Energy Prices Plunged To 7 Week Lows Wednesday, Even After DOE Reported Strong Recovery
Energy prices plunged to 7 week lows Wednesday, even after the DOE reported a strong recovery in petroleum demand, putting the complex back where it started the week, on the verge of a technical breakdown that could shave another 20-30 cents/gallon off of refined products. A surge in gasoline imports may have been the biggest contributor to the pullback in prices Wednesday as it seems to have knocked the wind out of the rally in NYH spot prices, and slashed more than 1/3 of the backwardation out of that market in just a single day.
As has been the case most days ever since prices peaked a month ago, a big selloff has been met with some modest buying this morning. It looks like the $2.35 range for ULSD and $2.25 for RBOB are setting a new temporary floor, and will become the pivot point for the next several days.
Running out of ideas? As political pressure heats up over the highest inflation in 30 years, the White House seems increasingly desperate to find a solution to reduce gasoline prices. Another letter was sent to the FTC to try harder to find out who is cheating even though that produced no results the last time they tried it, more rumors of a coordinated SPR release are being floated amongst other brilliant plans like banning crude oil exports again, even though that’s more likely to raise gasoline prices by further straining the transportation network.
None of those options reflect the reality that refiners are still recovering from a near-death experience in 2020 that slashed capacity and deferred necessary repairs meaning there are no short term solutions until the plants undergoing maintenance (both planned and unplanned) can come back online, which has proved to be a big challenge in recent weeks. Even then, there’s not a short term fix to the driver shortage, which means that even when prices for diesel in Phoenix trade nearly $1/gallon above other parts of the country like they are today, long hauling fuel to help heal the supply crunch can’t happen like it would in years past.
The ethanol market remains the best indicator that this tightness is one of transportation more than supply, as $1/gallon or more of backwardation persists over the next few months, even as ethanol output in the US remains near all-time highs and inventories are holding just below their average for this time of year.
An inconvenient promise? The administration also just opened up the largest Gulf of Mexico oil lease in history, auctioning off more than 80 million acres, which of course has environmental groups fuming as it comes just a few days after pledging to aggressively reduce carbon emissions. This is the problem with a country that at least pretends to follow the rule of law, as the administration had tried to block this type of sale but was overruled in the courts, meaning this administration is now stuck granting more oil permits than its predecessor, but still seeing prices increase.
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View AllEnergy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.