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 AllEnergy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
Click here to download a PDF of today's TACenergy Market Talk.
The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.