Energy Futures Are Back On The Move Higher To Start The Week
Energy futures are back on the move higher to start the week, after ending on a softer note Friday in what appeared to be a round of profit taking after a strong rally. The charts continue to point higher, although another big pullback is likely along the way as several short term indicators remain in overbought territory. The saber rattling on either side or Ukraine, volatile stock markets, the backside of the Omicron hill, and another attack on the UAE are all making headlines to start the week, and could each take their turn getting credit for whatever move the market takes that day. It does seem that a major selloff will be challenging until the Ukraine situation clarifies in one form or another, and as long as that’s lingering a spike to $100 for oil and $3 for products cannot be ruled out.
The East Coast is digging out from the weekend storm that dumped 2 feet of snow in places, but terminal disruptions appear to have been minimal and power outages not as widespread as feared. For those that can’t get enough of these events, you’re in luck as another major storm is set to sweep across the US in the back half of the week, which may bring the first big snow and ice event back to Texas since last year’s Polar Plunge crippled the state.
It’s the last trading day for February RBOB and HO futures, so make sure you’re looking to the March RBH/HOH contracts for direction if your market hasn’t already shifted. The Feb ULSD (HO) contract has been particularly volatile lately, rallying 26 cents last week, then dropping by a dime from its high on Friday, before moving higher again today. With just a few hours left for that contract, don’t be surprised if there are more fireworks today.
Money managers looked like they were taking some profits off the table in Crude oil and gasoline contracts last week, reducing their net length slightly as of last Tuesday after weeks of increases. The large speculative trade category continued to add length in diesel however, with both ULSD and Gasoil contracts seeing new longs added during the week, and ULSD saw a fair amount of short covering, which may help explain part of the recent spike in prices.
Baker Hughes reported 4 more oil rigs were put to work last week in the US, resuming the steady increase after last week saw the first net decline in 3 months. The Permian basin, which accounts for more than half of the total US rig count, has held flat on its total count of 293 rigs for the past month, even as the EIA predicts that the basin will set new production records this year as efficiency gains are expected to help offset the headwinds of a tight labor market and the supply-chain bottlenecks most people are tired of hearing about by now.
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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.