Energy Markets Rally As Saudi-Russia Production Cuts Extend
Oil and diesel futures are poised for a 6th straight week of gains after some whipsaw price action over the past couple of days.
ULSD futures saw a 12-cent intraday reversal lower Wednesday - that ruined a run at 12 consecutive increases – followed by a 13 cent bounce off of their lows Thursday to set a new 6 month high. The double reversal puts the bulls back in the driver seat with weekly charts suggesting a run towards $3.50 could be coming soon.
Saudi Arabia and Russia both announced they would extend their voluntary production cuts yesterday, which helped give WTI and Brent a boost, even though the Russians reduced the amount they are keeping off the market. Ukraine seems to want to help the Russians involuntarily reduce their export volume taking aim at a major Black Sea port overnight.
After being the weak link in the energy chain for much of the week, RBOB futures have decided to join in on the bull run fun and are leading the complex higher this morning with nickel gains for the prompt September contract.
Back to school squeeze? Gasoline spreads are getting interesting once again as we wind down the last weeks of summer the Sep/Oct (U/V) RBOB futures contracts (AKA the “sunburn spread”) have widened out to an almost 25 cent premium for the remaining summer-grade RVP grade, which is roughly double what we’ve come to expect with that annual transition. West Coast spot are seeing even more dramatic moves with San Francisco CARBOB trading up close to a 50-cent premium to summer-grade futures and LA approaching a 40-cent premium, despite the new laws from the governor of California that now require refiners to report their trading activity on a daily basis that were put into place following last year’s RVP transition-related price spike.
Time for reform? A pair of reformer-unit upsets at Gulf Coast refineries seems to be a contributor to the relative strength in gasoline prices so far today. Exxon’s Baytown facility reported a hydro-former unit had a leak yesterday, but noted it had a “minimal impact to production” in its regulatory filing. Total was forced to shut a unit at its Port Arthur refinery after a pump leak that lasted 11 hours, which will most certainly have more than a minimal impact to production.
PBF joined the growing list of new Renewable Diesel producers, reporting during an earnings release Thursday that output at its St. Bernard (parish, not the dog) JV production facility co-located at its Chalmette LA refinery came online in July. The company’s operations followed the theme of most refiners in Q2, with margins notably lower from the record-setting quarter a year ago, but still above average despite lackluster demand as inventories remain relatively tight across the country.
Slowing down? The July payroll report estimated 187,000 jobs added last month, while the May and June estimates were revised lower by a combined 49,000 jobs. The headline unemployment rate ticked down a tenth to 3.5%, while the less-manipulated U-6 unemployment rate ticked down 2 tenths to 6.7%. The market reaction was muted to the report as it probably isn’t good or bad enough to change the FED’s plan of action on interest rates.
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View AllThe Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.