Gasoline Futures Have Rallied 43 Cents Since Setting A Low Of $3.02 Last Thursday
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.
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“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.