Diesel Prices Are Trying To Drag The Rest Of The Energy Complex Higher This Morning
Diesel prices are trying to drag the rest of the energy complex higher this morning as their weekly rally has now surpassed 40 cents in less than 4 days. Gasoline prices are resisting the pull higher so far, despite some positive demand signals in yesterday’s DOE report, and remain range-bound for now, while WTI is facing a big test near $100.
We said yesterday morning that the ULSD contract looked like it was ready to make a run at $3.80 after breaking through resistance on the charts around $3.60 and it didn’t waste any time already reaching that mark this morning. The last time ULSD touched $3.80 3 weeks ago, it dropped 20 cents the next day, so today’s tug of war with gasoline could prove pivotal. A break and hold above $3.80 opens the door for another 40 cent run higher for diesel, while a failure sets up a drop to the lower end of the July trading range.
All sorts of news out of Washington that may influence markets as the Senate has made a surprise breakthrough on a bill that includes nearly $370 billion in energy and climate change programs, while the commerce department just reported it’s GDP estimate showing the US is now “not officially” in a recession with a 2nd straight quarter of contracting GDP.
Bad news is good news when it comes to the stock market reaction to FED policy, and it seems like the Chairman’s statement that the US economy shows signs of slowing yesterday was enough to send stocks rallying once again, as it implies that the pace of increase for interest rates is going to slow down after their largest increase in over 40 years. The big rally in stocks following that announcement seemed to spill over to the energy arena in the afternoon, but could also create more volatility if today’s confirmation of that economic slowdown sends the big money funds to the sidelines.
If you’re an energy bull, you may note that we’ve already lived through the recession, and yet yesterday’s DOE report showed a healthy recovery in fuel consumption which could mean the worst is behind us…not to mention that the world still doesn’t have a solution to replace Russian natural gas and distillate supplies.
Notes from yesterday’s DOE Report:
US crude oil exports surged to an all-time high last week north of 4.5 million barrels per day. That means a total of roughly 32 million barrels of oil (more than 1.3 billion gallons) were sent overseas last week, which makes the inventory drop of 4.5 million barrels in total for the week suddenly less impressive.
Refinery output dropped for a 2nd straight week, with 4 out of 4 PADDs declining, with the Midwest (PADD 2) leading the way with another major decline in run rates. Given the weakness in Group 3 and Chicago basis values, it doesn’t seem like anyone is worried about declining output in the middle of the country - most of which is unable to be exported – although this could spell trouble in the fall if rates don’t pick back up as Gulf Coast facilities seem to have their hands full trying to keep up with demand from Europe and the rest of the Americas.
Demand for gasoline and distillates were estimated to have climbed for a 2nd straight week putting both products back close to their seasonal 5 year averages after dropping below their seasonal range earlier in July. A big drop in gasoline imports, and the decline in refinery run rates are combining with that tick higher in demand to draw inventories lower after more than a month of gains.
The inventory declines are most pronounced on the East Coast, which helps explain why RFG gasoline in New York is worth 50 cents more per gallon today than it is in Houston, and nearly 70 cents more than its conventional counterparts in the Midwest.
See charts below.
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View AllEnergy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
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The 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.