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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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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