Conflicting Headlines And Inventory Data Points Continue To Confound The Market

Market TalkThursday, Nov 4 2021
Pivotal Week For Price Action

Energy contracts had their biggest 1-day selloff since July on Wednesday as a steady round of selling that started Tuesday afternoon continued throughout the day. Just when it looked like that the bulls had thrown in the towel and we were in for a technical breakdown, prices have rallied sharply overnight, wiping out most of Wednesday’s big losses as conflicting headlines and inventory data points continue to confound the market.

No official announcement from OPEC yet, but most reports continue to show expectations that the cartel will stick with its current output plan, in spite of pressure from world leaders to increase more.

Headlines about Iran seem to be causing at least some of the whiplash in prices, with news of a return to nuclear negotiations getting credit for some of Wednesday’s selling, followed by Iran claiming that the US had tried to seize one of its oil tankers in the Sea of Oman reminding everyone that negotiating with Iran is a fool’s errand challenging. 

Equity markets have rallied to new record highs after the FOMC made it clear that they still believe inflation levels at their highest levels in 30 years are still transitory, and that the FED can be patient with interest rate hikes. Even though the correlation between energy and equity markets has been close to zero in recent weeks, the market’s reaction to that statement does seem to take a fear-induced selloff off the table for now.

Who would ever guess that on a day when the DOE reported US Gasoline inventories reached a 4 year low, and PADD 1 inventories (home to the NYMEX delivery hub) reached a 7 year low, would also be the day when gasoline futures had their biggest daily drop in nearly 4 months. Of course, given the size of the rally over the past 1, 4 and 18 months, this seems a little bit like the market’s tendency to buy the rumor and sell the news, in this case pertaining to tightening supplies. This is also a good reminder that the futures market is less concerned about where we are today, than where we are headed, and with seasonal factors all pointing to gasoline stocks building steadily over the coming months, and high prices surely to dent consumption, it’s getting harder to see a reason to keep on betting on prices above a 7 year high.

Despite the big bounce this morning, charts near term continue to favor lower prices as refined products are setting lower lows and lower highs on the daily charts ever since prices peaked in late October. The $2.40 range for RBOB and $2.50 area for ULSD look to be good near term pivot points to watch. If prices can climb back above those levels, there’s a chance we see another run at the October highs, but if they can’t, another big move lower seems likely.

One more bearish factor to consider, it wasn’t just futures that were selling off heavily Wednesday, most cash markets saw basis values decline as well, pushing cash markets even further down on the day. When the big physical traders aren’t believing what the robots are doing the exchange, we’ll often see those diffs move contrary to futures, but yesterday’s action suggests that the concern of the winter demand doldrums for gasoline is real. No such concerns for ethanol prices however as spots continue to surge to record highs across the country, even as US ethanol output remains well above normal levels. While the ethanol forward curve has become murky due to a lack of trading in those futures, it looks like there’s 50-60 cents of backwardation between now and the end of the year, which means whenever the ethanol logistics logjam breaks there’s going to be a huge move lower in a hurry.   

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Market Talk Update 11.04.2021

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action