News & Views
Risk Taking Has Fallen Out Of Favor As Markets Around The World Fall Out Of Bed With Heavy Losses To Start Friday’s Trading
Risk taking has fallen out of favor as markets around the world fall out of bed with heavy losses to start Friday’s trading. Refined product futures are seeing heavy selling this morning, down 13 cents or more in the early going, despite signs from cash markets of supply tightness in numerous spots around the country.
Diesel prices would still finish with 10 cent gains for the week if they settled at current levels, but have dropped 20 cents from Wednesday’s high just a few ticks below the $3.50 mark. That pullback keeps a downward trend line in place that started from the August 25th high of $4.11, and would set up another test of the $3.14 range in the next week or two if prices don’t rally soon. Ordinarily, those types of swings would make for a busy year, and now we’re used to it happening in a month.
Fiona looks like it will set records as one of the strongest storms to ever hit the Canadian coast this weekend, but appears like it will stay just far enough east to avoid a hit on the Irving refinery in St. John New Brunswick. Shipping in the region will certainly be impacted as the storm blows through, but the current path appears favorable to avoid significant long term damage to ports.
The storm likely to be named Hermine was upgraded to a tropical depression overnight, and is now expected to hit south west Florida as a category 2 or 3 Hurricane Tuesday or Wednesday. The Key West and Ft. Myers are looking particularly vulnerable from the path of this system, with Cuba looking like the only thing that might slow the storm’s rapid intensification as it crosses the extremely warm waters in the Caribbean this weekend. The good news for energy supplies about this forecast path is that it keeps it well east of the oil production and refining zones in the Gulf of Mexico. That won’t prevent a surge of panic buying in Florida, but it will help resupplies once the storm has passed. Some models have this storm making additional landfalls on the east coast next week.
It’s been a rough week for refineries around the world. A fire at Husky’s refinery in Ohio killed 2 workers and has sent Chicago basis values soaring. Exxon is shutting down a refinery in France after a walkout of workers, and now Argentinian oil unions are striking after refinery explosion killed 3 workers. While none of those facilities individually will create major disruptions, they are all clear reminders of both the dangers of the industry, and the vulnerability of supply with refining capacity stretched to its limits.
Speaking of which, the West Coast continues to struggle with extremely tight supplies of gasoline that have sent basis values surging $1.50-$2 above futures and most other regional markets. A rash of refinery issues, and no options from neighboring markets for summer-grade gasoline are both contributing to the extreme price action. The big question for the next two weeks is whether or not imports are available to help alleviate this tightness, or if resupplies will have to wait until the market converts to winter-grade gasoline.
Markets Around The World Are Seeing Big Swings Over The Past 24 Hours As The Unknowns Of Monetary Policy
Markets around the world are seeing big swings over the past 24 hours as the unknowns of monetary policy, war strategy and storm paths all converge. It’s not unusual for the day after an FOMC announcement to see big price swings, and today in particular is set up for big moves after the FED made it clear it prefers a recession to inflation, and numerous other banks followed suit.
ULSD has been the most volatile contract in the energy complex this week, with multiple 10 cents swings in various directions as demand fears and supply fears manage to both grip parts of the global distillate market simultaneously. Adding to the uncertainty this week, Exxon’s refinery in France is facing a strike as employees see more leverage than ever given the weakened state of Europe’s energy supplies.
2 brothers were killed in the fire at the Husky refinery in Ohio, adding a tragic turn to the supply shortages in the area, which have sent Chicago basis values soaring. That plant is completely offline, and may stay so for weeks as the investigation continues, further complicating resupply efforts. The Explorer pipeline froze nominations shortly following that fire as shippers raced to find replacement options from other regions, quickly maxing out the pipe’s capacity. See the PADD 2 inventory charts below for perspective on how unusually low supplies in the Midwest are as a rash of refinery issues, and lack of shipments from the Gulf Coast – who is busy supplying the rest of the Western hemisphere – draw down stocks. PADD 2 refinery runs did see a 2nd straight large increase, largely due to the BP Whiting plant coming back online after a fire a few weeks ago.
The storm currently known as 98L continues to move towards the Caribbean with 90% odds of development in the next 5 days. Florida looks like it is still has the highest odds of getting hit by this storm (soon to be named Hermine) although the GEFS model has shifted it further West in the past 24 hours which puts Alabama, Mississippi and Louisiana all in the range of potential landing zones. While the odds may still be low, Louisiana has been a hurricane magnet the past two seasons, so those refineries and off-shore facilities will not breathe easy until this system is long gone. Hurricane Fiona meanwhile continues to churn north after battering several islands as a category 3 or 4 storm, and now sets its sites on Atlantic Canada. The Irving refinery in St. John looks like it will avoid a hit from this storm, while the long-idled and struggling to convert to RD production refinery in Come-By-Chance could still take a hit from this system.
Refinery production increased again last week, holding near the top end of the seasonal range as plants defer maintenance to try and continue maximizing output during these times of tight supply (and high margins). Compare this year’s refinery runs to 2021 and 2020 which both saw big storm-induced declines, and you’ll get a feeling for why the industry is still holding its breath to make it another month without a direct hit on refinery row.
One item to keep an eye on (if you didn’t have enough already): US ethanol production dropped to its lowest level since the great freeze of 2021 wreaked havoc on fuel producers of all varieties, which pushed ethanol inventories to their lowest levels of the year. Ethanol prices have been pulling back since the railroads narrowly dodged a major strike, so this drop in production could be a short term anomaly tied to maintenance or timing the corn crop, but if not, it could further complicate the refined fuel supply network since gasoline is no good in most cases without 190 proof grain alcohol to go with it.
West Coast (PADD 5) gasoline stocks look like they turned the corner on the charts with a small increase last week, but that did little to stop the squeeze on prompt supplies as San Francisco values shot up to a $1.70/gallon premium to futures and PNW values traded north of $1.40, which puts current values back close to $4/gallon.
With The DOE And FOMC Both On Tap, More Big Swings Appear Likely To Come
It’s already been a volatile day for energy prices, and with the DOE and FOMC both on tap, more big swings appear likely to come.
The big news overnight was Russia announcing it would draft 300,000 reservists to aid its [failing] war in Ukraine. That move seemed to add to bullish sentiment in oil and refined product prices with ULSD up 12 cents not long after that news broke, only to see prices pull back and trade down 4 cents as of 7:30 central. Crude oil and gasoline prices have seen less dramatic versions of those price swings, and are still holding on to modest gains in the early going.
The API reported inventory builds across the board last week, with crude stocks up 1 million barrels (thanks again to large releases from the SPR) while gasoline stocks increased by 3.2 million barrels and distillates increased by 1.5 million. The DOE’s weekly report is due out at its normal time of 9:30 am central.
The FOMC announcement is due out at 1pm central, just 30 minutes ahead of the settlement for NYMEX contracts, which often makes for some wild trading to end the session. Just about everyone expects the FED will raise interest rates by at least 75 points today, with a large focus on what the chairman will say in the news conference following that announcement, which is likely to add to the volatility late in the day.
Gasoline prices on the East and West coast continue heading in opposite directions. NYH gasoline prices have dropped to just even with RBOB futures, and hold just a 3 cent premium vs their USGC counterparts, which marks the lowest spread since the RVP transition in April. Colonial line 1 space was reported to trade at a negative 2 cent value yesterday, which marks the lowest value in 2 years, just a few short weeks after reaching an 8 year high.
While the East Coast is seeing gasoline values crumble, West Coast markets continue to hold premiums of $1/gallon or more as refinery issues and the end of the summer gasoline spec keep inventories at extremely low levels.
Another refinery fire in the Midwest injured 2 employees, and has completely shut operations at the Toledo facility and will keep surrounding markets which have been unusually tight further on edge. That fire is yet another black eye for Husky which is still rebuilding the refinery it blew up in Superior WI a few years ago.
There are 5 potential storm systems being tracked in the Atlantic basin today, which will probably mark the unofficial peak of activity for the 2022 season. Tropical storm Gaston
The most troubling at this point for energy supplies is the system known as 98L that is given 90% odds of being named (Hermine) in the next 5 days. Odds are good that this system will make it through the Caribbean and it could blow up to a major Hurricane once it reaches the extremely warm water East of the Yucatan, but are unclear where it will head once it reaches the Gulf of Mexico. The early favorite looks to be a Florida landfall, which would keep it east of the oil production and refining centers, but will not help the state’s fuel supplies that have been running low for the past 6 months.
Week 38 - US DOE Inventory Recap
The Bulls Have Scored An Emphatic Victory To Start The Week
The bulls have scored an emphatic victory to start the week, with diesel prices bouncing 25 cents off of the lows set yesterday morning, and putting the complex back into neutral territory after threatening a technical breakdown. RBOB gasoline futures have rallied 18 cents since Monday morning, while WTI has rallied more than $4/barrel.
Los Angeles gasoline prices have surged again in the past 2 sessions, trading back near $1.50 premium to October RBOB even as San Francisco premiums have dropped below $1/gallon. There’s not much time left for traders to schedule summer-grade gasoline in the local pipeline systems, which is likely to spark the inevitable price crash that everyone knows is coming, but no one can say when.
California’s LCFS values dropped to a 5 year low Monday, as a surge in new renewable diesel production has finally reached the market and created an excess supply of those credits.
Depending on the Carbon Intensity (CI) score of the product, this drop in LCFS values has knocked anywhere from 40-50 cents/gallon from the value of credit for biodiesel producers, to 75-95 cents/gallon for renewable diesel producers. Think about how your business may change to make a penny/gallon, and then think about how big of a deal this drop in credit values may be for those producers, particularly given the ongoing competition for feedstocks from biodiesel and SAF producers.
The good news for renewable producers is that RIN values have remained elevated and helped to offset some of the drop in LCFS credits, and in total RD producers can still earn nearly $5/gallon in total environmental subsidies, which makes competing with $3.50 ULSD a lot easier.
While Hurricane Fiona batters island nations throughout the Caribbean and North Atlantic, it is largely sparing energy supply infrastructure. There’s another storm system given 50% odds of developing this week however that looks like it could get into the Gulf of Mexico and will need to be watched closely. That storm would be named either Gaston or Hermine depending on how another system in the North Atlantic (with 80% odds of developing) behaves over the next few days.
Energy And Equity Markets Are Both Seeing Losses To Start The Week
Energy and equity markets are both seeing losses to start the week as fears of a global economic slowdown seem to be weighing heavily on markets around the world. Refined products are trading near multi-month lows, and threatening a technical breakdown that could see another big price slide unless buyers step in soon.
The US dollar is rallying this morning, approaching the 20-year high it set earlier in the month ahead of several central bank meetings this week, which is putting downward pressure on several commodities. According to the CME’s Fedwatch tool, traders are giving 80% odds the US FED will announce a 75 point rate increase this week, and a 20% chance of a 100 point hike. Those bets have changed dramatically over the past week, and the past month, as inflation reports came in worse than many expected, convincing some traders that the only way to stop inflation is to induce a recession.
Hurricane Fiona is expected to become a major storm later this week, after running over Puerto Rico and the Dominican Republic. The storm only appears to be targeting defunct refineries having passed near the bankrupt Limetree Bay FKA Hovensa refinery this weekend, and now taking aim at the Come by Chance facility in Newfoundland that is attempting to convert to renewables production, and already facing serious challenges in doing so.
Money managers continue to act cautiously towards energy contracts, with open interest holding near 5-7 year lows. The large speculative category of traders made small increases in crude oil net length last week, but cut their length in refined products, keeping their total holdings well below the average levels we’ve seen over the past 5 years.
Baker Hughes reported an increase of 8 oil rigs active in the US last week, snapping a 2 week decline that lowered the US total by 14. Natural gas rigs dropped by 4, wiping out last week’s gain. A WSJ article this morning highlights private drillers nearing their capacity, which helps explain some of why the rig counts seem to have plateaued recently.
The DOE’s leader met with the governors from North Eastern US states last week to discuss concerns over shortages of refined fuel and LNG supply ahead of the winter heating season. Options on the table appear to be a release of the regional gasoline and heating oil reserves, or waivers on the Jones Act. The energy secretary acknowledged “concern about the low levels of privately held refined product inventories in New England” but did not make any proposals yet on how to deal with the situation.
Diesel Prices Have Rallied More Than 10 Cents/Gallon After Approaching 6 Month Lows Thursday
Diesel prices have rallied more than 10 cents/gallon after approaching 6 month lows Thursday, despite a warning from a shipping bellwether that a global economic slowdown is upon us that has stock markets sliding lower once again.
From a chart perspective, the price action in the back half of September looks to be pivotal as we’ve reached “rally or else” territory with a slide below $3 for diesel and $2 for gasoline looking possible this winter if support doesn’t hold.
Yesterday’s reports of a tentative deal to avert a rail strike had products from ethanol and biodiesel to natural gas all pulling back sharply after rallying earlier in the week. The market is certainly behaving as if the unions will vote to formally accept this deal, even though there’s still a risk it could be rejected. Read here for a reminder on why supply chain challenges will continue even if this deal is done.
Germany announced it would be taking over 3 Russian owned refineries in the latest move in the energy chess match. The announcement removes one of the major hurdles to Germany backing a ban on Russian crude imports, with the big question being whether or not they’ve found a replacement supply source to keep those facilities operating.
West Coast gasoline prices are continuing to cool after a huge spike to start September, but LA distillates staged a 10 cent rally of their own Thursday, largely offsetting the big move lower in futures. Diesel inventories in the region appear to be ample, yet the buying extended into October, suggesting the diesel rally may be more than a simple short squeeze as September shipping schedules come to an end.
Tropical Storm Fiona continues to look like a non-issue for energy supplies, and most models keep it off shore of the US East Coast after it passes Puerto Rico and the Dominican this weekend, but the latest track does shift slightly to the West which keeps the possibility of a hit on the eastern side of Florida open. There are two other storms being tracked by the NHC today, but neither one looks like it will be a threat to the US even if they overcome their low odds of developing in the next 5 days.
The great oil traders: Today’s interesting read on why the US government may soon be buying oil at $80 instead of $24.
Diesel Prices Have Dropped 45 Cents From Monday’s High
Diesel prices have dropped 45 cents from Monday’s high as demand concerns both domestically and globally are putting heavy downward pressure on prices, and RBOB and WTI are now joining in on the selling after resisting the pull lower Wednesday. ULSD futures are still more than 10 cents higher than their August lows, but look like they could make a run at those levels soon, with a move below $3 likely if that support breaks.
Some suppliers will be breathing easier this morning after reports that a “tentative deal” was reached to avert a nationwide railroad strike that could have created chaos in numerous commodity markets. Ethanol supplies in particular were troubling many suppliers this week as it could have left many terminals with plenty of gasoline in the tank, and yet no E10 available to sell at the rack, in addition to numerous concerns about Biodiesel and DEF supplies nationwide. Watch the price reaction in the grain, renewables and RIN markets today to see whether or not the market believes this deal will actually make it to reality.
The European Commission proposed an emergency energy market intervention plan Wednesday that includes mandatory reductions in demand for member countries, a cap on electricity prices from renewable, nuclear and coal sources, and a “temporary solidarity contribution on excess profits” for oil and gas sectors that somewhat like a Soviet-style solution to the Russian energy problem. The plan did not include a price cap on Russian energy purchases as had been previously proposed.
The IEA highlighted how Chinese lockdowns are leading a slump in global energy demand, but noted that demand is still growing, just not as fast as it was expected to this year. The monthly report also noted that EU embargos on Russian oil have not yet come into effect, and will do so just in time for the coordinated SPR releases to come to an end, leaving markets susceptible to new price spikes. The report highlights the specific concerns around distillate supplies, as Europe still does not have a solution for the 600mbday of Russian diesel it will stop importing this winter, and refinery capacity constraints severely limit their options.
Wednesday’s DOE report showed a large build in US Commercial crude inventories, but total oil stocks including the SPR declined, proving the IEA’s point that supplies may not look so strong once the record releases come to an end in two months. US crude oil output has stagnated over the past two months as labor logistical challenges continue to limit the growth in production. The report estimated that US diesel demand dropped by 13% to its lowest level of the year last week, which certainly isn’t helping encourage any buyers to step in at these lower levels, even though most PADDs have inventories well below normal levels.
Want to understand why California gasoline prices surged by more than $1/gallon last week? Take a look at the PADD 5 gasoline stocks chart below. Also note the huge decline in Midwestern (PADD 2) gasoline stocks the past 2 weeks as regional refiners have struggled to stay online, and shows how important the RVP waivers issues after BP’s refinery went offline were to avoid a price spike like we’ve seen on the West Coast.
Tropical storm Fiona was named overnight, and most models continue to suggest the storm will turn north by Monday and not threaten the Gulf of Mexico, making it a non-event for energy supplies. Most models keep this storm moving away from the East Coast as it moves north, but a few suggest that a landfall near the Carolinas is possible next week.
Diesel Prices Fell Out Of Bed Wednesday Dropping More Than 20 Cents At One Point To A 5 Week Low
Diesel prices fell out of bed Wednesday dropping more than 20 cents at one point to a 5 week low, even as gasoline and crude prices hold around break even for the day. There’s not a clear reason for the big drop in diesel while WTI and RBOB are neutral, but it appears that recession/demand fears may outweigh supply fears as fuel inventories in the US and abroad show signs of recovery.
US stock markets had their worst day in more than 2 years Tuesday following a discouraging inflation report that doomed hopes of the FED easing up on their plans to raise interest rates and tighten the money supply anytime soon. Diesel prices have had a negative correlation to the S&P 500 in recent months, so it doesn’t seem there’s an immediate connection between the selling in the asset classes, but there’s no denying that a recession would take a heavy toll on distillate demand.
A report by a major US investment bank suggested that European natural gas prices would be cut in half this winter as widespread efforts to solve the Russian energy shortages are proving successful. If that prediction plays out, it suggests a lower need to switch to diesel fuel as a supplemental option for electricity generation.
Ethanol prices have surged this week, alongside corn prices following a bullish crop report from the USDA. Another factor to watch closely in ethanol markets is a looming railroad strike that could hamper the primary transportation method for numerous commodities, including grain alcohol that goes into your fuel tank. The gasoline price vs Ethanol, both gross and net of RIN values, has fallen to its lowest level of the year as gasoline prices have come under pressure while ethanol rebounds.
The potential railroad strike would be a double-edged sword for diesel prices, both reducing the 2nd largest demand source for diesel, while also putting a key supplemental supply source at risk for markets that can’t be fully stocked by pipeline or waterborne options. There is a possibility that some of today’s action in ULSD futures could be related to major railroads unwinding fuel hedges if they now anticipate their actual consumption to be below expected levels, but there’s no way to prove whether or not that’s happening.
The API reported a large build in US commercial crude oil stocks of 6 million barrels last week, but since the SPR was drawn down by more than 8 million barrels, the total oil inventories in the US actually fell again during the week. Distillates increased by 1.7 million barrels while gasoline stocks declined by 3.2 million barrels, which looks like it’s contributing to the big price disparity between products this morning. The EIA’s weekly report is due out at its normal time this morning.
The NHC gives a 70% chance that we’ll see another named storm in the Atlantic this weekend, which would be named Fiona. Most early models show this system turning north and east and avoiding a US Landfall, but a few still leave the door open for this storm to get into the Gulf of Mexico and threaten oil production and refineries, so it can’t be dismissed completely yet.
Week 37 - US DOE Inventory Recap
Energy Prices Were Rallying Overnight But Gave Up Those Gains Following The August Inflation Report
Energy prices were rallying overnight but gave up those gains following the August inflation report.
CPI for August increased .1% as a 5% drop in energy prices offset increasing prices in just about every other category. The reality that the cost for everything besides fuel (and maybe used cars) continues to increase seems to be having at least a short term negative impact on both the equity and energy markets, after a 4 day rally.
The US dollar has also had a sharp pullback in the past week as hopes were increasing that inflation had peaked, but this latest report may cause that optimism to be tempered, which is likely to weigh on commodity prices near term.
From a technical outlook, the energy complex looks to be back in neutral territory, with the rally over the past week putting off the risk of a breakdown that could push prices sharply lower, but not high enough to suggest the bulls are back in control.
OPEC’s monthly report kept global supply and demand estimates steady from the August report, noting that economies seem to be dealing with inflation headwinds better than many expected. The cartel’s oil output rose by more than 600,000 barrels/day last month, primarily driven by Libyan output coming back online.
California gasoline prices look like they’ve made the turn back towards earth, with differentials dropping more than 20 cents on Monday, after a short squeeze on the end of season summer grades had San Francisco CARBOB trading $1.50 over futures last week. The few times we’ve seen similar spikes in the region, it usually takes about a week once the bubble bursts to get prices back into “normal” ranges, which suggests daily drops of 20 cents or more may continue.
The NHC is giving 40% odds of a named storm reaching the Caribbean in the next 5 days, with the long range path suggesting a move into the Gulf of Mexico is possible.
The Energy Complex Is Green Across The Board This Morning
The energy complex is green across the board this morning with the distillate contract leading futures higher with over 1% gains to start the day. US gasoline and crude oil benchmarks are tagging along, both boosting prices about .7% this morning, as a weakening dollar takes the credit for positive price action.
Not all quiet on the Atlantic front: while Hurricane Earl came and went without causing any damage to energy infrastructure, there are two areas of interest that have potential for development, heading this way. While they don’t pose an immediate threat, both disturbances are positioned squarely in the historical origin range for some of the largest storms we have experienced.
Baker Hughes’ total US rig count dropped by one last week, the second consecutive week of decreases in active oil production plants. The reactivation of platforms has slowed down over the past few weeks, mirroring the drop in oil prices, disincentivizing some from starting their drills.
Money Managers trimmed their net positions in all but one of the major petroleum futures contracts last week. West Texas Intermediate crude oil saw the only increase in net positions while speculators telegraphed much more bearish sentiment in its European counterpart, cutting their bets on higher prices by nearly 8%. The refined product positions saw either double digit percentage drops in long positions or double digit percentage gains in short positions, signaling that the “smart money” expects lower prices in the short term.
The Chinese response to their increased COVID-19 problem remains one of the go-to topics for headlines as of late. Demand concerns due to new lockdowns are taking credit for the weakness in energy prices we’ve seen since June this year. Several other fundamental drivers remain in flux however:
Will Russia respond to the West’s price cap proposal ?
Will OPEC+ maintain the production levels or continue to tweak them ?
Will a nuclear deal be made with Iran , releasing some of their oil production back into the market?
The US Added Almost 9 Million Barrels Of Crude Oil Inventory Last Week
The US added almost 9 million barrels of crude oil inventory last week as we continue to pull from our Strategic Petroleum Reserve in an effort to lower prices. Slowing oil exports and a bump in imports is helping the nation replenish its energy stockpiles, however the total oil on-hand still remains below the 5-year seasonal average as the US, along with the rest of the world, continues to cope with the vast reduction of energy exports from Russia. We also added diesel and gasoline stores last week, according to the weekly DOE report released yesterday. Gasoline inventories added 333 thousand barrels last week while distillates increased by a meager 95,000 barrels.
Queen Elizabeth II ended her 70 year reign of the United Kingdom yesterday, passing away at the age of 96. While her death and shakeup of the monarchy isn’t expected to make any drastic impacts to the energy landscape, she died shortly after appointing a new prime minister whose first major action was passing a cap on electricity bills for the United Kingdom. This legislative action highlights the dire situation Europe is in concerning their projected energy costs for this winter.
While Hurricane Earl continues to churn out to sea, “only” threatening the US East Coast with dangerous rip currents, the rest of the Atlantic basin has calmed down significantly, for now. The handful of systems coming off the African coast are given a low probability (20%-30%) of organizing into a storm over the next five days. Tropical Storm Kay was downgraded from Hurricane status yesterday after making landfall in Baja Mexico. While the scope of her potential impact on the US mainland has significantly shrunk, the storm could still cause flash flooding in the Southern California area but will likely stay east of the major population centers of San Diego and Los Angeles.
Oil prices are set up for a drop on the week, however slightly, but price action is continuing to follow the bearish trend it started since mid-June. The gasoline chart is testing the support of its 100-week moving average in a bid to keep dropping in the short term. If the support doesn’t hold, not much stands in the way to keep the prompt month contract from challenging the $2 mark. Diesel, on the other hand, looks to be content in its sideways pattern, refusing to come back to “reality” since its overseas demand remains elevated. The proportion of global diesel demand vs gasoline is much higher than it is in the States and its use a backup fuel for heating and electricity generation has buoyed prices through this three-month selloff.
American And European Crude Oil Contracts Enjoy Modest Gains To Start The Day
The energy complex is drifting higher this morning, sans the New York Diesel contract, dropping around 2.5 cents while gasoline and American and European crude oil contracts enjoy modest gains to start the day. Prompt month WTI traded down to 8 month lows yesterday, below where it was trading before the war in Ukraine started. Renewed recession concerns took the blame for yesterday’s selloff, despite there being seemingly no new information that would spur such downward price action.
The American Petroleum Institute published their inventory estimates yesterday afternoon, showing a ~3.5 million barrel build in national crude oil inventory last week. Refined product stocks were mixed with gasoline dropping just under 1 million barrels and diesel building ~1.8 million barrels. Since the information collected by the API is given on a voluntary basis, the market typically waits for the Department of Energy’s weekly inventory report before deciding sentiment. That report is due out today at 10am CDT.
Hurricane Earl is forecast to become the Atlantic season’s first major hurricane, and while it may cause some disruptions in Bermuda (which is projected to just get some tropical-storm-force winds currently), it doesn’t look like the storm will impact energy infrastructure. Eyes are now turning to the mid-Atlantic system that’s given a 70% chance to organize over the next five days.
On the Pacific side of things, Hurricane Kay is set to make landfall in Baja California later today, and quickly dissipate into a tropical storm then depression this weekend. Flash flooding would be the main driver for energy disruptions in the area. Southern California, the majority of Arizona, and as far north as Las Vegas could see high amounts of rainfall and likewise flooding.
Week 36- US DOE Inventory Recap
After A Big Labor Day Rally, Diesel Prices Dropped 20 Cents From Monday’s Highs
After a big Labor Day rally, Diesel prices dropped 20 cents from Monday’s highs, ending Tuesday’s session down slightly from Friday’s settlement. That brief rally managed to close the chart gap left behind by the September contract roll, and the subsequent selloff sets up a test of last week’s low at $3.44.
Gasoline futures are down for the week, despite a modest bounce this morning, and the charts continue to suggest a good chance that we’ll see more selling in the weeks ahead. Crumbling values for NYH spot prices seem to be adding to the weak sentiment for futures, and driving the value for linespace on Colonial’s mainline to negative figures, just a week after they were trading for a 10 cent/gallon premium. While futures are looking weak, California gasoline prices continue to surge, trading $1.20/gallon over futures in LA Tuesday, as power concerns and refinery hiccups continue to hamper regional supplies. We will see a huge drop in those prices as we reach the transition to winter-spec gasoline, but that’s still 6 weeks away for California, whereas most of the rest of the country will change over next week.
European leaders are planning to enact a price cap on Russian energy supplies to try and curb runaway electricity prices, and Russia’s countermove is to threaten a complete shutdown of energy exports if those caps are enacted.
The huge spike in European electricity prices following Russia’s moves to cut off natural gas flows to the continent have left utilities in need of more than $1.5 trillion to meet margin calls, which could force some companies out of business and more to stop trading. We’ve seen a similar although so far less extreme example of this in the ULSD contract as the incredible volatility this spring drove a huge decline in open interest, and volume traded, which is adding to the volatility we’re experiencing now.
The weekly inventory reports are delayed a day due to the holiday, so expect the API report this afternoon and the DOE’s report tomorrow morning.
The EIA Tuesday highlighted 3 new LNG export projects scheduled in the US, that would increase capacity by nearly 1/3. That’s the good news. The bad news for parts of the world in desperate need of more natural gas supply is those projects don’t start for another year, and aren’t scheduled to be online until 2026.
There are two hurricanes in the Atlantic, and one in the Pacific today, but none of these storms appears to be a threat to energy infrastructure, even though Hurricane Kay is bringing rare tropical storm warnings to parts of Southern California. Kay looks like it could be a double-edged sword for the state, as it may snap the heat wave that’s brought the state’s electric grid to the brink of failure, but will bring high winds and rain to the area that could cause problems of their own. There are two more potential systems being tracked by the NHC, but the early guesses suggest low odds that either one will be a threat to the US.
Energy Futures Has Pulled Back From The Highs Seen During Yesterday’s Abbreviated Trading Session
Energy futures has pulled back from the highs seen during yesterday’s abbreviated trading session. The prompt month diesel contract has come down almost 15 cents since yesterday while WTI, America’s crude oil benchmark, made a run at the $90 level before pulling back and is now trading around $87 per barrel. New York gasoline is now trading just on the green side of flat, exchanging hands just half a cent above Friday’s settlement.
OPEC+ (aka OPEC & Friends/OPEC+Russia) surprised the energy market yesterday, announcing a small production cut for October, and spurred bullish price action Monday. Futures markets have cooled so far this morning after digesting that this “new” production level is just a reversion back to August’s supply expectation. The cartel bumped September’s production amount after meeting with the US President but has since clarified that increased supply was intended to be for one month only.
While not necessarily adding bearish sentiment, Russia’s declaration that it will respond to any imposed price cap on its oil exports by shipping to Asia will certainly be considered by anyone wanting to get long on oil. This announcement comes after the Group of Seven (G7) endorsed imposing a maximum price Russia could sell its oil for in order to trim the Kremlin’s hardy energy revenue stream. While requiring Russian’s to sell their product at discounts to current market value may seem like a great plan among the G7 countries, the idea’s practicality will hinge on compliance among several Asian countries, namely India and China.
The Atlantic hurricane season is continuing to ramp up so far this month. As hurricane Danielle continues to make it’s way Northeast in the top half of the Atlantic, Tropical storm Earl organized over the long weekend and will likely follow roughly the same path as it’s predecessor, steering clear of the US mainland and moving north, out to sea. Industry operators will still be keeping an eye on the couple of systems coming West off the coast of Africa as the closest of the pair has a 60% chance to exhibit cyclonic development over the next week.
Energy Complex Trying To Find A Floor As Gasoline Prices Lead Attempted Rally
The energy complex is trying to find a floor this morning, with gasoline prices leading an attempted rally after a wave of heavy selling swept the complex earlier in the week. Diesel prices were resisting the pull higher overnight, after having already dropped 45 cents this week, but have turned slightly positive following the August jobs report.
California gasoline basis values continued to surge Thursday, as a refinery hiccup turned one of the market’s largest sellers into a buyer. Regular CARBOB gasoline values in the LA and San Francisco spot markets are trading 85-95 cents over the October RBOB contract, with implied cash values ranging from $3.30-$3.40 this morning, compared to USGC values around $2.38/gallon, which are translating to retail prices in the south dropping below $3/gallon this week.
Meanwhile, California regulators asked residents not to charge electric vehicles yesterday, one day after announcing an upcoming ban on new gasoline power vehicles. Maybe they just need higher taxes.
While West Coast values are surging, East Coast prices have come back to reality, with the spread between NYH and USGC prices reaching a 6 week low yesterday, which has nearly wiped out the premium to ship barrels along the Colonial pipeline. That correction should help alleviate some of the product tightness across the South East and Florida markets as shippers no longer have the incentive to shift their barrels further north.
G7 leaders are expected to propose a plan to cap prices for Russian oil purchases. Whatever is announced is likely to have minimal impact on markets however as the Russians are proving capable of circumventing restrictions already imposed by the G7 countries, and hitting a record high export volume in August despite sanctions.
The US added 315,000 jobs in August according to the payrolls report estimate released this morning, while the agency lowered its estimates for July down by 105,000 from 398,000 to 293,000. The headline unemployment rate ticked up to 3.7% even though jobs increased, while the total unemployed (U-6) figure jumped from 6.7%-7%. Stocks and fuel prices ticked modestly higher following the report as it seems to be good enough to convince traders we’re not yet in a recession, without being so good that it might encourage the FED to be even more harsh to the free money junkies.
Yesterday the BLS reported that US labor productivity decreased 4.1 percent in the 2nd quarter of 2022 as hours worked increased nearly 3% but actual output declined by 1.4%. Labor costs increased by 10.2% in the quarter, which is the highest increase in 40 years.
Tropical Storm Danielle formed in the North Atlantic yesterday and is expected to become a hurricane today. The good news is that forecasts suggest this storm won’t be a threat to any land over the next week, although it could disrupt shipping traffic between the US and Europe, which has already been stressed by the fallout of Russia’s war on Ukraine. While the US has been fortunate so far this Hurricane season, South Korea is expected to be slammed by the most powerful storm in that country’s history next week. While that storm may not have a great impact on US energy markets, it could further complicate the global supply chain challenges.
September Trading Picks Up Where August Left Off - Heavy Selling Across Energy Complex
September trading is picking up where August left off, with heavy selling across the energy complex. Actually, that’s how August trading started as well with big moves lower the first week of the month, only to see a rally of nearly $1/gallon in diesel prices before the latest pullback started.
Demand fears of several varieties continue to get credit for the big drop in product prices, while low volumes/liquidity and reports that Russia continues to find ways to circumvent sanctions also seem to be contributing factors to the big price swings.
ULSD prices are leading the complex lower this morning, even though US inventories remain at dangerously low levels and exports are holding near record highs. Yesterday’s DOE report did show a sharp decline in the weekly demand estimate for diesel, which is no doubt contributing to the bearish sentiment.
One note to watch, just as we saw in August, ULSD futures left a gap in their chart when October took over the prompt position today, due to the backwardation in prices. One trading adage that actually works more often than not is that gaps get filled, meaning there’s a good chance we’ll see prices bounce back at least to $3.69 sometime in the relatively near future.
Gasoline futures are now at their lowest level since January 11th, and if today’s early selling holds, we could see spot prices in the USGC and Group 3 markets touch $2.20/gallon, which would mark a $2/gallon drop from their June peak.
While most gasoline prices are crumbling this week, gasoline basis values in LA spiked Thursday, more than offsetting the big drop in futures, as PADD 5 gasoline stocks fell sharply for a 4th straight week, and are now approaching their lowest levels since 2019. A combination of low refinery runs, almost no imports the past 6 weeks, and the end of the summer-grade gasoline spec for the year all seem to be contributing to that squeeze in gasoline prices.
For the first time in 25 years, there were no named storms in the Atlantic for the entire month of August, and we’re approaching the record for the longest stretch of days without a named system, even though the major forecasts for the year all called for above-average activity. We’re still about 2 weeks away from the peak of the season, however, meaning there’s still the majority of the annual activity left to come. The NHC is still tracking 3 systems this week, but none of them appear to be a threat to the US. If you’re wondering why we have to watch this so closely, take a look at the Refinery Thruput PADD 3 chart below and see how production has been impacted the past two years right about this time.