Energy Markets Reeling On FED and EIA News

Market TalkWednesday, Mar 8 2023
Pivotal Week For Price Action

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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Market Talk Update 03.08.2023

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Pivotal Week For Price Action
Market TalkThursday, Mar 30 2023

Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session

Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.

US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.

The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.

Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.  

Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.

Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.  

It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.

Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
Market TalkWednesday, Mar 29 2023

Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning

Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.

WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened. 

Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning. 

Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning. 

While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time. 

French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action