Market Talk - 2023 february
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Today Is The Last Trading Day For March RBOB And ULSD Contracts
Gasoline prices are leading the energy complex in another rally Tuesday as refinery issues around the country, on top of an already busy maintenance season have some traders acting like the respite in supply disruptions we’ve become accustomed to over the past year may be coming to an end. While diesel prices have been leading the action for most of the past year, we’re now in the window of the annual spring gasoline rally so it won’t be surprising to see RBOB take the lead more often over the next several weeks.
Today is the last trading day for March RBOB and ULSD contracts. Most regional markets have already transitioned to trading vs the April contracts, but the NYH and Group spots will change today, so watch the RBJ and HOJ contracts for direction today if you haven’t already made the switch. Tomorrow will no doubt create confusion, as it does every year, when the April RBOB contract takes over the prompt position as it is trading at a 20+ cent premium to March futures due to the change in RVP specifications between the contracts and wreaking havoc on basis and rack spreads due to the mismatched timing of pipeline, terminal and retail transitions to summer-grade fuels.
More coast to coast winter storms are keeping drivers off the roads in parts of the country, while the risk of power outage and wind damage will keep some refinery operators on edge for the rest of the week. There were at least 3 different refinery issues talked on the West Coast Monday, and while it’s hard to assess what may be storm related, and what has to do with ongoing spring maintenance, the strong reaction in gasoline basis values left no doubt that traders see a sudden reduction in supply. Both LA and San Francisco spots rallied to 4 month highs Monday, with SF CARBOB values leading the way trading at a 55-cent premium to April futures.
The gulf coast also had several reported hiccups at refineries, with plants in Pasadena, Deer Park, Big Spring and Baton Rouge all said to be dealing with unplanned issues. So far Gulf Coast basis markets are largely shrugging off that news with little change in either gasoline or diesel values.
The EIA took a closer look at the impacts of the Suncor refinery downtime this winter, noting the regional price increases while most of the US was enjoying lower prices. That facility has been in the process of restarting some units over the past couple of weeks, and has been producing some fuel, although there have been numerous leaks and delays along the way. Markets for space on Magellan’s mountain line are still being talked at double digit premiums as suppliers believe it will take at least another month for supplies to heal, but those values are down 40-50 cents from their peak in January.
A suspected drone attack started a fire near a Russian refinery on the coast of the black sea overnight. Given the location of the facility, and the immediate threats to not spread “Fake information”, we’ll probably never know the real cause or effect of this latest attack on Russian energy infrastructure.
Baker Hughes Reported A Decline Of 7 Oil Rigs Drilling In The US, While The Natural Gas Rig Count Held Steady
It’s another mixed bag for energy markets to start the week, with ULSD trying to follow through on its strong showing Friday, while RBOB is flat and WTI is trading modestly lower to start the day.
Natural gas prices have rebounded sharply in the past 4 days, reaching $2.69 overnight after trading as low as $1.96 last Wednesday. The restart of the Freeport export facility, and some forecast models calling for below average temps in March after a much warmer than normal winter are both getting credit for that rally, which is no doubt having some positive impact on ULSD prices which have rallied 15 cents since reaching their lowest levels in 13 months last week, just as natural gas prices were bottoming out.
The CFTC issued its first set of commitments of trader's data in nearly a month Friday, releasing data originally scheduled to be published from January 31. The agency hopes to get caught up with its reporting by Mid-March. In case you were wondering, the contracts directly impacted by the cyber-attack, based on the latest update were “IFED MISO IN RT Off-Peak and CME USD Malaysian Crude Palm Oil Calendar Spread contract markets”. Somehow, I think the world could have managed without seeing the COT data on those two contracts.
While we’re still a couple of weeks behind for NYMEX contracts, we can see the money flows in ICE Brent and Gasoil contracts, and no surprise there it’s been steady liquidation by hedge funds for diesel contracts so far in February as prices have crumbled.
Baker Hughes reported a decline of 7 oil rigs drilling in the US, while the natural gas rig count held steady. California, New Mexico, Oklahoma and West Virginia all had a decline of 2 or more rigs on the week, while Texas held steady. Canada looks like it has topped out for its winter drilling season, with a reduction of 5 rigs on the week.
Russia’s influence on European energy supplies continues to be a wild card, with changes continuing on a near daily basis. Over the weekend we saw reports that Russia was allowing shipments of crude from Kazakhstan to Germany to begin flowing after delaying them for several weeks only then to find out that Russia had cut off shipments to Poland due to “paperwork issues”. Neither event seemed to have much influence on futures prices but serve as a reminder that despite the relative calm that’s taken over markets so far in 2023, there are still plenty of unknowns in the global supply network this year.
The Deer Park TX refinery was forced to shut its smaller crude unit after a fire on Thursday, which was one of 3 fires to hit owner Pemex’s operations in the US and Mexico that day.
So far there are no reports of major issues at California refineries following the blizzard, although power outages in the region were numerous.
Charts Continue To Suggest Diesel Is In A Precarious Position
It’s a mixed bag for energy markets to start Friday’s trading with diesel prices up 2 cents, gasoline down 2 cents and crude oil flat in the early going.
Diesel prices had their lowest settlement Thursday since prior to the war breaking out a year ago, an event that was the major factor in ULSD futures breaking just about every record on the books. The March ULSD contract also came within a penny of hitting its lowest outright value of the past 13 months before once again finding enough of a bid to avoid a technical collapse. Charts continue to suggest diesel is in a precarious position, with a major slide possible if the $2.66 range fails to hold support. If you’re a believer in the trading adage that “There’s no such thing as a triple bottom” on the charts, then a slide into the $2.50s should feel inevitable as we’ve seen lows near $2.66 three times in the past 3 weeks.
Crude oil inventories saw another large build, swelling by more than 7.6 million barrels, despite a surge in export activity that sent more than 32 million barrels of crude out of the country last week. The combined build in crude oil stocks reported over the past two weeks totals nearly 24 million barrels, even though those same reports show strong export growth and stagnant imports. Refinery runs and crude production can’t explain the big inventory gains since both were flat last week, leaving many to wonder how a government report could possibly have such confusing and misleading data.
Don’t worry, the EIA makes it perfectly clear by reporting a 2 million barrel/day adjustment to US Crude oil supplies in each of the past 2 weeks. 2 million barrels/day X 14 days = 28 million barrels of oil that the agency has in its compiled reports and is saying has no idea how it got there.
If you’re enjoying the confusing government data theme today, check out the PCE report that shows inflation continues to run hot and has stock markets pulling back yet again since it reinforces the idea that the FED won’t be letting up its tightening any time soon.
Los Angeles diesel basis values dropped 11 cents on Thursday, even though PADD 5 diesel inventories remain well below the 5-year seasonal range and multiple refinery issues continue to limit output in the region. Soft demand was likely the culprit in that large basis slide as 6” of rain and the first blizzard warning in parts of California in more than a decade are certainly not encouraging trucks to be on the road.
Total US Diesel inventories climbed back into their 5-year seasonal range for the first time in a year and moved above prior year levels for the first time since 2021. Diesel demand remains at very low levels for this time of the year, with minimal heating demand getting much of the blame for the worst start to a year for diesel consumption in a decade.
The US exported nearly 6 million barrels of refined products last week, but most of it wasn’t gasoline and diesel. In fact, the charts below show propane and propylene exports were on part with gasoline and diesel, demonstrating the growing importance of HGLs in the global energy mix.
Week 8 - US DOE Inventory Recap
ULSD Wiped Out The 8 Cent Gains From Tuesday
Energy contracts were trying to bounce to start Thursday’s session after another heavy wave of selling knocked them sharply lower on Wednesday and saw ULSD wipe out the 8 cent gains from Tuesday.
WTI has traded lower for 6 consecutive trading sessions, but still doesn’t look overly bearish on the charts, as it remains above the lows set in each of the prior 3 months. That said, the contract is “only” $5 away from setting new lows for the past year, and if the December support near $70 breaks, there’s not much on the charts to stop a slide to $62.
Russia is trying to stop the slide in oil prices, with reports suggesting plans to cut exports from Western ports by 25%, in excess of the already announced production cuts. The relative lack of reaction to that latest attempt to stir the oil pot is yet another sign of the weak market sentiment compared to a year ago when the war broke out.
ULSD still looks the most bearish on the charts, even though fundamentally there’s a strong argument that diesel stocks remain in the most precarious position. Even with today’s modest gains, ULSD prices are just 7 cents off of their lows for the past 12 months and if the $2.66 range fails to hold it looks like there’s a good chance, we’ll see a quick move towards $2.50.
The API reported another large build in US Crude stocks of nearly 10 million barrels last week, adding to last week’s estimate of a 10.5-million-barrel gain. The API’s figures seem to be catching up to the EIA’s data that showed stocks swelled by 16 million barrels last week as refiners cut runs due to heavy maintenance scheduled and numerous unplanned outages. The API also estimated small builds in gasoline and diesel inventories, in line with seasonal expectations. The EIA’s report is due out at 11am Eastern.
California’s LCFS credits spiked to a 6 month high this week after CARB suggested it would propose accelerating its emissions reduction targets this week to prop up prices that have come under steady selling pressure over the past 2 years thanks to a surge in renewables production. The $20 increase in credits this week adds roughly 2.5 cents/gallon to the cost of each gasoline and diesel (which create a deficit under the program) sold in the state but increases the value of Renewable Diesel by 10-13 cents/gallon depending on the CI value of the product.
California’s Cap and Trade program credits (CCAs) didn’t move on this news, as that program has a set credit amount, rather than a mechanism for renewable producers to create credits. The February CCA auction results are expected later this afternoon, which can be a market moving event depending on where prices settled out in the quarterly auction vs where they’ve been trading in the open market.
Energy Futures Buck Sinking Equities, OVX Drops To Yearly Low
It’s a quiet start for energy markets Wednesday with gasoline and diesel prices hovering around break even for the day following a strong recovery rally in diesel prices Tuesday that earned back nearly half of last week’s heavy losses.
Refined products continue to shrug off moves in equity markets, with a 2% drop in US stock indices doing little to slow the bounce in refined product prices Tuesday. It’s also worth noting that the oil volatility index (OVX) reached its lowest level since January of 2022 last week, even as stocks are seeing a tick higher in their volatility readings (VIX).
A new report suggests that European refinery runs reached their highest levels since the start of COVID in January, which no doubt played a role in the substantial pullback in crack spreads we’ve seen in the past several weeks. The big question now is whether or not those plants can maintain that level of run rate, or if it was a short-term acceleration in preparation for the Russian diesel embargo. Speaking of which, a Reuters report today highlights how traders continue to get creative with their boats to bypass sanctions.
Freeport reported it had received regulatory approval to restart commercial activities at its LNG facility that has been offline for nearly 8 months due to a fire. That facility is the 2nd largest in the US, and accounted for more than 10% of export volumes, so should help alleviate some of the domestic glut of supplies that have pushed Natural gas futures below $2 for the first time since September of 2020.
California’s Air Resources Board (CARB) is holding a public workshop today to discuss potential regulation amendments. The slide deck published ahead of that meeting suggests the agency is pushing for a “step change” in carbon intensity targets to boost LCFS credit prices and “increase ambition for 2030”. LCFS values rallied to a 6 week high following that report, although they remain at just a fraction of the value we saw 2 years ago…which is why the agency seems to see the need to change target reduction levels to prop up those prices. The slide deck also suggests the agency is looking to add intrastate Jet Fuel usage to the LCFS program, and phase out some forms of renewables, like RNG (aka biomethane).