Combination Of Bullish Technical And Fundamental Factors To Push Oil And Diesel Prices To 7 Year Highs
The rally continues in energy markets as a combination of bullish technical and fundamental factors combine to push oil and diesel prices to 7 year highs. For ULSD, this would mark a record setting 12th straight trading session with gains, but since yesterday’s holiday means there was no settlement published, it will only count as 11.
“There’s no such thing as a triple top.” In October 2018 Brent crude reached a high of $86.74 before falling to $50 in December. In October of 2021 Brent topped out at $86.70 before dropping to $65 in December, and yesterday Brent topped out at $86.71. The old, and often disputed, trading adage proved true overnight, with Brent rallying north of $88, which now opens the door for another move higher, with a rally to $100 looking certainly possible. ULSD is looking similarly bullish on the charts, with a push towards $2.80 and even $3 looking more likely now that prices have enthusiastically followed through on their breach of technical resistance.
It’s not just the charts that look supportive of a sudden spike either, the escalation of tensions in Ukraine seem to be contributing to some panic buying as the risk of Russia using oil and gas exports as a weapon seems to be growing. In addition to the large amounts of natural gas which can indirectly push up oil and product prices when replacement options are needed, Russia exports roughly 2 million barrels/day of oil to other parts of Europe, that will no doubt be threatened if the conflict continues to escalate.
Cause or Effect? The combination of bullish factors has drawn large amounts of fund money back into the energy arena in recent weeks, which can create a snowball effect as bandwagon jumping begets more buying. So what might stop the rally? Short term there are plenty of overbought signals on the charts, so trading algorithms might start selling heavily at any sign of a pullback. Longer term, the stock market may be foreshadowing the end of the bull run as it continues to pull back under the weight of higher interest rates, and in some cases, higher fuel prices. Unfortunately, that sets up a scenario where a supply-fear price spike may lead to a longer term demand collapse and we end up seeing lower fuel prices because the economy starts to shrink.
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Energy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
Click here to download a PDF of today's TACenergy Market Talk.
WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.