Futures Seek Direction Amid Lukewarm Technicals, Mixed Monetary Policies
The search for direction continues in energy markets, with refined products starting the day with modest gains again Thursday, after a back-and-forth Wednesday session saw early gains turn into losses later in the day. The neutral technical outlook remains in place after ULSD prices failed to make much of an effort to challenge the top end of their 7-week-old trading range, which sets the stage for more back and forth action in the days ahead.
The FED held interest rates steady Wednesday, after 10 straight increases, but made it clear that more rate increases were coming with 12 of 18 voters all seeing the need for more increases this year. The ECB meanwhile raised rates to a 22 year high with a 25 point increase this morning to try and combat inflation, while China’s central bank took the opposite approach and reduced a key lending level to try and get their economic recovery back on track.
The EIA’s refining capacity figure finally caught up to the Exxon Beaumont expansion only 3 months after the fact, showing an increase of 240mb/day in PADD 3 capacity last week, and bringing the utilization percentage back to reality. Total US refinery runs dipped for the first time in 6 weeks but remain above average and year-ago levels thanks in large part to that new capacity coming online.
Gasoline consumption estimates aren’t great, but they are holding above the 5-year average and year-ago levels and export activity remains strong, which is keeping inventories well below average levels despite the strong refinery runs. Gasoline days of forward cover remain at the bottom of the seasonal range, shifting the supply concerns for most of the country from diesel a year ago, to gasoline today. We have seen a large increase in PADD 1 gasoline imports the past two weeks however, which has pulled East Coast inventories off the low end of their seasonal range and helped relieve some of the steep backwardation that had been building in the NYH.
Besides the weekly inventory report, the DOE also highlighted the plight of West Coast diesel demand in its This Week in Petroleum article. The report details how the lack of details on the surge in renewable diesel production is skewing the official figures, which show total diesel inventories much lower than reality, and demand at a 20 year low since most of the RD is not factored into the official estimates yet.
The IEA’s monthly oil report predicted that global oil demand will reach a new record high this year at 102.3 million barrels/day, with China’s rebound the driving force in those figures, while developed nations remain in a “slump”. The report also suggested that new refining capacity in Oman and Kuwait, and the shift of discounted Russian supply to Asian markets will continue to skew activity away from the Atlantic basin. Meanwhile, a new medium term report from the IEA made longer term estimates for fuel consumption, highlighting once again that while transportation demand for fuels is set to slow in the coming years, the need for plastics will keep petroleum demand growing for decades to come.
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Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
Week 39 - US DOE Inventory Recap
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View AllThe Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
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Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.