Beware The Ides Of March - Biggest Daily Drop Of Year For Energy Complex Yesterday

Beware the ides of March. Wednesday saw the biggest daily drop of the year for the energy complex, which joined in a major selloff in risk assets around the world as fears over the latest banking crisis spread.
Futures did not waste any time moving towards their technical targets to the downside when chart support failed to do much at all to stand in the way of the selling wave yesterday morning. WTI dropped briefly below $66, its lowest since December of 2021, while ULSD dropped to its lowest level since early January of 2022, and RBOB closing the gap in its charts left behind by the RVP roll, which now leaves the complex looking like it may consolidate for a while.
Diesel prices continue to look the most vulnerable, with a move towards $2 possible if prices can’t hold above $2.50 to end the week. RBOB meanwhile doesn’t look nearly so bad despite the big drop yesterday, and now that the gap is closed on the continuous chart, there’s still an argument to be made that we could get a traditional spring rally over the next couple of months.
While the 10+ cent drops in refined products and 20-cent trading ranges are certainly noteworthy, they pale in comparison to what we saw in March of last year, when trading ranges were routinely north of 30 cents/gallon. March 15, 2022, for example, saw gasoline prices drop 17 cents with a 28-cent range, while ULSD dropped 25 cents with a 33-cent range, and that day was actually quite tame compared to the previous week.
The DOE had another adjustment of more than 15 million barrels (aka 2.2 million barrels/day) on crude oil inventories last week, which helped inventories build despite large increases in exports and refinery runs, while production remains stagnant.
Total petroleum demand remains soft, well below last year and the 5-year average as gasoline and diesel consumption are both holding at the bottom end of their 5-year seasonal range.
Exxon announced that its 250mb/day expansion at its Beaumont refinery was officially online Wednesday, which accounted for the 249mb/day increase in PADD 3 refinery runs last week. The DOE has not yet counted those new units in its capacity figures, which will mark the largest increase in US output in over a decade, and could be the last major refinery expansion ever in the US but will likely do so next week following the official announcement.
PADD 5 also saw a substantial increase in refinery runs last week of 124mb/day, or roughly 6% of capacity, as plants returned to service after a rash of issues in the past month. That increase in production was foreshadowed by large declines in gasoline basis values over the past couple of weeks.
The US Exported more than 6.2 million barrels/day of refined products last week, but gasoline and diesel only accounted for 2 million bpd of that total as the “other” liquids like propane, propylene, and other oils continue to see growth in both international demand and US production.
The IEA’s monthly oil report still suggests that global demand will accelerate sharply in 2023, bringing total consumption to a new record high of 102 Million barrels/day by the end of the year, despite the sluggish start. Rebounding air traffic and the release of pent-up Chinese demand are said to “dominate” the recovery. The report also forecasts refinery runs will stay strong this year, despite the recent collapse in diesel margins, as cracks are still strong by historical standards.
Couche-tard announced a $3.3 billion purchase of 2,200 stores from Total this morning, nearly doubling the company’s footprint in Europe.
Time for an omelet: The US PPI index decreased slightly in February, which brought a sigh of relief for those looking for any sign that inflation is going away. The news was less encouraging if you read further and saw that “Over 80 percent of the February decline in the index for final demand goods can be attributed to a 36.1-percent drop in prices for chicken eggs.”
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Energy Markets Are Holding Steady To Start Tuesday’s Session
Energy markets are holding steady to start Tuesday’s session after oil prices had their biggest rally of the year Monday.
Reports that Iraq had halted shipments on the Ceyhan pipeline through Turkey, which removed 400,000 barrels/day of exports from the world market temporarily were given much of the credit for the big move higher. The rally in oil came just a week after large speculators reduced their bets on higher prices to the lowest level in 7 years, providing yet another reminder of why the moves made by hedge funds is often seen as a contrary indicator of market direction.
Refined products touched a 2-week high overnight before pulling back to modest losses this morning but remain in the middle of their March trading range, which sets the stage for more choppy back and forth action as markets around the world search for direction and worry about what’s coming next.
California approved the bill that will create a new committee within the state’s energy commission that will oversee oil refiners and potentially levy penalties on them if they’re deemed to be making too much money on consumers. The state has already had a handful of refineries close down in the past 6 years, with another scheduled to close and convert to an RD facility in early 2024, and there’s no doubt that this new law may be yet another reason for the remaining facilities to consider closing their doors as well, which many will see as a victory.
The Dallas FED’s manufacturing Survey showed a small increase in production in March, after February showed a contraction for the first time since the COVID lockdowns. The business outlook remains mixed however as many noted uncertainties around the banking situation, along with continued supply chain and labor challenges as factors hindering growth.
New competitor for feedstocks? A moose breached the security gates at the refinery in Sinclair Wyoming Monday. No word if the animal was just lost, or searching for the soybeans that are now being used to make renewable diesel at that facility.
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Energy Futures Rebound to Start the Week
Energy futures are bouncing to start the week, following through on a recovery rally that saw Friday’s early losses wiped out and salvaged weekly gains.
Money managers have been bailing out of their bets on higher energy prices in recent weeks, and as the CFTC’s data is finally catching up after 2 months of delays, we can finally see those figures the same week they’re compiled. The past two weeks alone have seen a reduction of more than 100,000 WTI contracts held by large speculators, bringing the total net length to the lowest level since January 2016.
The COT data also shows large reductions in producer hedging during this latest selloff in a sign that the industry may believe that prices won’t stay this low for long.
A WSJ article over the weekend highlighted how the options traders may have exacerbated the push lower over the past two months and could help spark a recovery rally later in the year.
Baker Hughes reported an increase of 4 oil rigs drilling in the US last week, snapping a 5-week slide that had pushed drilling activity to a 9-month low. The Permian basin accounted for 3 of the 4 rigs added last week.
Iraq won a 9-year lawsuit against Kurdish oil shipments, and that result has temporarily halted shipments of oil from the autonomous Kurdish region via the Turkish Ceyhan pipeline system.
Saudi Arabia announced an expansion of its partnership with China, increasing its multi-billion investment in new refining infrastructure in the world’s largest oil buyer. We’ve already seen multiple new refinery projects come online in both countries over the past two years, and this new agreement will continue the trend of additional capacity in the eastern hemisphere while the west continues to see declines.
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Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
Oil prices are leading a slide lower to end the week after the US government walked back plans to buy oil since it’s dropped below $70, and the latest ripples in the banking crisis push stocks lower and the dollar sharply higher after it touched a 2-month low Thursday.
Even though the correlation between energy prices and stocks or currencies has been weak lately, or even opposite of normal in the case of the dollar, there still seems to be more influence lately as the fear trade has funds flowing back and forth between markets depending on whether or not risk-taking is in style that day.
The US Energy Secretary told congress that the agency won’t be refilling the SPR this year, despite previous pledges by the White House to buy oil when it dropped to $70, since the agency is still working through congressionally mandates sales of oil from the reserve. That news seems to be contributing to the downside in WTI and Brent prices as traders hoping to front run the DOE are now going to have to wait a while longer to do so.
Even though ULSD prices are up 17 cents from the lows set last week, they’re still on the verge of their lowest weekly settlement since January of 2022 should prices end the day near current levels. Given that this week’s recovery rally failed to take out the highs seen in previous weeks, charts continue to look bearish for distillates. Another run at $2.50 looks more likely and a break below that level, when the May contract takes the prompt position in another week, may be a foregone conclusion.
As has been the case for most of March, RBOB look as bad as ULSD on the charts, although that certainly isn’t helping so far today with gasoline futures outpacing the losses in diesel. Unless we see RBOB end the day down a dime or more (it’s down a nickel currently) the weekly trend will still be higher, and the charts will still be giving favor to another push towards $2.80-$3 this spring.
The LA spot market saw a healthy bounce in gasoline basis values Thursday following multiple refinery upsets in the area reported to local regulators. Meanwhile, the California Governors new plan to create an oversight committee to prevent price gouging – a major change from earlier proposals to levy a new tax on oil producers and refiners – passed through the Senate on Thursday. If this new bill is fully passed, it will allow the Governor to appoint that committee himself. A 1,000-page prediction of how that plan will work is available for less than $10 on Amazon.
Click here to download a PDF of today's TACenergy Market Talk.