Energy Complex Seeks Recovery Rally After Reaching One Year Low

Market TalkMonday, Feb 20 2023
Pivotal Week For Price Action

Diesel prices are trying to lead the energy complex in a recovery rally this morning, trading up nearly 6 cents/gallon in a holiday-shortened trading session after reaching a 1 year low on Friday.  Gasoline futures are up nearly 4 cents so far today, after staging a notable comeback Friday afternoon, and erasing most of the losses from earlier in the day.

US Spot markets are not being assessed so most of the refiners and trading houses are taking the day off.  Futures are trading since apparently the rest of the world doesn’t celebrate Washington’s birthday, but will halt at 12:30 central, and there will not be any settlements. 

Diesel prices are back in “rally or else” mode after last week’s futures action set the stage for a slide to $2.50 or below with the lowest weekly settlement since before Russia invaded Ukraine a year ago.  Cash markets aren’t quite so bearish however with many wholesale markets still holding above the lows set in December.  Gasoline prices don’t look nearly so bearish on the charts, still holding well above their February lows, and hinting that they’re ready for the annual spring rally with just 1 week left for the last winter grade RVP contract of the season.

The CFTC still has not released any commitments of traders data since the January 24th report after a cyber-attack impacted a service provider. Last week was the 3rd missed weekly report, so we can continue guessing how the big money funds have been reacting to the waves of selling we’ve seen so far in Feb.

Baker Hughes reported a decline of 2 oil rigs working in the US last week, while natural gas rigs saw an increase of 1.  The total rig count has essentially held steady for the past 5 months as US drillers remain unenthusiastic about the forward outlook for prices even as US oil exports are in high demand.  Canadian drillers meanwhile are getting busy again, with the country’s total rig count reaching a 3 year high in February, as producers make their annual race to take advantage of frozen ground to reach areas that are off limits once the ground thaws. 

Reuters reported last week that Chinese refining capacity has overtaken the US for #1 in the world, with new plants coming online increasing total output potential to 18.4 million barrels/day. That figure is less than the 19 million barrels/day the US had in capacity 2 years ago before the wave of refinery closures.  Despite the diverging paths on capacity, the US is still the world’s largest refiner, as output domestically holds around 90% of nameplate capacity, while Chinese plants only average around 70%.

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Market Talk Update 02.20.2023

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Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

Energy 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.

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

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.

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