Energy Complex Trying To Find A Floor As Gasoline Prices Lead Attempted Rally
The energy complex is trying to find a floor this morning, with gasoline prices leading an attempted rally after a wave of heavy selling swept the complex earlier in the week. Diesel prices were resisting the pull higher overnight, after having already dropped 45 cents this week, but have turned slightly positive following the August jobs report.
California gasoline basis values continued to surge Thursday, as a refinery hiccup turned one of the market’s largest sellers into a buyer. Regular CARBOB gasoline values in the LA and San Francisco spot markets are trading 85-95 cents over the October RBOB contract, with implied cash values ranging from $3.30-$3.40 this morning, compared to USGC values around $2.38/gallon, which are translating to retail prices in the south dropping below $3/gallon this week.
Meanwhile, California regulators asked residents not to charge electric vehicles yesterday, one day after announcing an upcoming ban on new gasoline power vehicles. Maybe they just need higher taxes.
While West Coast values are surging, East Coast prices have come back to reality, with the spread between NYH and USGC prices reaching a 6 week low yesterday, which has nearly wiped out the premium to ship barrels along the Colonial pipeline. That correction should help alleviate some of the product tightness across the South East and Florida markets as shippers no longer have the incentive to shift their barrels further north.
G7 leaders are expected to propose a plan to cap prices for Russian oil purchases. Whatever is announced is likely to have minimal impact on markets however as the Russians are proving capable of circumventing restrictions already imposed by the G7 countries, and hitting a record high export volume in August despite sanctions.
The US added 315,000 jobs in August according to the payrolls report estimate released this morning, while the agency lowered its estimates for July down by 105,000 from 398,000 to 293,000. The headline unemployment rate ticked up to 3.7% even though jobs increased, while the total unemployed (U-6) figure jumped from 6.7%-7%. Stocks and fuel prices ticked modestly higher following the report as it seems to be good enough to convince traders we’re not yet in a recession, without being so good that it might encourage the FED to be even more harsh to the free money junkies.
Yesterday the BLS reported that US labor productivity decreased 4.1 percent in the 2nd quarter of 2022 as hours worked increased nearly 3% but actual output declined by 1.4%. Labor costs increased by 10.2% in the quarter, which is the highest increase in 40 years.
Tropical Storm Danielle formed in the North Atlantic yesterday and is expected to become a hurricane today. The good news is that forecasts suggest this storm won’t be a threat to any land over the next week, although it could disrupt shipping traffic between the US and Europe, which has already been stressed by the fallout of Russia’s war on Ukraine. While the US has been fortunate so far this Hurricane season, South Korea is expected to be slammed by the most powerful storm in that country’s history next week. While that storm may not have a great impact on US energy markets, it could further complicate the global supply chain challenges.
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Energy Contracts Are Trying To Find A Floor After Taking Their Largest Weekly Losses Of The Year So Far Last Week
Energy contracts are trying to find a floor after taking their largest weekly losses of the year so far last week.
There’s not much in the way of news yet this morning, so the modest buying is largely being blamed on reports that Saudi Arabia raised its prices for Asian and Mediterranean buyers in June, signaling that demand is strong enough in those markets to shoulder the increase.
RBOB gasoline futures have already dropped 28 cents from the high set April 12th, leading the argument that prices have peaked for the season. The 200-day moving average comes in just under $2.50/gallon this week, some 6.5 cents below current values, and helps set a pivotal chart support layer. If prices break there, there’s a strong case that we’ll see another 20-30 cents of downside, similar to what we saw this time last year.
Money managers continued to reduce their net length in NYMEX contracts last week, as WTI, RBOB and ULSD saw a net decrease of more than 17,000 contracts of speculative length. The hedge fund liquidation seems to have run its course for this latest news cycle however, as new short positions accounted for the majority of the decrease, and WTI and Brent both saw new length added by the big speculators. Money managers are now net-short on ULSD, which could be another reason to think the bottom is near if you subscribe to the theory that the bandwagon-jumping hedge funds usually are wrong.
Baker Hughes reported a decline of 7 oil rigs and 3 natural gas rigs last week, bringing the combined total rig count to its lowest level in more than 2 years. Perhaps most noteworthy in this week’s report was that Alaska saw 5 of its 14 active rigs taken offline in just 1 week. It’s not yet clear if this may have anything to do with the startup of the transmountain pipeline which will have Western Canadian crude now competing more directly with Alaskan grades.
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Energy Markets Are Pointing Modestly Higher To Start Friday’s Session
Energy markets are pointing modestly higher to start Friday’s session, in a meager attempt at a recovery rally at the end of what would be the worst week in over two months if prices settle near current values. The liquidation of speculative bets placed on higher energy prices ahead of the direct conflict between Israel and Iran continues to appear to be the driver of the weakness, and we’ll have to wait and see if this modest bounce is a sign that the liquidation is over, or just a pause before it picks up again. Most contracts remain in a precarious technical position with the potential for a slide towards $70 for WTI and $2.20 for both refined products if the buyers don’t get serious soon.
Stocks are pointing sharply higher after a slowdown in job growth reported in the April Non-Farm payroll report. The BLS reported an increase of 175,000 jobs for the month, down sharply from the 315,000 jobs added in March, and the February & March estimates were revised down a combined 22,000. Both the “official” (U-3) and “real” (U-6) unemployment rates ticked up by .1% to 3.9% and 7.4% respectively. The immediate positive reaction to negative news suggest that the bad news is good news low-interest-rate junkies believe this may help the FED’s dilemma of the US economy being too strong to cut rates. The big jump in equities has not seemed to spill over into energy contracts yet, as crude and refined product contracts changed very little following the report.
San Francisco diesel basis spiked 15 cents Thursday to reach the highest level of any market in the country so far this year at 35 cents over prompt futures. While there aren’t yet any refinery upsets reported to blame the spike on, PBF is undergoing planned maintenance at its Martinez facility, and of course P66 just finished converting its Rodeo plant to RD after Marathon converted its Martinez facility in the past couple of years, meaning there are at most only 2 out of the previous 5 refineries in the region operating near capacity these days. The question now is how quickly barrels can shift north from Southern California which continues to show signs of a supply glut with weak basis values and spot to rack spreads.
PBF continued the trend of Q1 refinery earnings that were sharply lower, but still healthy by longer-term historical standards. The company noted that its Saint Bernard (the parish, not the dog) Renewables facility co-processing at its Chalmette refinery had received provisional approval from CARB to lower its CI scores and help improve the amount of LCFS subsidies it can receive. That facility is operating at 18mb/day which is roughly 86% of its capacity.
Cenovus highlighted the restart of its Toledo and Superior refineries in improved refinery run rates in Q1 2024 vs Q1 2023 and noted that it had ramped up production at units that were slowed down for economic reasons in December and January (you may remember this as the time when midcontinent basis values were trading 50 cents/gallon below futures). The company did note that the January deep freeze slowed operations at Superior, but did not mention any change in operating rates despite numerous upsets at its 50% owned Borger refinery.
Dress rehearsal for a busy hurricane season? So far there are no reports of refinery issues caused by the flooding in the Houston area this week. At this point, most of the flooding appears to be far to the north of the refining hubs on the Gulf Coast but with more storms in the forecast and 88 counties already declaring disaster status, this will be something to watch for the next few days.
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Crude Oil Inventories Climbed Above Year-Ago Levels For The First Time In 2024
Sell by May then go away.
The old trading adage looked good for energy markets in 2024 as the new month started off with the biggest daily sell-off of the year so far. WTI and ULSD contracts are now in “rally or else” mode on the charts with sharply lower prices a strong possibility now that technical support layers have broken down. RBOB doesn’t look quite as bearish on the charts, but seasonal factors will now act as a headwind as we’re well into the spring peaking window for gasoline prices, and we’ve already seen a 27 cent drop from the highs. If RBOB can hold above $2.50 there’s a chance to avoid a larger selloff, but if not, a run towards $2.20 for both gasoline and diesel looks likely in the months ahead.
The selling picked up steam following the DOE’s weekly report Wednesday, even though the inventory changes were fairly small. Crude oil inventories continue their steady build and climbed above year-ago levels for the first time in 2024. Demand for refined products remains sluggish, even after accounting for the RD consumption that’s still not in the weekly reports, and most PADDs are following a typical seasonal inventory trend. The Gulf Coast saw a healthy build in diesel inventories last week as the export market slowed for a 3rd straight week. Refinery runs dipped modestly last week following a handful of upsets across the country, but overall rates remain near normal levels for this time of year.
The Transmountain pipeline expansion began operations yesterday, completing a 12-year saga that has the potential to materially change refining economics for plants in the US that relied heavily on discounted Canadian crude to turn profits over the past decade.
The P66 Borger refinery reported another operational upset Monday that lasted a full 24 hours impacting a sulfur recovery unit. Last week the company highlighted how the plant’s fire department helped the surrounding area when the largest wildfire in state history came within feet of the facility.
The EPA approved a new model to determine life cycle carbon intensity scores this week, which cracks open the door for things like ethanol to SAF, which were previously deemed to not reduce emissions enough to qualify for government subsidies. The new model would require improved farming techniques like no-till, cover crop planting and using higher efficiency nitrogen fertilizer to limit the damage done by farms that no longer rotate crops due to the ethanol mandates. Whether or not the theoretical ability to produce SAF comes to fruition in the coming years thanks to the increased tax credit potential will be a key pivot point for some markets that find themselves with too much RD today, but could see those supplies transition to aviation demand.
The FED continues to throw cold water on anyone hoping for a near term cut in interest rates. The FOMC held rates steady as expected Wednesday, but also highlighted the struggles with stubbornly high inflation. The CME’s Fedwatch tool gave 58% odds of at least one rate cut by September before the announcement, and those odds have slipped modestly to 54% this morning.