A Heavy Wave Of Selling Hit Energy Markets To Start The Week
A heavy wave of selling hit energy markets to start the week, as more demand fears seem to be driving a risk-off stance in markets around the world.
Beijing started mass COVID testing, which sparked fears that another one of the world’s largest cities would be locked down. Already the lockdowns in Shanghai have pushed Chinese oil consumption down an estimated 20% in April.
Slowing consumption is not just an international story anymore. A slowdown in US trucking demand is a concerning leading indicator for some, and a welcome change for others after more than a year of severe shortages in trucking capacity.
While demand fears are grabbing the headlines, supply shortages have not gone away yet, and we’re seeing more evidence of that today in diesel markets, both traditional and renewable. While most of the NYMEX futures contracts are seeing double digit losses this morning, May ULSD is down less than 3 cents, and trading nearly 36 cents above its June counterpart. Think about that for a second, diesel prices are worth more than 1 cent less every day in the near future given this extreme backwardation.
Biodiesel prices are surging to new record highs, and their RINs have rallied to their highest levels in more than 8 months last week, while ethanol & its RINs follow close behind. Indonesia announced a ban on palm oil exports to protect its domestic food supply, which sent shockwaves through the food and fuel oil industries which were already reeling from the war and weather-related supply restrictions. There was some relief this morning as the government clarified that the export ban only applied to processed oils, leaving crude palm oil available for export, for now.
Money managers continue to take a cautious approach to energy contracts, with short covering by speculators pushing net length in Brent higher, while new shorts in WTI decreased the net bet on higher prices. Refined products also saw minimal changes on the week, and continue to see extremely low levels of open interest as risk managers apparently still telling traders “don’t touch that” after the record shattering volatility in March.
Baker Hughes reported a net increase of 1 oil rig and 1 natural gas rig drilling in the US last week. North Dakota took credit for the increase this week, giving Texas a week off as it prepares for a new boom cycle after record setting permitting in the region last month.
There were a pair of noteworthy refinery fires over the weekend. One outside of New Orleans sent 8 workers to the hospital but is not expected to have a major impact on fuel supplies as the facility was in the midst of shutting down for planned maintenance. The other at an “illegal” refinery in Nigeria is reported to have killed more than 100 people in a shocking reminder of how desperate some countries are for fuel.
Click here to download a PDF of today's TACenergy Market Talk.
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“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.