Energy Futures Continue To Hold In A Sideways Pattern
Energy futures continue to hold in a sideways pattern, setting up more back and forth action, in what appears to be a bit of wait and see ahead OPEC & COP26 meetings this week. One thing we learned, from the G20 meetings over the weekend: Most of the world is in a tough position of wanting less fossil fuels long term, but needing more of them today, and not really agreeing on how to close that gap.
Reminder that the severe backwardation in RBOB futures has the newly prompt December contract trading well below where the November contract when off the board Friday, so even though prices are up a couple cents this morning a continuous chart will show RBOB down 7 cents or more. The ULSD curve isn’t as steep as RBOB, but here too, cash prices are ticking higher around 1.5 cents this morning even though prompt futures values are lower today than were Friday.
China announced Sunday that it would be releasing gasoline and diesel fuel from its strategic reserves to help stabilize markets, a move some reports suggested would push prices lower Monday. Naturally the market had other ideas as the rare move proves 2 things: 1) China’s energy traders are some of the best in the world, stockpiling reserves when prices plummeted 18 months ago and selling them now at 7 year highs and 2) there are limited options short term to supplement dwindling energy supplies.
Money managers reduced their net length in WTI and Brent contracts last week, but added to their length in refined products. RBOB and Brent both saw a jump in new short positions added as some funds appear to be trying to call a top to this market, while ULSD and WTI saw a large amount of short covering, proving how challenging (and costly) trying to call a top can be. A WSJ article over the weekend highlighted how inflation fears can drive hedge funds and other money managers into oil…and thereby help create inflation.
Baker Hughes reported a net increase of 1 oil rig drilling last week, with the DJ Niobrara and Williston basins each adding 1 rig, while the Permian declined by 1. A rare occurrence last week: The Permian saw a new natural gas rig put to work, showing the industry adjusting to the new world where natural gas is again a commodity worth selling rather than burning off, and where the infrastructure has grown to be able to bring that gas to market.
One month left in the hurricane season: Tropical storm Wanda has formed over the Atlantic, but looks like it will stay far away from the US and not be a threat. There’s one other system currently being tracked by the NHC but it too looks like it will stay offshore if it develops.
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View AllRefined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.