Diesel Futures Are Trying To Lead The Energy Complex Higher To Start The Week
Diesel futures are trying to lead the energy complex higher to start the week, while gasoline prices are dragging modestly lower after touching new lows for the year overnight.
After 6 straight weeks of selling that have knocked more than $1.90/gallon out of prompt futures prices, ULSD contracts are finding a bid this morning as a major winter storm sweeps the country, and offers another reminder that the world is still short on heating supplies. This storm could prove to be an ultimately bearish factor for many parts of the country however as fewer and fewer people still heat their homes with distillates, and many vehicles may be forced to stay off the roads this week. This week’s action could prove pivotal technically for ULSD, as a layer of chart support around $2.76 that formed last week could be the springboard for the next big rally, or could lead to a slide towards $2.20 in the next 2-3 months if it breaks.
The big drop in refined product prices over the past 6 weeks has pushed crack spreads to their lowest levels since January, and may encourage some refiners to cut back on the unusually strong run rates we’ve seen over the past few weeks.
RBOB gasoline futures touched a new low for the year overnight at $2.02, marking a $1/gallon drop from their October highs. Unlike heating oil, gasoline contracts don’t have the benefit of any seasonal factors with less than 2 weeks left before Christmas, and the big plunge in demand that follows.
Crude oil prices continue to shrug off the Keystone pipeline spill news, as that appears to have been contained, and other delivery options appear to be able to spread the load short term.
Money managers saw a big decline in their net length held in refined product contracts last week with ULSD, Gasoil and RBOB contracts all seeing notable liquidations of long positions and distillates also seeing new shorts being added. Crude oil contracts were mixed on the week, with WTI seeing a modest increase in speculative length, while Brent saw a small decline. The sigh of relief over European energy supplies can be seen in the Brent and Gasoil figures which are both seeing 2/3 less bets on higher prices now than they were this time last year, while the general lack of speculative enthusiasm for energy contracts despite historically low supplies is seen as another sign of the looming economic recession.
Open interest in Brent and ULSD contracts fell to a fresh 6+ year low last week as the combination of volatility and increased margin requirements, which are exacerbated by higher interest rates, continues to keep some traders on the sidelines.
Baker Hughes reported a decline of 2 oil rigs, and 2 natural gas rigs drilling in the US last week as the industry continues to show restraint in its attempts to raise output. The relative lack of drilling investment was called “Un-American” by a White House appointee over the weekend, in the same interview the advisor highlighted the goal of shrinking energy demand.
The IEA released a report last week highlighting how energy security concerns have accelerated investment in renewable energy options, with the next 5 years expected to witness as much new renewable electricity brought online as we’ve seen over the past 20 years. Meanwhile, a major breakthrough in fusion energy technology will be announced this week as a big step towards clean energy alternatives, even though the technology is likely many years away from widespread commercial use.
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Energy Markets Are Holding Steady To Start Tuesday’s Session
Energy Futures Rebound to Start the Week
Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
FOMC Rate Increase Rocks Equity Markets, Energy Futures Unshaken
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View AllEnergy Markets Are Holding Steady To Start Tuesday’s Session
Energy markets are holding steady to start Tuesday’s session after oil prices had their biggest rally of the year Monday.
Reports that Iraq had halted shipments on the Ceyhan pipeline through Turkey, which removed 400,000 barrels/day of exports from the world market temporarily were given much of the credit for the big move higher. The rally in oil came just a week after large speculators reduced their bets on higher prices to the lowest level in 7 years, providing yet another reminder of why the moves made by hedge funds is often seen as a contrary indicator of market direction.
Refined products touched a 2-week high overnight before pulling back to modest losses this morning but remain in the middle of their March trading range, which sets the stage for more choppy back and forth action as markets around the world search for direction and worry about what’s coming next.
California approved the bill that will create a new committee within the state’s energy commission that will oversee oil refiners and potentially levy penalties on them if they’re deemed to be making too much money on consumers. The state has already had a handful of refineries close down in the past 6 years, with another scheduled to close and convert to an RD facility in early 2024, and there’s no doubt that this new law may be yet another reason for the remaining facilities to consider closing their doors as well, which many will see as a victory.
The Dallas FED’s manufacturing Survey showed a small increase in production in March, after February showed a contraction for the first time since the COVID lockdowns. The business outlook remains mixed however as many noted uncertainties around the banking situation, along with continued supply chain and labor challenges as factors hindering growth.
New competitor for feedstocks? A moose breached the security gates at the refinery in Sinclair Wyoming Monday. No word if the animal was just lost, or searching for the soybeans that are now being used to make renewable diesel at that facility.
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Energy Futures Rebound to Start the Week
Energy futures are bouncing to start the week, following through on a recovery rally that saw Friday’s early losses wiped out and salvaged weekly gains.
Money managers have been bailing out of their bets on higher energy prices in recent weeks, and as the CFTC’s data is finally catching up after 2 months of delays, we can finally see those figures the same week they’re compiled. The past two weeks alone have seen a reduction of more than 100,000 WTI contracts held by large speculators, bringing the total net length to the lowest level since January 2016.
The COT data also shows large reductions in producer hedging during this latest selloff in a sign that the industry may believe that prices won’t stay this low for long.
A WSJ article over the weekend highlighted how the options traders may have exacerbated the push lower over the past two months and could help spark a recovery rally later in the year.
Baker Hughes reported an increase of 4 oil rigs drilling in the US last week, snapping a 5-week slide that had pushed drilling activity to a 9-month low. The Permian basin accounted for 3 of the 4 rigs added last week.
Iraq won a 9-year lawsuit against Kurdish oil shipments, and that result has temporarily halted shipments of oil from the autonomous Kurdish region via the Turkish Ceyhan pipeline system.
Saudi Arabia announced an expansion of its partnership with China, increasing its multi-billion investment in new refining infrastructure in the world’s largest oil buyer. We’ve already seen multiple new refinery projects come online in both countries over the past two years, and this new agreement will continue the trend of additional capacity in the eastern hemisphere while the west continues to see declines.
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Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
Oil prices are leading a slide lower to end the week after the US government walked back plans to buy oil since it’s dropped below $70, and the latest ripples in the banking crisis push stocks lower and the dollar sharply higher after it touched a 2-month low Thursday.
Even though the correlation between energy prices and stocks or currencies has been weak lately, or even opposite of normal in the case of the dollar, there still seems to be more influence lately as the fear trade has funds flowing back and forth between markets depending on whether or not risk-taking is in style that day.
The US Energy Secretary told congress that the agency won’t be refilling the SPR this year, despite previous pledges by the White House to buy oil when it dropped to $70, since the agency is still working through congressionally mandates sales of oil from the reserve. That news seems to be contributing to the downside in WTI and Brent prices as traders hoping to front run the DOE are now going to have to wait a while longer to do so.
Even though ULSD prices are up 17 cents from the lows set last week, they’re still on the verge of their lowest weekly settlement since January of 2022 should prices end the day near current levels. Given that this week’s recovery rally failed to take out the highs seen in previous weeks, charts continue to look bearish for distillates. Another run at $2.50 looks more likely and a break below that level, when the May contract takes the prompt position in another week, may be a foregone conclusion.
As has been the case for most of March, RBOB look as bad as ULSD on the charts, although that certainly isn’t helping so far today with gasoline futures outpacing the losses in diesel. Unless we see RBOB end the day down a dime or more (it’s down a nickel currently) the weekly trend will still be higher, and the charts will still be giving favor to another push towards $2.80-$3 this spring.
The LA spot market saw a healthy bounce in gasoline basis values Thursday following multiple refinery upsets in the area reported to local regulators. Meanwhile, the California Governors new plan to create an oversight committee to prevent price gouging – a major change from earlier proposals to levy a new tax on oil producers and refiners – passed through the Senate on Thursday. If this new bill is fully passed, it will allow the Governor to appoint that committee himself. A 1,000-page prediction of how that plan will work is available for less than $10 on Amazon.
Click here to download a PDF of today's TACenergy Market Talk.