Energy Markets Reeling On FED and EIA News
Energy markets got hammered Tuesday following comments from the FED president that suggested interest rates may go higher than previously forecast, and a monthly report from the EIA that suggested fuel supplies are going to heal faster than previously expected.
Within a few seconds of Jerome Powell beginning his congressional testimony we saw a harsh reaction in energy futures that moved quickly and sharply lower. It was interesting to note that equity markets took longer to build up momentum to the downside, and were actually following energy contracts, not leading them. Prior to that testimony, Fed fund futures showed the market split 50/50 on whether rates would go up more than 75 points by July, and today 86% are betting that rates will be increasing by 100 points or more in that time.
The selloff certainly took the wind out of gasoline’s sails after reaching a 4-month high earlier in the day and looking poised to make a run at the $3 mark in March. That said, the slide hasn’t yet changed the technical outlook on the weekly charts, leaving the door open for the spring gasoline rally to continue if RBOB can hold above the $2.60 range. The technical outlook for distillates remains neutral at best and may be reliant on a pull higher from gasoline to avoid another test of support at $2.66, that could lead to a bigger move lower if it fails to hold.
The EIA thinks it figured out why they’ve had more than 2 million barrels/day of crude oil inventory show up in their weekly reports the past few weeks. EIA administrator Joe DeCarolis took to Twitter Friday to awkwardly spell out the reason why their reporting has had so many issues of late in a string of 140-character notes. They said that crude oil blending and under-reported oil output were the two key reasons for the huge builds in inventories, over the past few weeks, even though the other figures suggested we should see inventories decline.
The blending factor is certainly a real issue, as many refiners have reported that due to the high levels of condensates blended in gathering systems, aka “Hydrocarbon Soup” that “WTI” isn’t WTI anymore, which has created challenges for processing that oil which has more light ends than many plants are configured to handle and makes them more valuable in the export market than at home, particularly when many other countries have less complex facilities and less strict pollution controls.
The report also notes that those condensates are not yet reportable in the EIA’s data, which is why their net effect ends up as an adjustment factor. The tweet storm ended with a note that suggests the agency will soon change their weekly reporting forms to better account for the extra liquid production and blending, with their plans to be laid out on March 22.
Speaking of data not reported by the EIA, you may wonder why west coast diesel markets have been trading at a discount to futures even though PADD 5 diesel inventories look tight. Part of the answer, besides the horrible weather to start the year that’s ground trucking and industrial demand to a standstill, is that the EIA does not yet count Renewable diesel inventories in their weekly report, so the rapidly increasing RD simply isn’t showing up in the figures. As RD continues to become more available, it’s likely we’ll see the EIA add this to the weekly figures, either on a standalone basis or as part of the total ULSD pool. We saw a similar phenomenon about 15 years ago as the EIA had to adjust their reporting to account for the steady increase in ethanol blending after congress declared grain alcohol had to be blended into fuel.
Perhaps next week the EIA can tweet why their latest short term energy outlook reduced the forecast for vehicle miles traveled over the next 2 years but increased its estimate for gasoline consumption. The monthly report also forecast that US gasoline inventories will have a counter-seasonal build this spring after refineries return from a heavy maintenance schedule in March. The forecast also says that the demand for US product exports, particularly diesel, will diminish this year as new refinery capacity comes online elsewhere in the world.
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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.
Click here to download a PDF of today's TACenergy Market Talk.
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.