Bleeding Has Stopped For Energy Prices
The bleeding has stopped for energy prices, temporarily at least, after another DOE-inspired tidal wave of selling knocked prices to fresh multi-month lows Wednesday. If the tentative early gains can hold, it would snap a 6-day losing streak for gasoline futures that have wiped out more than 25 cents/gallon. (As I was about to hit send, the 2 cent gains from 30 minutes ago have turned into losses, which suggests it’s too soon to declare an end to the meltdown.)
Stock markets seem to be happy that negotiations are underway between US & Mexican representatives in an effort to avoid another tariff battle. Although energy and equity prices have detached from one another recently, those discussions could have direct impacts on US refiners who are weighing in to try and avoid paying more for imported crude, and for exported products should a retaliatory tax battle break out.
US Oil production reached a new all-time high at 12.4 million barrels/day last week, that’s 1.5 million barrels/day more than 1 year ago, and more than 3 million barrels/day more than 2 years ago.
Diesel demand remains dismal with last week’s estimate from the DOE marking the lowest level for May in the past 7 years.
Gasoline stocks continued to build, led by the largest weekly increase in PADD 5 (West Coast) inventories in more than 20 years. The past 3 weeks have seen PADD 5 gas stocks move from below their 5 year seasonal range to the top end of it as record imports flooded the market to take advantage of the high prices created in the wake of numerous unplanned refinery issues. Based on the industry’s uncanny knack for over-healing its wounds, it would not be surprising to continue to see builds in the coming weeks even though supplies are now ample.
You know a market is bearish when…one of the country’s largest refineries reports operational issues due to storms and prices barely flinch.
The heavy rains sweeping across the country continues to threaten many states already fighting flood waters. Reports Wednesday indicated that Exxon was facing multiple unit shutdowns at its Baytown TX plant, one of the country’s largest refineries. Gulf coast gasoline and basis values moved modestly higher on the day, and it did not seem to move the needle in futures markets, but it’s another reminder that we’re starting off the hurricane season with refineries in an unusually vulnerable spot due to the spring rains.
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Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
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The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.