A Trio Of Headlines Are Pushing Energy Prices Sharply Lower
Last week’s supply fears that sparked the strongest rally since April have given way to demand fears following a trio of headlines that are pushing energy prices sharply lower. Another round of lockdowns in China is certain to curb demand for fuel by the world’s largest oil importer, European markets are facing fears of financial market instability after the Bank of England was forced to intervene again to prevent fire selling of government debt, and JP Morgan’s CEO warned that the US is likely about to dip into a recession.
That trio of negativity seems to be the driving force behind the sharp pullback in futures this week, whereas physical markets continue to signal that supplies are tight and options to refill storage tanks are few and far between. See this Bloomberg article for a detail look on the changing flows of Russian oil, and why that means supply options globally may soon go from bad to worse.
ULSD futures are leading the move lower after several 10+ cent swings Monday that eventually led to a weaker finish following several rallies throughout the day. The November contract is currently trading down around 15 cents, after being down as much as 22 cents overnight, marking a 39 cent drop from the high trade set Monday morning. Considering that ULSD prices had risen 98 cents in 2 weeks, this type of pullback shouldn’t be too surprising, and was actually a common occurrence this spring, but is also a good reminder of why open interest has dropped so sharply as many traders simply aren’t allowed to take on this type of risk.
The rally, and pullback, in ULSD is eerily similar to what we saw in August, with a 97 cent run-up over two weeks followed by a big reversal. If that pattern plays out again, we should see prices stabilize for a week or two in the $3.60 range. The big question from there is if prices will give back all of their gains like we saw in September, or if they’ll make another push higher. Longer term charts, and inventory reports, continue to favor another rally towards the $4.50 mark this winter.
A storm system is given 60% odds of developing in the Gulf of Mexico this week, but forecast models suggest it will bring heavy rains to Mexico and not threaten refinery row along the gulf coast.
Click here to download a PDF of today's TACenergy Market Talk.
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View AllThe Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.