Energy Prices Were On The Move Higher To Start Wednesday’s Trading
Energy prices were on the move higher to start Wednesday’s trading despite increases in weekly inventory levels after another attempted sell-off proved short lived, and buyers seem to be quite content to buy the dip.
A late day rally cut Tuesday’s losses dramatically, with RBOB bouncing 10 cents off of its low for the day, while ULSD rallied by 7 cents. Despite that big bounce, which managed to keep the bullish trend comfortably intact, ULSD prices did snap their 10 session winning streak that had added a casual 66 cents to prices over the past 2 weeks.
The EIA’s monthly Short Term Energy Outlook followed the pattern of several major bank reports in the past week, raising its forecast for energy prices for the next year due to the ongoing fallout over Russia’s invasion of Ukraine, even though the forecast suggests global oil supplies should outpace demand in each of the next 6 quarters.
The report predicts that Russian oil output will drop 2 million barrels/day over the coming year from 11 to 9 million, while US output will increase from 11 million to 13 million by the end of 2023. The report also highlights the drop in operable US refining capacity over the past 2 years, as a harsh reminder that this isn’t so much a global lack of oil, it’s more a shortage of transportation and refining capabilities. See the notes and charts below.
The API reported inventory builds across the board last week with US crude and gasoline stocks each up 1.8 million barrels, while distillates increased by 3.3 million. The DOE’s version of the weekly stats is due out at its normal time this morning.
Excuse me: New efforts to curb carbon emissions this week include New Zealand putting a pricing mechanism on sheep and cow burps and a Wisconsin fuel marketer shipping processed cow waste to California. (insert Texans making a “is that why they’re all moving here?” joke) Meanwhile, as new and more creative ways to take advantage of California’s Low Carbon Fuel standard emerge, that market-based program is seeing the value of its credits plummet to 5 year lows.
STEO NOTES:
Open Interest: The STEO also noted the dramatic drop in open interest for energy contracts, stating that, “Fewer futures contracts held by these traders suggest some producers or end users could be reducing their hedging activity, in part, because higher commodity prices and higher volatility are likely making it more expensive to hedge. In addition, higher interest rates may be increasing the costs of opening a futures position, such as higher margin rates.” Keep this in mind the next time oil prices crash.
East Coast Shortages: “By the end of April, gasoline inventories on the East Coast were 14 million barrels below their five-year (2017–2021) average levels (Figure 6). At the same time, combined Gulf Coast and Midwest inventories were almost 2 million barrels above their five-year average level. In May, East Coast gasoline inventories remained low and did not decrease much further, while Midwest and Gulf Coast inventories drew down substantially. On May 27, combined Gulf Coast and Midwest inventories were down by 6 million barrels from their end-April levels while East Coast gasoline inventories were down by almost 1 million barrels”
Tight Diesel Supplies: We estimate distillate imports, which would normally increase to help rebuild low inventories and moderate prices, were below the five-year average at 145,000 b/d for the four weeks ending May 27. If confirmed in monthly data, this recent decrease in distillate imports would signal that global demand remains strong as markets continue to adjust to sanctions on Russia’s exports, reduced export quotas in China, and overall lower global refinery capacity.
Refinery crack spreads: Inventories for gasoline and diesel in the United States are low at the same time that they are similarly low in Europe and elsewhere in the Atlantic Basin, contributing to broad increases in crack spreads for both products
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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.