December Trading Is Kicking Off With Modest Gains For Energy Contracts
December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.
Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally. New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.
The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.
US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.
Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait.
US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.
The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel.
There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.
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Week 38- US DOE Inventory Recap
It’s A Soft Start For Energy Markets Wednesday As Traders Await The Weekly Inventory Report, And The FOMC
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View AllThe 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.
Week 38- US DOE Inventory Recap
It’s A Soft Start For Energy Markets Wednesday As Traders Await The Weekly Inventory Report, And The FOMC
It’s a soft start for energy markets Wednesday as traders await the weekly inventory report, and the FOMC.
Whiplash is the theme of the week for diesel prices that are trading down 7-cents this morning, after a 10-cent rally Tuesday, that followed a 10-cent decline Monday. The weekly trend-line that helped propel values up more than $1/gallon since July 4th is still barely intact, and may prove pivotal in the weeks ahead, with a slide back below $3 looking likely if it breaks down, while a run towards $4 by year end can’t be ruled out if it holds.
Gasoline prices are trading lower for a 4th straight session and have given up 15 cents/gallon over that stretch. While gasoline futures are looking weak, shippers are paying up to move gasoline north on Colonial again, with line space premiums for Line 1 trading above 4- cents/gallon Wednesday. The transition to winter grades that increases output at Gulf Coast facilities, and the maintenance at two refineries on the East Coast both seem to be contributing to the surge in values.
Another bubble burst? Basis values for gasoline and diesel in LA spot markets dropped 30 cents Tuesday as sellers emerged on both sides of the barrel for the first time in nearly a month.
The API reported another large draw in crude oil inventories last week, with total US inventories declining more than 5 million barrels on the week, while Cushing OK stocks dropped more than 2 million barrels. It was a mixed bag for refined products with gasoline seeing a small increase of around 730,000 barrels, while diesel stocks dropped by 250,000. The EIA’s weekly report is due out at its normal time this morning.
Reuters reported Wednesday that the surge in WTI prices has closed the arbitrage window to Europe, while Bloomberg is reporting that a French shipper has been driving the bidding for physical prices along the Gulf Coast that’s compounded the jump in futures prices.
RIN values continue their slide this week, trading in the $1.15 range for D4 and D6 values, which marks an 18-month low for ethanol (D6) RINs, and a 30-month low for the Bio/RD (D4) values. The drop in RINs spells more bad news for many RD producers that are also struggling with a sharp drop in California LCFS values, and shipping delays in the Panama Canal. Ethanol prices have also dropped sharply this week as concerns over a supply disruption following last week’s explosion at the country’s largest ethanol plant are subsiding.
We dodged a couple of major storms in the past week with Lee’s late shifts to the east minimizing the damage along the East Coast, and Nigel’s eastward path making it a non-issue. The NHC is tracking 2 other potential systems this week, one looks to be a rain maker over the Southeast US that’s unlikely to develop, while the other is given 70% odds of being named as it moves across the Atlantic and is in the zone that could make it a threat to either the Gulf or East Coasts to start October.
Pretty much nobody expects to see the FED raise rates again today, with the CME’s Fedwatch tool showing 99% odds that rates hold at current levels, while the market is fairly split on whether or not we’ll see another increase at either of the two remaining FOMC meetings this year.
Motiva’s Pt Arthur TX refinery, the largest in the US, reported an upset at an FCC unit Tuesday. Gulf coast spot markets didn’t seem to flinch on the news, suggesting the impact on operations is minimal.
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