Energy Prices Are Bouncing After 2 days Of Heavy Selling To Start The Week
Energy prices are bouncing after 2 days of heavy selling to start the week. While the moves so far are mild compared to what we’ve been used to so far in March, technical and fundamental factors are hinting that there may be more room to move higher in the weeks to come.
RBOB futures closed the chart gap left behind by the roll to the summer spec contract at the end of February during Tuesday’s melt-down, but held above its bullish trend-line on the weekly report, both of which are bullish factors leaving room on the charts for more upside just in time for the seasonal jump in demand. ULSD also managed to hang onto the upward sloping trend line despite dropping 30 cents on Tuesday, and was rewarded with a 10 cent bounce so far today.
The IEA is reducing its global oil demand estimate by 1.3 million barrels/day for the rest of the year, and its refinery throughput by 1.1 million barrels/day both due to the war in Ukraine, which it says, “…could turn into the biggest supply crisis in decades.” The report also notes that only Saudi Arabia and the UAE have the capacity to bring more oil to the global market quickly, and the other options will take several months at a minimum, IF agreements can be made.
OPEC left its global demand estimate “under assessment” in its March oil output, acknowledging that the fallout from the war in Ukraine will lead to a decline in consumption, but not willing to make an official guess by how much given the chaotic and rapid nature of the changes taking place in the global economy.
Speaking of which, the chaotic trading of the past couple of weeks is also creating concerns of a repeat of the 2008 liquidity crisis, with billions of dollars in margin calls putting some companies on the brink of insolvency. Since 2008, banks have been finding new ways to circumvent the laws put in place to keep them acting like banks and not the biggest oil traders in the world (which is why the actual traders have to rush their EFP orders to the exchange in 15 minutes or less) and now Barclays has announced it was suspending its ETN tied to crude oil after it realized that pushing these contracts on its customers is not a good idea when prices are moving this quickly.
For those that remember the oil price spike that killed Semgroup in 2008, and its “bank’s” alleged role in that short squeeze, it’s not hard to imagine the fallout that could still come from the whipsaw action we just witnessed over the past two weeks.
If you think that’s a little dramatic, just look at what happened in the Nickel market again this morning.
Speaking of dramatic, West Coast gasoline markets are doing their diva impressions once again, with basis values in both northern and southern California soaring to nearly $1/gallon over futures as refinery disruptions and a lack of replacement options thanks to the state’s boutique grades hammer those markets while other regions have enjoyed a bit of relief as prices have pulled back sharply over the past week.
The API reported a draw in gasoline stocks last week of nearly 3.8 million barrels, while distillates had a small build of less than 1 million barrels. There is plenty of evidence of a spike in demand over the past couple of weeks as consumers panicked over rising prices and potential supply shortages, which could manifest as large inventory draws in today’s DOE report.
The FOMC announcement is expected at 1pm central. According to the CME’s fedwatch tool, just about everyone expects a 25 point rate increase today (the first increase in 3 years) and just about everyone is planning that this will be the first of at least 6 rate hikes for the year.
Click here to download a PDF of today's TACenergy Market Talk.
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Wholesale Gasoline Prices Across Most Of The US Reached Their Lowest Levels In 2-Years Thursday
Wholesale gasoline prices across most of the US reached their lowest levels in 2-years Thursday, after the morning recovery rally fizzled in the afternoon. RBOB gasoline futures dipped below the $2 mark briefly, before settling just above it, while cash prices in several major markets dropped below $1.80 for the first time since December 2021, while crude oil and diesel prices reached fresh 6-month lows.
The bulls are giving it another go this morning, pushing futures up 5-cents for gasoline and 6- cents for diesel, trying to snap the streak of 6-straight daily losses for ULSD, although we’ll need to see products double their early gains to erase the weekly decline.
Energy prices didn’t react much initially to the November Payroll report that estimated 199,000 jobs were added during the month, while the official unemployment rate dipped to 3.7% from 3.9% and the U-6 rate dropped to 7% from 7.2%. Equity futures moved modestly lower immediately following that report as labor market resilience throws cold water on recent hopes for interest rate cuts, but as has often been the case for several months now, energy prices are managing to shrug off the move in stocks.
Big negative basis values continue to be the theme across the Gulf Coast and Mid-Continent, with USGC, Group 3 and Chicago all trading at 20+ cent discounts to futures for both gasoline and diesel. Those negative values are weighing on refining margins with USGC crack spreads approaching their lowest levels in 2 years, which will almost certainly curtail some refinery run rates through the winter months. East Coast refiners meanwhile are finding themselves in a strong position as shipping bottlenecks keep PADD 1 inventories low and their crack spreads remain in the mid $20/barrel range despite the recent pull back in futures.
The long-awaited Dangote refinery is reportedly receiving its first cargo of crude oil today. That new 650mb/day refinery would be the world’s largest single train refinery, but is already years behind schedule, and many still doubt its ability to run anywhere near capacity. We’ve already seen the impact Kuwait’s 615mb/day Al Zour refinery can have on markets across the Atlantic basin, so whether or not the Nigerian facility can ramp up run rates could have a major influence on product prices next year.
Click here to download a PDF of today's TACenergy Market Talk.
West Coast Gasoline Inventories Dropped Sharply Last Week And Are Now Holding Below Their 5-year Seasonal Range
Energy futures are bouncing this morning as buyers are finally stepping in after RBOB futures touched a 2-year low Wednesday, while WTI and ULSD both hit their lowest levels in 5 months. There are headwinds both fundamentally and technically, but so far, the market isn’t acting like a collapse is imminent and as the table below shows this is right about the time when gasoline prices bottomed out the past two years.
Saudi Arabia and Russia released a joint statement this morning, following Vladimir Putin’s trip to the Kingdom, urging OPEC & friends to join their output cut agreement, which takes the risk of a price war that could send prices plunging (as we’ve seen twice in the past decade) off the table for now and seems to be contributing to WTI climbing back above the $70 mark and Brent getting back above $75.
The DOE reported a healthy bounce back in fuel demand estimates after the annual Thanksgiving holiday hangover, but that wasn’t enough to prevent refined product inventories from continuing to build as refiners continue to return from maintenance and increase run rates. The builds in gasoline inventories particularly suggest it could be a tough winter for some refiners who are already having some challenges clearing their extra barrels.
The exception on gasoline comes in PADD 5. West Coast gasoline inventories dropped sharply last week and are now holding below their 5-year seasonal range, which is dramatically lower than year-ago levels which set the top end of that range. Those tight stocks help explain why West Coast values are the most expensive in the country by a wide margin and leave little cushion to deal with unplanned maintenance which helps explain the jump in CARBOB basis values this week.
On the diesel side of the barrel, the recent themes of tight supplies on the East Coast, ample supply in the Midwest and Gulf Coast, and a Wild Card on the west coast since we don’t see Renewable Diesel inventories in the weekly figures continues. Take a look at the PADD 2 gasoline and diesel charts below and it’s easy to understand why we’re seeing cash prices in both Group 3 and Chicago approaching multi-year lows with 20-30 cent discounts to futures becoming the rule rather than the exception.
The market seemed to shrug off the drop in total US crude oil stocks, as Cushing OK stocks increased for a 7th straight week, and the decline was largely driven by the largest negative adjustment value on record, which went from a positive 1.2 million barrels/day last week to negative 1.4 million barrels/day this week. The EIA has done a lot of work trying to fix the bugs in its report system and to better define what exactly it’s reporting, but clearly there’s still more work to be done.