Energy Futures Are Bouncing Back This Morning After Their Biggest Daily Drop Since Black Friday

Market TalkWednesday, Feb 16 2022
Pivotal Week For Price Action

Energy futures are bouncing back this morning after their biggest daily drop since Black Friday as a debate over troop counts, inventory declines and a presidential warning all seem to be encouraging buyers this morning. Equity markets continue to struggle with another troubling inflation report and a flattening yield curve both signaling to many that there may be more economic pain ahead.

As the forward curve charts show, despite the big selloff Tuesday, not much has changed from a week ago. From a chart perspective, the weekly bullish trends are still holding, but there’s no longer much room to spare to the downside if the bulls are going to regain control this week.

While NATO and Russia continue to disagree on just about everything, including whether there are more or less troops surrounding Ukraine, the US President warned that the sanctions planned if Russia does invade will target energy exports, which will likely push prices higher. Given that petroleum prices have already risen 40% or more in the past 2 months (see the PPI inflation note above) the question then becomes whether or not that’s already priced in, and anything less will become a reason to sell in the near future. 

The API reported small inventory draws across the board last week. If the DOE confirms that estimate, it will provide more validation for the backwardation we’re seeing in the forward curves as most US markets outside of the Midwest are tighter on days of supply than they typically are this time of year, setting the stage for more product allocations and outages as demand ramps up this spring. 

Speaking of outages:  Another winter storm is sweeping the country, and is expected to bring severe thunderstorms with it. Unlike the last 3 storms however, it’s not expected to bring the cold snap, snow and ice to parts of the south that disrupted both refinery operations and travel. While overnight temperatures will dip below freezing for most of Southeast, day time tempts will still be pushing mid 50s which should help limit the surge in electricity demand that might hamper a diesel supply network that’s been caught flat footed this winter. That sigh of relief seems to help explain why the March HO contract went negative in the past few minutes after being up 4 cents overnight, while the rest of the complex is holding onto gains.

The relatively tight gasoline markets should make the spring RVP transition a bit easier for inventory holders, and may limit the amount of price dumping that often happens as the deadlines loom. The refiners that survived the COVID crisis look to be in a great position now as crack spreads have rebounded nicely and the forward curve shows them staying in positive territory for the next few years.

The EIA continues to predict that US oil production will hit record highs this year and next, even though the weekly stats have yet to show much increase in output so far this year. The Permian basin is expected to account for 6 out of every 7 new barrels of oil produced in the country this year according to the report, while other basins will take on more of the burden next year.  

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

Market Talk Update 02.16.22

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Pivotal Week For Price Action
Market TalkMonday, Dec 5 2022

The Officially Imposed Sanctions Against Russian Oil Exports Are Taking Credit For This Morning’s Gains In Energy Prices

The officially imposed sanctions against Russian oil exports are taking credit for this morning’s gains in energy prices. Brent futures, the benchmark for European crude oil, are leading the pack higher so far today, trading up nearly 3%. West Texas Intermediate futures, along with both American refined product contracts, are tagging along with 1.5-2.5% gains.

OPEC’n’friends decided to stay pat on their Production Reduction™ policy through the end of the year, which aims to remove about 2 million barrels per day from global oil inventories. The relatively muted response in energy futures action suggests the ban on Russian crude and the continued reduction in cartel oil supply were both largely priced in.

It seems we have averted disaster last Friday as Washington passed legislation to prevent rail workers from going on strike. While the vast majority of refined products are transported to market hubs via pipeline, the required ethanol component of retail gasoline is by-and-large supplied via railcars.

Heating Oil futures stand out as the lone contract of the ‘big five’ that saw increased bullish bets from money managers last week, mostly due to the trimming of short positions rather than the addition of long positions. It seems fewer and fewer traders are willing to bet on lower diesel prices heading into the winter, where distillates act as backup supply for heating homes.

Market participants in crude oil futures fell to lows not seen since 2016 last week. It seems the global uncertainty surrounding energy supply and infrastructure has some potential players taking a wait-and-see approach rather than betting on price direction.

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

Pivotal Week For Price Action
Market TalkFriday, Dec 2 2022

The Energy Complex Is Trading Mostly Lower So Far This Morning

The energy complex is trading mostly lower so far this morning, with prompt month RBOB futures leading the way. Brent crude oil is struggling to hold on to overnight gains and it is exchanging hands on the green side of even, if only just.

The easing of quarantine protocols in China is taking partial credit for the weekly gain in WTI futures this morning, despite the emergence of reports and images showing provisional camps set up to enforce isolation and curb the latest spread of the pandemic.

The “ban” on Russian crude oil, set to take effect on Monday, has yet to reach final approval in Europe. Poland seems to be one of the last holdouts and has not been shy about wanting the price cap to be as low as possible.

Sunday’s OPEC+ meeting, which will reportedly be held virtually, is also getting some play in the headlines this morning. While some consider the setting of the meeting to telegraph no change in the cartel’s production policy, others posit the group is considering cuts ahead of next week’s oil ban.

The Bureau of Labor Statistics published the November jobs report this morning, an increase in nonfarm payrolls of 263,000 while unemployment rate held pat at 3.7%. The stock market did not like that: S&P 500 futures dropped 1.4% on the news as traders expect higher-than-expected job growth to buttress the Fed’s intent on continuing to raise interest rates.

The EPA published their proposed volume obligations under the Renewable Fuel Standard for the next three years and is now seeking public opinion on their target levels. Their report also estimates that the RIN obligations will reduce US oil imports by ~170,000 barrels per year. Is that a typo? We imported 6 million barrels per day last week, for reference.

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

Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

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