Choppy Morning For Energy Prices, But The Volatility Continues To Slowly Diminish
It’s been another choppy morning for energy prices, but the volatility continues to slowly diminish, with “only” 10-12 cent price swings for refined products, compared to the 30-50 cent swings we got used to seeing in March.
So far the biggest story of the day is that Natural gas continues to flow from Russia to Europe despite threats to cut off supplies today for countries that wouldn’t pay in Rubles. An apparent loophole in the Russian ruble rule may allow both sides to keep those supplies moving, without “giving in” to the other, which seems to be helping alleviate some concerns of an immediate supply shortage.
Yesterday’s big news was the biggest planned release of US strategic petroleum reserves on record, after OPEC & Russia signaled they were not changing their supply plans despite pleading from the US and other nations.
While the long term impact of this SPR release (which accounts for less than 2 days’ worth of global demand) is debatable, it has certainly taken some of the backwardation out of the forward curve, and may become one of the regulatory arbitrage deals in history for buyers capable of utilizing that crude today and paying it back later at much lower prices.
That’s not a joke. The first day of April trading brings with it the first day of May ULSD as the prompt diesel contract, and it opened up trading some 35 cents below where the April futures contract ended. What does that mean for you? If you’re looking at a continuous chart you may see a huge drop in futures prices, but in reality, your cash prices are pointing to a 4 cent gain at the moment.
While the world worries about how they’ll replace energy supplies, Russia is struggling to cope with simultaneous inventory excesses and shortages within its borders. More Russian refineries are signaling that they’ll be forced to cut run rates due to a lack of storage as their buyers have disappeared, leading to the biggest drop in output on record in that country. On the other hand, Russia’s military continues to grapple with a lack of fuel supply, which is probably going to get worse after a Rosneft fuel terminal just 40 miles from the Ukraine border was reportedly attacked.
March was another strong month for job growth in the US, according to the estimate just released another 431,000 positions were added, and the February and March estimates were revised even higher by a combined 95,000. That strength helped lower both the headline and U-6 unemployment rates to pre-pandemic levels of 3.6% and 6.9% respectively. Equity markets did not react in a big way to that report, but energy futures did seem to find a bid just after its release.
Click here to download a PDF of today's TACenergy Market Talk.
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Wholesale Gasoline Prices Across Most Of The US Reached Their Lowest Levels In 2-Years Thursday
Wholesale gasoline prices across most of the US reached their lowest levels in 2-years Thursday, after the morning recovery rally fizzled in the afternoon. RBOB gasoline futures dipped below the $2 mark briefly, before settling just above it, while cash prices in several major markets dropped below $1.80 for the first time since December 2021, while crude oil and diesel prices reached fresh 6-month lows.
The bulls are giving it another go this morning, pushing futures up 5-cents for gasoline and 6- cents for diesel, trying to snap the streak of 6-straight daily losses for ULSD, although we’ll need to see products double their early gains to erase the weekly decline.
Energy prices didn’t react much initially to the November Payroll report that estimated 199,000 jobs were added during the month, while the official unemployment rate dipped to 3.7% from 3.9% and the U-6 rate dropped to 7% from 7.2%. Equity futures moved modestly lower immediately following that report as labor market resilience throws cold water on recent hopes for interest rate cuts, but as has often been the case for several months now, energy prices are managing to shrug off the move in stocks.
Big negative basis values continue to be the theme across the Gulf Coast and Mid-Continent, with USGC, Group 3 and Chicago all trading at 20+ cent discounts to futures for both gasoline and diesel. Those negative values are weighing on refining margins with USGC crack spreads approaching their lowest levels in 2 years, which will almost certainly curtail some refinery run rates through the winter months. East Coast refiners meanwhile are finding themselves in a strong position as shipping bottlenecks keep PADD 1 inventories low and their crack spreads remain in the mid $20/barrel range despite the recent pull back in futures.
The long-awaited Dangote refinery is reportedly receiving its first cargo of crude oil today. That new 650mb/day refinery would be the world’s largest single train refinery, but is already years behind schedule, and many still doubt its ability to run anywhere near capacity. We’ve already seen the impact Kuwait’s 615mb/day Al Zour refinery can have on markets across the Atlantic basin, so whether or not the Nigerian facility can ramp up run rates could have a major influence on product prices next year.
Click here to download a PDF of today's TACenergy Market Talk.
West Coast Gasoline Inventories Dropped Sharply Last Week And Are Now Holding Below Their 5-year Seasonal Range
Energy futures are bouncing this morning as buyers are finally stepping in after RBOB futures touched a 2-year low Wednesday, while WTI and ULSD both hit their lowest levels in 5 months. There are headwinds both fundamentally and technically, but so far, the market isn’t acting like a collapse is imminent and as the table below shows this is right about the time when gasoline prices bottomed out the past two years.
Saudi Arabia and Russia released a joint statement this morning, following Vladimir Putin’s trip to the Kingdom, urging OPEC & friends to join their output cut agreement, which takes the risk of a price war that could send prices plunging (as we’ve seen twice in the past decade) off the table for now and seems to be contributing to WTI climbing back above the $70 mark and Brent getting back above $75.
The DOE reported a healthy bounce back in fuel demand estimates after the annual Thanksgiving holiday hangover, but that wasn’t enough to prevent refined product inventories from continuing to build as refiners continue to return from maintenance and increase run rates. The builds in gasoline inventories particularly suggest it could be a tough winter for some refiners who are already having some challenges clearing their extra barrels.
The exception on gasoline comes in PADD 5. West Coast gasoline inventories dropped sharply last week and are now holding below their 5-year seasonal range, which is dramatically lower than year-ago levels which set the top end of that range. Those tight stocks help explain why West Coast values are the most expensive in the country by a wide margin and leave little cushion to deal with unplanned maintenance which helps explain the jump in CARBOB basis values this week.
On the diesel side of the barrel, the recent themes of tight supplies on the East Coast, ample supply in the Midwest and Gulf Coast, and a Wild Card on the west coast since we don’t see Renewable Diesel inventories in the weekly figures continues. Take a look at the PADD 2 gasoline and diesel charts below and it’s easy to understand why we’re seeing cash prices in both Group 3 and Chicago approaching multi-year lows with 20-30 cent discounts to futures becoming the rule rather than the exception.
The market seemed to shrug off the drop in total US crude oil stocks, as Cushing OK stocks increased for a 7th straight week, and the decline was largely driven by the largest negative adjustment value on record, which went from a positive 1.2 million barrels/day last week to negative 1.4 million barrels/day this week. The EIA has done a lot of work trying to fix the bugs in its report system and to better define what exactly it’s reporting, but clearly there’s still more work to be done.