New Ideas Coming From The White House To Ease High Fuel Prices
The rumor mill is hard at work this week with multiple reports of new ideas coming from the White House to ease high fuel prices – which were already on a path to easing themselves – now roiling prices.
Monday morning saw reports that the White House was considering a release of the North East Strategic Heating Oil reserve to ease diesel prices in the region, but the market seemed to largely shrug off that news as prices had already fallen more than $1/gallon in the prior week, and a 1 million barrel release would do little to improve inventory levels that are 20 million barrels below their average, and 40 million barrels below where they were 2 years ago.
Monday afternoon after the close another report suggested the White House was also considering pollution waivers on gasoline to lower prices this summer. RBOB futures dropped more than a dime following that report, and held those losses overnight, even though there were no details about what those waivers would be, and as we’ve seen with previous emergency waivers, the NYMEX specs probably won’t change anyway.
The EPA announced Monday that it would publish its 2023 RFS targets by next April, as part of a settlement over a lawsuit for the agency not meeting its deadlines for the program which has forced the industry to guess at obligations for years. The agency is also expected to finalize the 2021 and 2022 RVOs – which should have been finalized 6-18 months ago – by June 3.
California Carbon Credits meanwhile plunged to a new low Monday south of $100/LCFS credit. This is bad news for producers of renewable fuels as their subsidy is rapidly shrinking. In January of 2021 producers of Renewable or Bio diesel with a CI score of 30 were receiving $1.65/gallon from the LCFS credits generated, and today those producers are “only” receiving around $.77 gallon. Don’t feel too bad however, that 77 cents/gallon is still on top of the $1/gallon Blenders Tax Credit (which is set to expire at the end of this year) and the $1.5-$3/gallon in RIN subsidy depending on the product.
D4 RIN values may prove particularly pivotal for producers as the increase in RIN values over the past 18 months largely offsets the drop in LCFS credit values, and may help keep some products heading for the US West Coast that may have otherwise gone to Europe.
Energy Prices Are Moving Modestly Higher To Start The Week As Equities Try To Find A Bottom After Another Brutal Week Of Selling
Energy prices are moving modestly higher to start the week, as equities try to find a bottom after another brutal week of selling, and the world continues to wonder what is worse between a shortage of supply, or the shortage in demand it will eventually bring.
In the bullish column this morning, Shanghai is in the process of reopening after a multi-month lockdown, and Russia cut off natural gas flows to Finland. Unlike most of Europe, Finland has other options to replace those Russian supplies, which probably goes a long way to explaining the muted reaction to that latest move in the global energy chess match.
Money managers added new longs, and covered old shorts last week, pushing their net length to the highest levels since February. That said, the net length held by the large speculators remains well below the past several years as the big funds seem either afraid of, or prohibited by their risk management departments from, making large wagers on energy prices.
Refined product open interest ticked higher off of multi-year lows for another week as a return to more tolerable volatility seems to be encouraging some flows back into the ULSD contract. WTI meanwhile saw its OI drop to a new 4.5 year low as volatility and competing products both seem to be taking a toll on the NYMEX contract, especially given the focus on waterborne crude oil this year.
Maybe they went on Spring Break? After a month of holding near unchanged, Texas led a big jump in active drilling rigs last week, adding 8 rigs in the Permian basin, and accounting for 12 of the 13 new rigs put to work according to Baker Hughes’ weekly count. If the recent 3 week average of 9 rigs/week holds, we could see the rig count reach pre-pandemic levels by the fall. A pair of Rystad energy reports last week suggest it will take 5 years for employment in the oil and gas sector to reach pre-pandemic levels, even as parts of the Permian are on pace to reach record output later this year.
The EIA this morning highlighted retail diesel prices in New England, which surged north of $6 last week. Now that the NYH diesel bubble finally popped and wholesale prices dropped more than $1/gallon last week relief is on the way for consumers, and retailers will enjoy some incredible margins on the way down. It’s also worth noting that even though NYH spots were trading more than $1 above California levels during the price spike, retail prices along the East Coast were still trading below those on the West Coast.
The Energy Complex Is Selling Off Once Again This Morning As Gasoline Futures Lead The Way Lower
The energy complex is selling off once again this morning as gasoline futures lead the way lower. The prompt month RBOB contract is currently showing 3.5% losses as the oils (heating and crude) trail closely, trading lower by 2.5%. Futures traders seem to be shrugging off the report published by the Department of Energy yesterday which showed a sizeable drawdown in national gasoline inventories. This latest drop in stockpiles only exacerbated the tight gasoline landscape, especially in PADD 1, which contains the New York market, the physical delivery point of the globally traded futures contract.
Market participants could be referencing the increase in crude production as their justification for selling oil in the middle of a shooting war. Even though national oil inventory is still at 5-year seasonal lows, optimism surrounding the steadily increasing number of active production rigs might be enough to convince some ‘help is one the way’ and/or ‘the worst is over’.
Diesel basis markets were relatively quiet yesterday as some take a wait and see approach to valuing the physical markets. The increase in national diesel inventories, combined with the across-the-board bump in refinery run rates for all PADDs, pushed the prompt-second month HO spread below 10 cents for the first time since March yesterday.
Technical (technical) breakdown? Momentum trading spurred by a grim global demand outlook and a coincidental(?) drop in equities markets seem to be taking credit for today’s selloff. The ‘big three’ American energy benchmarks are breaking or already trading lower than a few of their respective moving averages, signaling that lower prices may be coming in the short term. If today’s action holds, refined product futures charts show little support between current levels and the $3.30s. Crude oil, on the other hand, has a test at the $105 level but if that’s broken, a drop to $100 seems likely.
Week 20 - US DOE Inventory Recap
WTI Is Attempting To Lead A Move Higher In Energy Futures This Morning
WTI is attempting to lead a move higher in energy futures this morning as falling inventories and Chinese reopening optimism are both getting credit for the early rally after yesterday’s sell-off.
New York Harbor diesel prices continue their fall back to reality dropping another 25 cents Tuesday, and more than 80 cents so far for the week. Time spreads have been falling along with basis differentials, with the June/July spread hitting a 1 month low just above 10 cents/gallon after starting the month north of 40 cents, which eases the pucker factor for shippers dramatically.
The API reported a 5 million barrel draw in gasoline inventories last week, while crude oil stocks declined by 2 million barrels (despite 5 million barrels released from the SPR) and Diesel stocks increased by 1 million barrels. The DOE’s weekly report is due out at its normal time this morning. The price action suggests that the worst of the East Coast diesel crunch is behind us, but we’ll have to see if the inventories are healing after plummeting to all-time lows in the past few weeks.
The US has lifted some sanctions on Venezuela, allowing talks with Chevron and the government to resume discussions over “potential future activities” but does not yet allow for any operations in the country that has more oil reserves than anyone else in the world, and yet has to rely on oil from Iran to keep its refineries operating at all. Long story short, don’t count on Venezuelan crude short term, although long term it could absolutely be part of the solution to replacing Russian oil, and theoretically so could Iran.
The EU is releasing its plan today for how to end its reliance on Russian energy supply …which will take 5 years. This Bloomberg article sheds light on the handful of European refineries that make ditching Russian crude much more complicated.
It’s Been A Choppy Trading Session For Energy Futures With Overnight Gains Turning Into Morning Losses
It’s been a choppy trading session for energy futures with overnight gains turning into morning losses, and signs of a potential market top flashing even as new records are being set. RBOB gasoline futures and several US spot markets set fresh records on Monday, meaning new record highs for retail prices are coming. While that’s bad news for consumers, and will no doubt continue to dominate headlines near term, there’s a divergence with diesel prices that could be bringing relief.
Monday was a relatively quiet session for NYH ULSD futures, which traded down less than 1.5 cents, but a big day for NYH diesel spot markets that dropped more than 56 cents on the day. A big drop in NYH was inevitable as those values were trading $1/gallon or more than any other US region, and typically once a bubble like that bursts it’s a one way trip lower so don’t be surprised to see more downside now that sellers have emerged.
Just as the backwardation in ULSD, and the spread to NYH, have started their return trip to reality, gasoline spreads have decided to smash records. The Prompt month futures spread for RBOB reached its highest level since the wake of Hurricane Harvey yesterday, and is actually more impressive given that this backwardation doesn’t include the winter RVP discount like that one did. Even more impressive, June RBOB futures are trading $1.15 above January, which is roughly 60 cents higher than the record prior to this year.
The premium for barrels in NYH has sent values for shipping product along Colonial to their highest levels of the year, although as we saw with diesel prices the past couple of months, the backwardation in the market makes this a challenge. The difference between gasoline and diesel however is that the export bid for gasoline is not nearly as strong, so sending barrels north on Colonial seems to make the most sense for those with space.
With supply options in the slim to none category globally the major question is how soon will the record high prices start hitting fuel demand? Rising fuel prices are already being cited as a headwind in Wall Street earnings reports, and we’ll have to wait and see if main street reacts with staycations this summer, or if they’ll pay up to get out after 2 years of travel disruptions.
Gasoline Futures Hit The $4 Mark For The First Time Ever This Morning
Gasoline futures hit the $4 mark for the first time ever this morning even though oil and diesel prices are selling off to start the week.
We’re approaching one of the busiest demand weeks of the year with tight supplies in many US markets, and much tighter supplies elsewhere around the world, which helps explain the 50 cent jump in gasoline futures over the past 4 trading sessions. Then again, we’re also in the seasonal peaking window for gasoline prices, so don’t be surprised to see a big pullback before the end of May.
On the bearish side of the ledger this morning, reports of a sharp slowdown in economic activity in China (which also happens to be the world’s largest importer of energy) and a warning that the US might be next.
Those reports may help explain why diesel prices continue to pull back and trade at a discount to gasoline despite warnings of a potential need for rationing across the East Coast this summer as US refineries are already running near capacity following a rash of closures the past two years leaving no good options to solve the shortages.
Money managers followed a pattern last week, reducing old long positions and adding new shorts with WTI, RBOB, Brent and Gasoil contracts just in time to get run over by the surge in prices to end the week. ULSD contracts saw the opposite with a small amount of new length added and a large amount of short covering that missed out on the subsequent pullback in diesel prices. In other words, it seems like hedge funds continue to struggle to get a grip on the petroleum market, which may explain why Brent open interest dropped to a new 5 year low last week and ULSD OI remains near its lowest in over a decade.
Baker Hughes reported 6 more oil rigs and 3 more natural gas rigs were put to work in the US last week, with Oklahoma taking the state lead adding 4 rigs while a handful of other states added 1 each. The Permian Basin, home to nearly 60% of all active rigs in the country, held steady at 334 rigs for a 3rd week. Last week the Dallas FED released a report explaining why oil producers won’t be the solution to high gasoline prices this year.
Gasoline Futures Have Surged To A New All-Time High On Friday The 13th
Gasoline futures have surged to a new all-time high on Friday the 13th, trading north of $3.90 for the first time and making a run at $4 seem inevitable.
Most cash markets in the US are following the lead of futures and are hitting record highs this morning as well, with Midwestern gasoline a notable exception as Group 3 spots dropped to a 40 cent discount below the June RBOB contract. West Coast basis values meanwhile are seeing strong gains this week following reports of more refinery issues keeping supplies tight in the region.
While it may not (yet) be as dramatic as what we’ve witnessed the past month in ULSD futures, the backwardation in RBOB contracts is reaching extreme levels, with the January 2023 contract trading more than $1 below June values. Just as we saw with distillates, this spread creates a challenging environment of huge basis swings and a reluctance by shippers to hold inventory today and sell it for much less down the road.
Don’t worry about most of the shippers however, as the crack spread charts below show margins that have spiked north of $50/barrel for many, which is roughly $1.20/gallon. Think about what your business will do to save a penny per gallon, and imagine what’s happening at those facilities when they can make $1 just two years after most were hemorrhaging cash. Those higher crack spreads seem to be keeping a bid under RIN values as well, with D6 values reaching their highest levels since last August yesterday.
The IEA followed the lead of OPEC and the EIA in estimating a slowdown in global economic growth in the back half of the year in its monthly oil market report, thanks (or no thanks) in large part to demand destruction caused by “soaring pump prices”. The good news, if you’re looking for an end to high fuel prices, is that the agency expects oil output outside of Russia to grow by 3 million barrels/day from May to December, which should largely offset the drop in Russian output. The report does remind us however that the worst of the supply crunch is still ahead of us as most Russian exports have continued thanks to deals struck before their invasion, but those transactions are quickly coming to an end.
It’s A Mixed Bag For Energy Markets To Start Thursday’s Session
It’s a mixed bag for energy markets to start Thursday’s session, with Gasoline prices rising after an overnight drop, WTI coming under pressure after a Wednesday rally, while Diesel drama is dominating the price action once again.
June ULSD futures have already seen a 22 cent swing this morning as any headline from Europe has the potential to move prices a dime or more in just a few minutes.
Some of the 30 cent pullback from yesterday’s highs are credited to Germany’s utility Uniper announcing it had found a loophole to continue purchasing Russian natural gas without violating sanctions, which may provide substantial relief for the next supply crunch. Then again, Russia is cutting off some natural gas to other parts of Germany to retaliate against sanctions, which may explain why prices have bounced 10 cents from their overnight lows.
The DOE’s weekly report showed East Coast (PADD 1) diesel inventories reached their lowest level since they started keeping records in 1990 last month, and have dropped another 13% in the past 2 weeks. The East Coast is suffering from 2 undeniable fundamental realities these days, first, it has been a net importer of refined products for decades, and has only increased its reliance on other producing regions in recent years. Second, it’s also the closest district to Europe, and if you put diesel on a vessel from a US Port, the Jones Act and proximity makes it easier in some instances to cross the pond than send those barrels to an East Coast port. The shortage is most notable in PADD 1B which included the central Atlantic states, and the NY Harbor delivery hub. That reality helps explain both the record-smashing price spreads we’ve seen over the past month, and the terminal outages we’re witnessing today.
Just as we saw with the insane price spike for Jet Fuel in NY last month, eventually the price spreads will draw in reinforcements and bring prices back to reality, but in the meantime, if you hold of diesel anywhere near New York today, it’s worth $1.25/gallon or more than just about anywhere else in the US.
Gasoline stocks are nowhere near as tight as distillates on a historical level, but they too are facing logistical challenges as the world struggles to deal with the supply chain going from bad to worse over the past 3 months just in time to reach our peak demand season.
OPEC’s monthly report revised its outlook for global economic growth and oil demand lower for the balance of the year citing the “geopolitical events” in Eastern Europe (AKA a war) and COVID restrictions for the slowdown.
Week 19 - US DOE Inventory Recap
Diesel Prices Are Once Again Trying To Lead The Energy Complex In A Rally After 2 Days Of Heavy Selling
Diesel prices are once again trying to lead the energy complex in a rally after 2 days of heavy selling for gasoline and oil prices as both fuel supplies and inflation continue to move somewhere between bad and worse. The big news that appears to have sparked a 25 cent bounce in distillates the past couple of days was that Ukraine was cutting off nearly 1/3 of Russian natural gas shipments, at least in part because Russia is lobbing bombs at the facilities pumping that fuel.
While equity and Energy prices were seeing strong gains in the overnight session, they’ve pulled back sharply this morning following the April CPI reading that showed inflation is holding near a 40 year high, and will give the FED plenty of reasons to hike rates and stop printing money. If you’re looking for good news, you might say that April’s inflation reading of 8.3% for the year wasn’t as bad as the 8.5% estimate in March. Then again, if you read through the release and realized that it was a drop in retail gasoline prices that accounted for a big part of that decline, you can already guess how May’s numbers will look now that gasoline prices have surged to new all-time highs.
The EIA’s monthly report reduced estimates for global crude oil and fuel production, noting the extreme levels of uncertainty caused the war and fuel embargoes. The report did however suggest that global inventories will be able to build in the back half of the year as new supply sources return from their COVID-induced shutdowns.
A Reuters article this morning highlights the steep discounts that Russian diesel cargoes are trading for as most European nations that are desperate for distillates still refuse to take those supplies. Meanwhile, the premium for prompt barrels in NY Harbor is several times larger than the premium paid for non-Russian diesel in Europe, which suggests enough of the Russian barrels are still making it through the EU loophole while the US is struggling through the tightest supply ever on the East Coast.
Based on the pullback in prices in all US markets outside of the East Coast, it seems like just a matter before we see a collapse in values of $1/more in the NY Harbor, but so far this week we are seeing the opposite as premiums surge to $1.40 over futures even while most other US markets have shifted to discounts.
The API reported small inventory builds across the board in its weekly report yesterday, which offers little relief to markets around the country that have seen terminal outages become commonplace. The DOE’s weekly report is due out at its normal time this morning.
Energy And Equity Prices Are Trying To Find A Floor This Morning After The Worst Daily Selloff In 2 Years
Energy and equity prices are trying to find a floor this morning after the worst daily selloff in 2 years for several contracts pushed US equity markets to their lowest levels since March of 2021. While stock markets are looking weak technically, and it seems like fear is taking over the market for the time being, refined products are still a ways away from threatening their bull trends and we’ll need to see another 20-25 cents knocked off of prices before even thinking about calling an end to the 2022 rally.
In addition to the general economic fears that are putting downward pressure on stocks and commodities, the European “Union” has been unable to agree on a Russian oil embargo which leaves the door cracked for exports to continue flowing – through Ukraine no less – despite the war. If the EU can figure out a way to convince Hungary to get out of the way however, expect another price spike near term.
Diesel prices on the East Coast continue to be the standout, even as gasoline prices hit record highs in the past week. Despite most of the country seeing heavy pullbacks over the past week, NYH ULSD prices continue to hold near $5/gallon, with a prompt trade of $1.25 over June futures in Monday’s session. For anyone with the capacity to run from Chicago or Gulf Coast based markets, there’s huge money to be made this week in long hauling diesel into the NYH region.
While the forward curve charts for distillates show expectations for dramatic easing in the coming months, a Rystad energy report suggests that the worst of the EU energy supply crisis may come this winter, which could continue the pattern we’ve seen recently where seemingly any spare barrel of diesel heads across the pond.
Energy And Equity Markets Around The World Are Seeing Another Round Of Selling To Start The Week
Energy and equity markets around the world are seeing another round of selling to start the week as fears of a bubble in stocks, housing and commodity prices have both investors and traders on edge.
Saudi Arabia cut its price premiums $5/barrel over its benchmark for Asian buyers, the first reduction in 4 months, after that premium reached a record high for May. The demand slowdown in China is getting credit for the price drop, but no doubt the bootlegged Russian barrels trading at steep discounts for those willing to buy them are also playing a role. While the price cuts are certainly a sign that the market may be cooling off and will be noted to justify today’s selling in futures, the remaining premium for Saudi barrels is still at the 2nd highest monthly level of the past 2 years so it’s not exactly collapsing.
After 2 months of being a sub-plot to the diesel show, RBOB futures have been taking the lead lately and managing some healthy gains even as distillates come under pressure. Gasoline prices didn’t quite reach their record high set back in March, but they did have their highest settlement of all time on Friday at $3.7590, and several spot markets reached new record highs on the day as well.
Money managers continue to tread lightly in energy contracts, with relatively modest positions and very low open interest. Most notable from last week’s CFTC Commitments of traders report is that the short positions held by money managers in RBOB contracts dropped to the lowest level in more than a decade. If you subscribe to the theory that hedge funds typically end up being wrong, this lack of short bets, even though prices are holding near all-time highs, may be a sign that the bull trend is coming to an end, especially as we are now in the seasonal peaking window for gasoline prices.
Baker Hughes reported 5 more oil rigs and 2 more natural gas rigs were added in the US last week. Louisiana took the top spot on the week, accounting for an increase of 4 rigs, while Texas saw another small weekly decline. An EIA report last week highlighted the growth in capital spending in the oil patch in recent months as surging prices are creating a huge increase in cash flow. That report also had a warning that drilled by uncompleted (DUC) wells have reached an 8 year low, meaning even more investment is needed to keep output levels increasing.
More Wild Action In Energy And Equity Markets This Week
More wild action in energy and equity markets this week with price swings and spreads that continue to confound.
Yesterday saw June ULSD futures (that have a delivery point in NY Harbor) drop 15 cents/gallon, and yet cash prices for ULSD in the New York harbor actually went up on the day as physical shortages continues to cause supply runouts and tight allocation all across the region.
Prompt values for diesel in the NY Harbor region are once again trading near a $1/gallon premium to June HO futures and to some neighboring markets. While Europe’s shortage of diesel is earning well-deserved credit for some of that phenomenon, the premium for NYH barrels vs European grades is now reaching the point where we may see some of those barrels that were destined for exports end up staying in the US. Which may help explain why the forward curve for futures has been coming back to reality this week. See Charts below.
US equity markets saw their biggest daily selloff in two years Thursday, just a day after some saw their biggest gains in two years as the FOMC’s plans to rein in inflation continue to create large amounts of turbulence for markets that got used to the idea of free money.
The April payrolls report estimated 428,000 jobs were added in the US during the month, while the February and March estimates were both revised lower. The official (U-3) unemployment rate held steady at 3.6% while the real unemployment rate (U-6) ticked up to 7%. The market reaction was fairly muted to this report as it seems in line with many expectations, and not a dramatic figure that might make the FED reconsider their plans.
Most Energy Contracts Are Seeing Modest Gains To Start Thursday’s Session
Most energy contracts are seeing modest gains to start Thursday’s session after the FED and fundamentals both gave a big boost to buyers Wednesday.
The only contract moving into the red this morning is June HO which is seeing its premium to outer months come back to something resembling sanity, while the majority of the complex moves higher.
While the FOMC announcement sent stocks on one of their biggest daily rallies on record, energy contracts were already staging a strong rally as the weekly inventory reports from the API and DOE remind buyers that there are no short term solutions to the supply crunch.
A surge in gasoline imports helped PADD 1 inventories tick higher after reaching a multi-year low last week, while the rest of the US saw healthy declines. Diesel does not have the luxury of international length coming to the rescue, pushing total US inventories to a fresh 8 year low, while PADD 1 stocks fell to a new record low. The arbitrage window from just about anywhere in the US to the East Coast is wide open for those with a truck, train or boat, the people to drive them and the nerves to ship into a market that’s trading $1.30/gallon lower in September than it is today.
The PADD 1 refiners that survived several bleak years are being rewarded for their perseverance with diesel margins that are being measured in dollars per gallon instead of dollars per barrel, and have increased run rates to their highest level since the start of the pandemic as a result. While other refiners have discussed delaying maintenance this summer to continue operating in this rare margin environment, run rates in each of the other 4 PADDs declined on the week which certainly isn’t helping the tight supply situations in most markets.
As expected, the FOMC announced a 50 point rate increase Wednesday, the first increase of that size in almost 22 years. What surprised just about everyone however was that the FED chair took the idea of a 75 point hike at the upcoming meetings off the table, which sparked a huge rally in equities that seemed to spill over into energy contracts as well. The CME’s Fedwatch tool shows that essentially no one is betting on a Fed Funds rate of 1.75% or higher in July, whereas yesterday before the announcement, 99% of the wagers were at or above that level.
While the FED probably can’t do anything to flatten the front end of the backwardated diesel curve, it is likely that the rally in equities could encourage more buying in the forward months for crude oil and diesel as a slower pace of interest rate hikes seems to reduce the likelihood of a recession.
Meanwhile, don’t expect politicians to sit back and not pretend to do nothing about high fuel prices in an election year. Congress is taking another run at making OPEC illegal as the mid-terms draw near. Read here to see what it would take to actually make this a law after numerous failed attempts in previous decades, and what the risks are if it happens.
Week-18-US DOE Inventory Recap
Yesterday’s Double Digit Losses Are Followed By Double Digit Gains Today
Energy market whiplash: yesterday’s double digit losses are followed by double digit gains today. Official news that the EU plans on completely banning Russia energy imports is taking credit for today’s rally, despite that news being a day old. Maybe the change in language describing the timing of the embargo from “by the end of 2022” to “in the next six months” sparked some additional concern this morning.
An anticipated decrease in energy inventory levels last week certainly isn’t doing anything to reign prices in this morning. The American Petroleum Institute published an across-the-board drawdown in their inventory estimates yesterday afternoon. Eyes will be on the DOE’s version of the report, scheduled to be released at its normal time this morning, to see if the API’s ~3.5 million barrel drop in oil stocks and the ~4.5 million barrel drop in refined products will be confirmed.
This month’s Federal Open Market Committee meeting is today where a 50 point interest rate hike is all-but-certain. In addition to bumping borrowing rate by twice the usual amount, more rate increases are expected in the coming months as the Fed tries to curb inflation, currently at a 40 year high. While the long term effects are uncertain, some view the rate hike as a “de-risking” event and anticipate a decrease in short-term volatility and an accompanying rally in equities in the short term.
Soybean Oil prices, and likewise biodiesel RINs, have back off from multi-year highs this week but still remain in the stratosphere as the world grapples with a shortage of edible oils. It’s a similar story with corn futures and ethanol RINs so far this week and while this might be great news for farmers, high blendstock prices aren’t doing anything to help bring down prices at the pump.
Energy Futures Are Drifting Lower This Morning
Energy futures are drifting lower this morning as traders mull over the likelihood and potential impact of an EU embargo on Russian crude oil and refined products. EU commissioners are expected to finalize their proposals for the 27 member states today, however the requirement of unanimous support throughout the Union for these new sanctions could drag out any implementation for months. If passed, the EU is targeting the end of 2022 for its members to cut energy ties with Russia.
Diesel futures lead yesterday’s rally in energy prices and looked especially eager to cover the gap on the chart left by the perhaps overzealous expiring May contract. If the adage is to be believed and chart gaps always get covered, we may see June ULSD futures make a run at the $4.40 level, about 30 cents above where it is trading currently. While the strong US dollar will likely keep crude oil from matching a runaway HO contract, gasoline futures may come along for the ride, especially leading up to Memorial Day weekend which could bring a surge in gasoline demand.
The EIA published its monthly Petroleum Marketing update yesterday, highlighting the economic factors that lead to all-time high fuel prices, specifically ULSD. Multi-year high in demand combined with record-breaking lows supplies does not paint a particularly pretty picture for anyone interested in affordable diesel fuel.
Energy Markets Are Facing A Wave Of Selling To Start May After A Wild Finish To April Trading
Energy markets are facing a wave of selling to start May after a wild finish to April trading. Equity markets around the world have been facing heavy selling pressure as expectations for a global economic slowdown increase, which seems to be giving a risk-off feel to all sorts of assets to start the new month.
ULSD futures stole the show again last week, with the expiring May contract breaking $5 for the first time ever on Thursday, then rallying all the way to $5.85 on Friday before crumbling to $4.40 before the close. The June contract is hovering around the $4 mark, down around 4 cents on the day, and while the 32 cents of backwardation to July would have set records in year’s past, it seems quaint compared to what we just went through.
Money managers continue to make only minimal changes in their NYMEX energy holdings and open interest for refined products remains near multi year lows as some contracts, HO in particular, are simply too hot to handle for many these days.
Baker Hughes reported a net increase of 3 oil rigs drilling in the US last week with New Mexico and Louisiana both adding a pair, while Texas dropped 1 on the week. While the rig count continues its slow and steady increase, at this pace it will take until the end of the year to reach pre-pandemic drilling levels.
California’s LCFS credits tumbled to a multi-year low on Friday after the state’s Air Resource Board reported the largest ever quarterly surplus in credits. Large increases in Renewable Diesel and electricity production were the biggest factors during Q4 of 2021, while biodiesel and bio-methane both saw decreases. The drop in LCFS credit values from $150 to start the year to $107 now saves a consumer of gasoline and diesel about a nickel/gallon, but costs producers of a renewable product with a CI of 30 about 35 cents/gallon, which may be enough to encourage incremental barrels to go to Europe instead of California.