Another Day Of Heavy Selling In Energy Contracts

Market TalkMonday, Aug 9 2021
Pivotal Week For Price Action

It’s another day of heavy selling in energy contracts, with refined products now down 17 cents or more so far in August. As has been the case for most of the past 18 months, demand fears from the latest rise in COVID cases is taking much of the blame for the latest wave of selling. The charts meanwhile had been hinting for some time that a substantial pullback may be coming after a 9 month rally finally appeared to have stalled out.  

The big test this week looks to be the July lows which WTI has already broken below this morning, putting the contract at risk of a drop to $62 in short order. Refined products still have some work to do to get close to those lows ($1.96 for ULSD and $2.07 for RBOB) which could create a bit of a technical tug of war between crude and its products.

Speaking of which, money managers (aka hedge funds) continue to struggle with timing on refined product trades. The latest CFTC COT report showed funds increasing their net length (bets on higher prices) last week, just in time for the latest round of heavy selling. Distillates in particular look troublesome for the large speculators, as the length held in HO contracts reached a 3 year high last week, and may add to the selling pressure if that length is forced to liquidate by margin calls. The performance in crude oil bets has been better, with WTI net length reaching a 9 month low ahead of this sell-off.

Baker Hughes reported a net increase of 2 oil rigs operating in the US last week, offsetting the drop we saw in the previous week. Don’t expect this stagnation in drilling activity to cause a drop in oil production however, as a Rystad energy report last week detailed that drilled by uncompleted (DUC) wells have dropped to an 8 year low as producers are choosing to work through their backlog before focusing on drilling new wells.

The recent spike in West Coast basis values should be drawing imports of refined products to Northern California and PNW ports, but they may soon find competition from Mexican buyers if a weekend fire at the country’s largest refinery disrupts operations. The country has been walking back its plans to open up its fuel market, trying to give PEMEX back control of the nation’s fuel supply, and events like this fire show that ultimately the country will need outside help.

storm system moving towards the Caribbean is given 70% odds of being named this week, with a good chance that it will head towards Florida, which would keep it east of the oil production and refinery centers in the Gulf of Mexico. A 2nd system right behind the first is given 20% odds of development, and we’ve reached the time of year where it will be rare not to have some system we’ll need to watch daily.

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Market Update (01A) 8.9.21

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Market TalkWednesday, Apr 24 2024

Energy Markets Trading Quietly In The Red As Ethanol Prices Rally To Five-Month High

Energy markets are trading quietly in the red to start Wednesday’s session after a healthy bounce Tuesday afternoon suggested the Israel-Iran-linked liquidation had finally run its course.

There are reports of more Ukrainian strikes on Russian energy assets overnight, but the sources are sketchy so far, and the market doesn’t seem to be reacting as if this is legitimate news.

Ethanol prices have rallied to a 5-month high this week as corn and other grain prices have rallied after the latest crop progress update highlighted risks to farmers this year, lower grain export expectations from Ukraine, and the approval of E15 blends this summer despite the fact it pollutes more. The rally in grain and renewables prices has also helped RIN values find a bid after it looked like they were about to test their 4-year lows last week.

The API reported small changes in refined product inventories last week, with gasoline stocks down about 600,000, while distillates were up 724,000. Crude oil inventories increased by 3.2 million barrels according to the industry-group estimates. The DOE’s weekly report is due out at its normal time this morning.

Total reported another upset at its Port Arthur refinery that’s been a frequent flier on the TCEQ alerts since the January deep freeze knocked it offline and damaged multiple operating units. This latest upset seems minor as the un-named unit impacted was returned to normal operations in under an hour. Gulf Coast basis markets have shrugged off most reports of refinery upsets this year as the region remains well supplied, and it’s unlikely we’ll see any impact from this news.

California conversely reacted in a big way to reports of an upset at Chevron’s El Segundo refinery outside of LA, with CARBOB basis values jumping by more than a dime. Energy News Today continued to show its value by reporting the upset before the flaring notice was even reported to area regulators, proving once again it’s ahead of the curve on refinery-related events. Another industry news outlet meanwhile struggled just to remember where the country’s largest diesel seller is located.

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Pivotal Week For Price Action
Market TalkTuesday, Apr 23 2024

The Struggle For Renewable Producers Continues As A Rapid Influx Of Supply And Crashing Credit Prices Make Biodiesel

The sigh of relief selloff continues in energy markets Tuesday morning, with gasoline prices now down more than 20 cents in 7 sessions, while diesel prices have dropped 26 cents in the past 12. Crude oil prices are within a few pennies of reaching a 1 month low as a lack of headlines from the world’s hot spots allows some reflection into the state of the world’s spare capacity for both oil and refined products.

Gasoline prices are trading near a 6-week low this morning, but still need to fall about another nickel in order to break the weekly trendline that pushed prices steadily higher since December. If that trend breaks, it will be safer to say that we saw the end of the spring gasoline rally on April 12th for the 2nd year in a row. Last year RBOB futures peaked on April 12 at $2.8943 and bottomed out on May 4th at $2.2500. The high (at this point) for this year was set on April 12th at $2.8516, and the low overnight was $2.6454.

It’s not just energy commodities that are seeing an unwind of the “flight to safety” trade: Gold prices had their biggest selloff in 2 years Monday and continue to point lower today. Just how much money poured into commodities in the weeks leading up to the direct confrontation between Israel and Iran is unclear, but we have seen in year’s past that these unwind-events can create a snowball effect as traders can be forced to sell to cover their margin calls.

Supply > Demand: The EIA this morning highlighted the record setting demand for natural gas in the US last year, which was not nearly enough to offset the glut of supply that forced prices to a record low in February. A shortage of natural gas in Europe was a key driver of the chaotic markets that smashed just about every record in 2022, and an excess of natural gas supply in Europe and the US this year is acting as a buffer, particularly on diesel prices.

The struggle for renewable producers continues as a rapid influx of supply and crashing credit prices make Biodiesel, RD and SAF unprofitable for many. In addition to the plant closures announced in the past 6 months, Vertex Energy reported Monday it’s operating its Renewable Diesel facility in Mobile AL at just 50% of capacity in Q1. The truly scary part for many is that the $1/gallon Blender's tax credit ends this year and is being replaced by the “Clean” Fuel production credit that forces producers to prove their emissions reductions in order to qualify for an increased subsidy. It’s impossible to say at this point how much the net reduction will be for domestic producers, but importers will get nothing, and at current CI values, many biodiesel producers may see their “blend credit” cut by more than half.

Click here to download a PDF of today's TACenergy Market Talk.