Energy Prices Are Moving Lower In The Early Going Friday After A Strong Week
Energy prices are moving lower in the early going Friday after a strong week in which fear of inflation and slowing demand both eased, while fears of supply disruptions returned. From a chart perspective, gasoline and diesel prices have returned into more neutral territory after failing to break near term resistance and are set up for another period of back and forth action – just like we saw yesterday with ULSD experiencing multiple 10 cent moves on the day.
The IEA disagreed with OPEC’s estimates for declining global fuel demand Wednesday, raising its oil consumption estimates, with consumers switching to oil-based products to supplement the electricity grid during the summer heat wave (and tight natural gas supplies) driving the increase and masking the “…relative weakness in other sectors…”. Of course, it’s typically not crude oil that’s being used to supplement electricity supplies, it’s some form of diesel whether it be known as Gasoil, fuel oil etc. which explains why we’ve seen ULSD prices react to movements in natural gas prices, while gasoline prices tend to go their own way.
The IEA increased its forecast for Russian oil output as buyers in some parts of the world are getting awfully creative to find ways around sanctions. Read here for an interesting story on a big gamble on old ships to carry out dangerous ship to ship transfers of Russian crude. Never doubt the ingenuity of an oil trader.
The IEA’s monthly report ended with a word of caution: “…with supply increasingly at risk to disruptions, another price rally cannot be excluded.” Read this Reuters note for more specifics on why European distillates are particularly vulnerable.
Speaking of disruptions, the storm system moving across the Atlantic didn’t turn into anything this week and the only other system on the NHC’s watch list is given just 10% odds of developing off the coast of Texas and Louisiana, although it is expected to bring heavy rains to the region over the weekend. We’re getting to the time of year where we can expect waves to move off the African coast every few days, and each of those waves has the chance to become a hurricane. Where those storms head will likely determine if this season is a nuisance or a disaster for energy supplies, with early forecasts suggesting Florida may be the storm magnet this year, which would be bade news for retirees, but good news for suppliers compared to the past 2 years of Louisiana landfalls that pummeled refinery row.
There are all sorts of new energy-related incentives in the new bill moving through congress. While electric vehicle incentives are capturing much of the attention, a lack of domestic battery production may limit the impact of those plans. Meanwhile, residential heat pumps may become the hot new item and lower carbon cement could end up making a larger impact on emissions than the slow moving changes in the transportation sector.
Massachusetts is jumping on the congressional climate bandwagon, passing a new bill this week that would join the California dream of banning sales of new gasoline and diesel powered vehicles in 2035, and designate some cities as fossil fuel free and ban natural gas in new construction. This comes just a few months after the state backed out of the proposed Transportation and Climate initiative that would have enforced a cap and trade style program on fuel suppliers.
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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.