Energy Futures Up Modestly After Diesel Prices Touch Pre-War Lows

Market TalkMonday, Feb 6 2023
Pivotal Week For Price Action

Diesel futures touched their lowest prices since before Russia’s invasion of Ukraine overnight before seeing a modest bounce of a couple cents this morning. The low trade at $2.7609 less than two weeks after the March HO contract hit a high of $3.58 fulfilled the technical target made when the chart support failed to hold last week and sets up a potential drop to the $2.50 range in the next few weeks if buyers don’t step in at these levels. 

While the drop in diesel futures has been eye-opening, it still hasn’t been confirmed in US Cash Markets, or by RBOB and WTI contracts that are all still trading well off their December lows. That lack of confirmation from the other contracts suggests the past two weeks have been more about diesel prices normalizing after an incredibly strong year more than a complete market collapse due to fear of a global economic slowdown.

We didn’t get to see the reaction by large speculators to the melt-down that came right after they’d increased their bets on higher prices, as the CFTC was forced to delay publication of its weekly Commitments of Traders report due to a Russian-linked ransomware attack at ION Derivatives, a UK-based service provider that processes transactions and submits trading data to the agency. It appears that the attack may be disrupting trading in some ETF derivatives but is not directly impacted trading on any NYMEX or ICE Commodity futures or options.

The official embargo on Russian diesel exports took effect Sunday, without much fanfare as Western buyers had months to stock up ahead of time and flows of product to the East seem to be ramping up well. A Bloomberg note over the weekend highlighted the increasing role India is playing in turning Russian crude and unfinished fuel oil into gasoline and diesel destined for the US and Europe.

Motiva’s Port Arthur Refinery reported an incident over the weekend that disrupted operations at one of its coker units. The event caused flaring for around 5 hours, but at this point it does not appear that run rates were reduced because of it. 

The IEA’s director over the weekend said the potential rebound in demand from China may force producers to reconsider their output policies this year, implying that OPEC would need to end its voluntary restrictions to meet the increased consumption. 

US oil producers aren’t acting like they got that memo, with Baker Hughes reporting a decline of 10 oil rigs and 2 natural gas rigs in the US last week, bringing the total count to a 4-month low. The declines were spread out fairly evenly across the drilling geography suggesting this wasn’t an isolated even caused by the winter storms.

The huge earthquake that killed more than 1,000 people in Turkey also temporarily halted operations at a major crude oil pipeline system that delivers oil from origin points in the Caspian Sea and Iraq to the Mediterranean.  It appears that major damage was avoided to the pipeline, so shipping should be able to resume shortly. Syria was forced to shut its largest refinery after the quake, but given that facility is only 130mb/day, and it’s in Syria, it’s not going to have much impact on markets elsewhere.

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Market Talk Update 02.06.2023

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Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

Energy 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.

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

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.

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

Pivotal Week For Price Action