Expectations For Driving Demand Surge
The rally continues in energy markets, with petroleum futures looking like they are going to test the high trades of the year now that buyers are stepping back into the market in earnest. ULSD prices are now less than two cents from their 2021 highs as their winning streak stretches to six straight days, while RBOB is about seven cents away and oil prices need to add about $3 to set new highs. Fundamentally and technically, diesel contracts are looking the strongest, although expectations for a surge in driving demand this summer seem to be underpinning gasoline prices as well.
The DOE’s weekly diesel demand estimates remain above average, and are holding above “pre-COVID” levels, even as trucking, rail, and mass transit demand have not fully recovered. A surge in planting activity (thanks in large part to grain prices reaching eight-year-highs) is getting some of the credit for the strong distillate demand, as is the surge in online ordering in the past year by U.S. consumers that’s created a huge increase in small truck delivery activity.
The EIA’s gasoline demand estimate pulled back on the week, even as signs on the ground suggest that motor fuel consumption may be reaching six months highs. Another sign that the weekly estimate might be light: Look at the large amount of gasoline imports on the week, and yet stockpiles barely increased, suggesting fundamentals may be better than this report suggests. As it stands, the official estimate has gasoline consumption roughly 4% below 2019 levels for this time of year, keeping expectations for a full recovery this summer intact.
Even as demand is getting back towards normal and stockpiles are holding near average levels, refiners are still processing roughly 8% less than their five year average, 1.4 million barrels/day. Some of that reduction comes from the rash of closures that happened in the past 12 months, others due to lingering maintenance issues left over from February’s storms, and some could be that plants still aren’t profitable – even as gross margins have recovered – due to the spike in RIN values this year, that’s pushed renewable obligations costs north of $7/barrel.
RIN prices set new record highs again on Wednesday, even as corn and soybean prices dipped from the high trades we saw on Tuesday. The new EPA administrator testified in front of congress, and was non-committal on the over-due RFS obligation levels (they’ll wait for the supreme court ruling) and on the future of traditional ethanol, attempting to walk the tight rope between the pressure from big-Ag states, and the push to move towards truly advanced fuels.
Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
Week 38- US DOE Inventory Recap
It’s A Soft Start For Energy Markets Wednesday As Traders Await The Weekly Inventory Report, And The FOMC
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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.
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.