Gasoline Futures Have Rallied 43 Cents Since Setting A Low Of $3.02 Last Thursday

Market TalkTuesday, Jul 26 2022
Pivotal Week For Price Action

Gasoline futures have rallied 43 cents since setting a low of $3.02 last Thursday, and diesel prices are up 20 in less than 2 days after the low end of the July trading range held support and now the bulls look like they’ll make a test of the top. This type of action is common in a sideways pattern, where the path of least resistance is a big move higher when sellers fail to breach chart support, and the reverse is also true if this rally fails to break resistance. 

The $3.50 range looks like it could be a pivotal test for RBOB futures, with a run at $3.80 likely if that layer of resistance fails to hold. The outlook is less clear for ULSD, but a sustained move above $3.60 should be enough to get another 20 cent rally in the near future. Some good news in the rally for consumers: Most US markets are resisting the pull higher from futures, with basis values continuing to decline. The exception is the NY Harbor market which continue to outpace futures by 20 cents or more, and holding 50 cents above its Gulf Coast counterparts, which has caused values for space on Colonial’s line 1 to jump this week.

Russia’s latest move in the global energy chess match is getting much of the credit for this week’s rally, with natural gas prices spiking on news of yet another reduction in flows to Europe on the Nordstream pipeline, and the rest of the petroleum complex going along for the ride. European countries have agreed to a 15% gas supply cut this winter in their counter-move, but that announcement has done little to calm prices so far. This WSJ article explains why the clean fuel push of the past few years made Europe more susceptible to Russia’s energy weapon with the current result that coal usage is rapidly increasing with other options holding somewhere between slim to none.

It’s the busiest week of the quarter for earnings releases, and refiners are expected to smash profitability records after crack spreads spiked during the second quarter. Even though margins have dropped over the past month, and the forward curve has them priced in lower than current levels, the outlook remains strong for those companies that were able to get their facilities through the pandemic. See charts below.

The CME’s FedWatch tool shows the market pricing in a 75% chance of a 75 point hike in its target interest rate tomorrow, and an 80% chance that they’ll increase an additional 1% by year end. With so much certainty that the FOMC will continue its most aggressive monetary tightening in decades this year, the big bets now seem to be whether or not those rates will start to ease again in 2023.  

Given that the two most influential groups for energy markets globally are OPEC and the US Federal Reserve, it’s not too surprising that the CME is now publishing an OPEC watch tool along with its FedWatch tool. That tool estimates an 83% chance of the Cartel keeping its production plans “as is” at next week’s meeting, while 13% are betting on additional increases, and 3% are betting on a lower output agreement.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk Update 7.26.22

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action