Energy Futures Are Seeing A Modest Move Higher Tuesday After Mixed Results In Mondays Session
Energy futures are seeing a modest move higher Tuesday after mixed results in Mondays session. COVID in China, central bank action and Europe’s reaction to its energy crisis continue to be major market themes, but are having less impact on prices daily as traders turn their focus to last minute shopping and expiring PTO rather than last minute supply needs and expiring futures contracts.
From a technical perspective prices have moved into a more neutral ground, which may mean an extended period of choppy sideways trading. ULSD is probably the best example, trading about 30 cents above its December lows from 2 weeks ago, but 25 cents below the highs set last Thursday. That leaves a range of more than 50 cents/gallon for prices to swing without threatening a change in any trends. RBOB gasoline is in a similar neutral zone with a high of $2.25 or low of $2.00 needing to be taken out before a trend can form.
Diesel prices dropped sharply from their overnight highs Monday after European nations agreed to a price cap on natural gas, which some believe will make switching from gas to oil for electricity needs less likely near term. Others meanwhile think this price cap will prevent the continent from outbidding Asian countries for LNG shipments, which could actually lower supplies of natural gas, and runs the risk of needing more supplemental supply options during peak demand. At the very least this will become an interesting case study in economics and the law of unintended consequences when governments intervene in markets, and hopefully for those struggling to heat their homes it’s not much more than that.
The Freeport LNG facility was reportedly receiving gas shipments again for the first time in 4 months after a June fire forced most operations to close. It’s unclear at this point whether that means one of the country’s largest LNG export facilities would be resuming full operations despite new hurdles put in place by the FERC earlier in the month, or if the plant was simply cranking up a power plant to help the Texas power grid deal with the deep freeze forecast for later in the week.
Speaking of which, the refinery zones along the Gulf Coast are forecast to get temperatures well below freezing Thursday and Friday, along with wind gusts approaching 50 miles per hour, so there’s a good chance of power disruptions or other damage being done to facilities that aren’t used to dealing with the cold temperatures. A big unknown is how these facilities may have changed their operations to deal with just such an event after the 2021 freeze, which caused the biggest disruption in refining operations on record (see the chart below). It seems unlikely they’ll be caught by surprise this time around, and fortunately the forecast suggest these temps will only last a couple of days, which should help minimize the impact.
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Refined Products Bounce Back And Forth Across The Break-Even Line To Start Friday’s Trading
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View AllRefined Products Bounce Back And Forth Across The Break-Even Line To Start Friday’s Trading
The choppy action continues for energy markets with refined products bouncing back and forth across the break-even line to start Friday’s trading after some big swings Thursday.
RBOB futures led the rollercoaster ride Thursday, trading up 4 cents in the early morning hours, only to see those gains turn into 10 cent losses mid-morning, and then erasing most of those losses in the early afternoon following an ENT report of unplanned maintenance at the largest refinery on the East Coast.
The selling portion of the ride was blamed on a combination of an increase in jobless claims, and the disruptive impacts of the Canadian wildfires on the major population centers along the East Coast. While air traffic has been disrupted, so far there are not any reports of delays in ship traffic around the New York Harbor, and the strong basis and time spreads we’ve seen in NY have been easing this week, so it appears that this event is more concerning to the demand side of the equation than supply.
From a technical perspective, it’s not surprising to see this type of back-and-forth action as most petroleum contracts look to be stuck in neutral territory on the charts, which encourages trading programs to sell as prices get towards the top end of a range, and buy when it gets to the low end.
The Atlantic Hurricane season is off to a quiet start with no tropical development expected over the next week, but NOAA did issue an El Nino advisory Thursday that suggests the warm-water pattern in the Pacific could reach “supersized” levels and create all sorts of disruptive events. Perhaps most notable in the report is that forecasters don’t believe this year’s El Nino will have the same dampening impact on Atlantic hurricanes due to record warm temperatures in the water. Here’s a brief recap in case you missed the most memorable El Nino from 25 years ago.
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Gasoline Futures Rally Despite Inventory Builds, Increased Throughput
Gasoline futures led another strong rally in the energy complex Wednesday and continued marching higher overnight before pulling back to near break-even levels around 7:45am central.
The RBOB contract has now wiped out the post-Memorial Day selloff, and erased the losses from the contract roll to July, setting up another test of the May highs at $2.73. If that resistance breaks, there’s a good chance we see another run at the $2.90 level, but if it holds we are probably still stuck in a sideways pattern as we move through the summer months. West Coast gasoline prices meanwhile have reached a 3-month high as surging basis values compound the move in futures.
The rally came despite healthy inventory builds for refined products and strong refinery runs across all 5 PADDs reported last week, with traders (or their algorithms) appearing to focus instead on healthy demand estimates in the DOE’s weekly status report. Gasoline also saw healthy exports last week, while diesel shipments overseas continued their decline which has helped keep downward pressure on diesel prices, which is essentially the polar opposite of what we were experiencing a year ago.
Lies, damned Lies and statistics: PADD 3 refinery utilization hit 98.8% of the official capacity figure last week, which would mark a 5 year high, except the numbers are wrong. The DOE still isn’t including recent capacity additions of almost 300mb/day in those stats, so the actual figure is about 3% lower. Don’t worry though, the lack of accurate data probably isn’t intentional. The DOE recently announced it was suspending data collection for some of its monthly reports as the agency is still struggling to overcome the IT Systems failure they experienced a year ago. Add this to the realization that the official crude production and petroleum demand figures have been incorrect due to a lack of clarity surrounding condensate production that comes along with oil output.
Speaking of which, the official US Oil output figure surged to the highest levels since the COVID lockdowns began more than 3 years ago last week. No word from the EIA if this means actual production increased, or if they’ve just changed the way they’re reporting the molecules coming out of the ground.
Irving Oil released a statement highlighting a strategic review of the company, that could include selling the business that’s been held by the Irving family for nearly 100 years. The Irving Refinery in New Brunswick is Canada’s largest at 300mb/day and is the largest importer of fuels into the northeastern US. Critics are arguing that the review is an attempt to politicize Canada’s Clean Fuel Regulation that could weigh on the refinery’s profitability when it goes into full effect in July or could simply incentivize the facility to send more product to the US.
RIN values saw their first bounce in a couple of weeks, with both D6 and D4 values climbing back above the $1.40 mark after their recent slide from the mid $1.50s. We’re still 6 days away from the EPA’s deadline to issue the final RFS ruling for the next couple of years.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.