Energy Prices Slide Amid Sanctions, Positive Economic Outlook
Diesel prices are once again leading the petroleum complex lower, dropping more than 10 cents overnight as natural gas prices tumble to an 18-month low, and adding to the sentiment that another energy crisis will not only be avoided this year, but perhaps next year as well.
This latest move looks particularly bearish for crude oil prices, with a good chance we could see a slide to $72 for WTI if prices can’t manage to rally later today. So far refined products look less bearish on the charts, but if they take out the February lows about 5 cents below current values for ULSD and 10 cents lower for RBOB, the door is open for another 20-30 cent slide.
Last Friday, an announcement that Russia would cut oil production by 500,000 barrels per day helped spark a sharp but brief rally in energy prices, a move the IEA says is proof that sanctions are having their intended effect. This week reports suggest the country would not need to cut exports to reduce oil production, it could simply supply less to its domestic refineries, which seems to be contributing to the selloff, and will no doubt be seen as a sure sign that the diesel embargo that started Feb 5 is having at least some of its intended impact.
China continues to be the main beneficiary of Russia’s energy follies, and a Reuters report highlights how the country is set to reach record oil import levels thanks to the reopening economy, and new refineries reach to pump both domestically and abroad.
A surging US dollar is also getting some credit for the latest sell-off, as positive economic data and stubborn inflation levels reported this week suggest the FED will be forced to continue its rate increases, and another 50-point increase could be back on the table. The correlation between daily moves in energy and currency prices remains fairly weak however, so this probably isn’t as big of a factor as it was in past years.
Speaking of which, the relationship between stock markets and energy prices has been very weak for the past 6 months or so, so while it’s still possible that this week’s selling in equities could be carrying over into the move lower in energy prices, it’s probably not the main factor.
We have not seen any commitments of traders data from the CFTC for going on 3 weeks, following a cyber-attack on ION markets, which is a 3rd party service provider for certain derivative contracts. So far there are no new updates on the situation since February 10th, but we should hear one way or another later today as the report is typically scheduled to be released late on Friday afternoon.
Click here to download a PDF of today's TACenergy Market Talk.
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View All“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.