Diesel Futures Are Trying To Lead The Energy Complex Higher To Start The Week

Market TalkMonday, Dec 12 2022
Pivotal Week For Price Action

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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Market Talk Update 12.12.2022

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Market TalkFriday, Jul 19 2024

Summertime-Friday-Apathy Trade Influencing Energy Markets

Energy markets are treading water to start the day as the Summertime-Friday-Apathy trade seems to be influencing markets around the world in the early going. RBOB futures are trying for a 3rd straight day of gains to wipe out the losses we saw to start the week, while ULSD futures continue to look like the weak link, trading lower for a 2nd day and down nearly 3 cents for the week.

Bad to worse: Exxon’s Joliet refinery remains offline with reports that repairs may take through the end of the month. On top of that long delay in restoring power to the facility, ENT reported this morning that the facility has leaked hydrogen fluoride acid gas, which is a dangerous and controversial chemical used in alkylation units. Chicago basis values continue to rally because of the extended downtime, with RBOB differentials approaching a 50-cent premium to futures, which sets wholesale prices just below the $3 mark, while ULSD has gone from the weakest in the country a month ago to the strongest today. In a sign of how soft the diesel market is over most of the US, however, the premium commanded in a distressed market is still only 2 cents above prompt futures.

The 135mb Calcasieu Refinery near Lake Charles LA has been taken offline this morning after a nearby power substation went out, and early reports suggest repairs will take about a week. There is no word yet if that power substation issue has any impacts on the nearby Citgo Lake Charles or P66 Westlake refineries.

Two tanker ships collided and caught fire off the coast of Singapore this morning. One ship was a VLCC which is the largest tanker in the world capable of carrying around 2 million barrels. The other was a smaller ship carrying “only” 300,000 barrels (roughly 12 million gallons) of naphtha. The area is known for vessels in the “dark fleet” swapping products offshore to avoid sanctions, so a collision isn’t too surprising as the vessels regularly come alongside one another, and this shouldn’t disrupt other ships from transiting the area.

That’s (not) a surprise: European auditors have determined the bloc’s green hydrogen goals are unattainable despite billions of dollars of investment, and are based on “political will” rather than analysis. Also (not) surprising, the ambitious plans to build a “next-gen” hydrogen-powered refinery near Tulsa have been delayed.

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Market TalkThursday, Jul 18 2024

Refined Products Stanch Bleeding Despite Inventory Builds And Demand Slump

Refined products are trading slightly lower to start Thursday after they stopped the bleeding in Wednesday’s session, bouncing more than 2 cents on the day for both RBOB and ULSD, despite healthy inventory builds reported by the DOE along with a large slump in gasoline demand.

Refinery runs are still above average across the board but were pulled in PADD 3 due to the short-term impacts of Beryl. The Gulf Coast region is still outpacing the previous two years and sitting at the top end of its 5-year range as refiners in the region play an interesting game of chicken with margins, betting that someone else’s facility will end up being forced to cut rates before theirs.

Speaking of which, Exxon Joliet was reportedly still offline for a 3rd straight day following weekend thunderstorms that disrupted power to the area. Chicago RBOB basis jumped by another dime during Wednesday’s session as a result of that downtime. Still, that move is fairly pedestrian (so far) in comparison to some of the wild swings we’ve come to expect from the Windy City. IIR via Reuters reports that the facility will be offline for a week.

LA CARBOB differentials are moving in the opposite direction meanwhile as some unlucky seller(s) appear to be stuck long and wrong as gasoline stocks in PADD 5 reach their highest level since February, and held above the 5-year seasonal range for a 4th consecutive week. The 30-cent discount to August RBOB marks the biggest discount to futures since 2022.

The EIA Wednesday also highlighted its forecast for rapid growth in “Other” biofuels production like SAF and Renewable Naptha and Propane, as those producers capable of making SAF instead of RD can add an additional $.75/gallon of federal credits when the Clean Fuels Producer’s Credit takes hold next year. The agency doesn’t break out the products between the various “Other” renewable fuels, but the total projected output of 50 mb/day would amount to roughly 2% of total Jet Fuel production if it was all turned to SAF, which of course it won’t as the other products come along for the ride similar to traditional refining processes.

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Pivotal Week For Price Action