HO And WTI Reach Fresh 3-Month Highs As Inflation Outlook Improves

Market TalkWednesday, Jul 12 2023
Pivotal Week For Price Action

ULSD and WTI prices are both trading at fresh 3-month highs this morning as energy and equity markets seems to be embracing an improving outlook on inflation, and shrugging off inventory builds in the early going. 

The push higher this week opens a big of a technical window for WTI to make a run at the 200 day Moving Average, which is currently around $77.55, and managed to harshly repel 2 other rallies over the past year. 

ULSD has clawed its way back into the $2.60 range that held prices for most of March and April and there’s an argument that this opens the door to another 15-30 cents of more gains in the coming few weeks. Given that diesel inventories haven’t been able to recover much despite the freight recession this year, there’s also a fundamental argument being made that ULSD prices are poised to rally as we approach the busier demand seasons for distillates. It’s also worth noting that the correlation between ULSD daily price moves and the S&P 500 has reached a 2 year high this week, so for now, it looks like diesel prices may simply be following the stock market, which is adding to the bullish outlook today. 

The S&P 500 is trading at a 15 month high this morning after the June CPI report calculated inflation at 3% for the past 12 months, which was slightly below the “official” estimates. If it weren’t for the big drop in energy prices over the past year however, the inflation rate would be north of 5% which may eventually cause a pullback in the early rally if traders realize this better-than-predicted figure simply isn’t as good as it seems.

The API reported inventory builds across the board last week as the holiday hangover for fuel demand took hold. The industry group estimated inventory increases of 3 million barrels for crude oil, 2.9 million for distillates, and 1 million barrels for gasoline. The EIA’s weekly estimates are due out at their normal time this morning, and there’s a good chance we’ll see a big pullback in demand figures after gasoline consumption reached an 18-month high to end June, but evidence at the rack levels suggests its dropped sharply in the first third of July.

The DOE increased its outlook for US GDP growth for 2023 and 2024 in its latest Short Term Energy Outlook which helped increase the outlook for fuel prices. The agency also highlighted a change in operable refining capacity over the coming year now that Lyondell has pushed back plans to shutter its Houston refinery, but also failed to note the upcoming conversion of the P66 Rodeo CA facility to renewable production which will result in a net decrease of roughly 100mb/day. The report lowered the forecast for renewable diesel production next year due to the EPAs final ruling on the RFS through 2025 that increased targets for advanced biofuels, but not by enough to satiate the appetites of the government credit harvesters.   

Today’s interesting read: If you weren’t already convinced that ESG was a farce, read this note on how investors who don’t read the fine print ended up financing Saudi Aramco.

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

Market Talk Update 07.12.2023

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkWednesday, Jul 17 2024

Energy Markets Are Trying To Find A Price Floor After Gasoline And Crude Oil Staged A Healthy Bounce To Minimize The Heavy Losses

Energy markets are trying to find a price floor after gasoline and crude oil staged a healthy bounce to minimize the heavy losses we saw early in Tuesday’s session. WTI is leading the move higher early Wednesday, up nearly $.90/barrel in the early going, while RBOB prices are up just under a penny.

Diesel continues to look like the weak link in the energy chain both technically and fundamentally. Tuesday the API reported a 4.9 million barrel build in diesel stocks, while gasoline inventories were only up 365,000 barrels, and crude oil stocks declined by more than 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning and it’s likely we’ll see a reduction in oil output and PADD 3 refining runs thanks to shut ins ahead of Hurricane Beryl, but otherwise the storm appears to be a relative non-issue with only 1 notable refining hiccup, that wasn’t even as bad as a midwestern Thunderstorm.

Chicago basis values rallied Tuesday after reports that Exxon had shut down the 250mb/day Joliet refinery following severe storms that knocked out power to the area Sunday. RBOB differentials surged nearly 9 cents on the day, while diesel diffs jumped more than a nickel. With 3 large refineries in close proximity, the Chicago cash market is notoriously volatile if any of those facilities has an upset. Back in May there was a one-day spike in gasoline basis of more than 50 cents/gallon after Joliet had an operating upset so don’t be surprised if there are bigger swings this week if the facility doesn’t come back online quickly.

Moving in the opposite direction, California basis values are heading the opposite direction with the transition to August scheduling pressuring CARBOB differentials in LA and San Francisco to their biggest discounts to prompt RBOB futures in more than 18 months. Gasoline imports into PADD 5 have held well above average levels over the past 2 months, which has more than offset the loss of the P66 Rodeo refinery’s output after it completed its conversion to RD production, in another sign of how growing refining capacity in China and other Asian countries may become more influential to the US. California regulators may also pat themselves on the back that their new plans to force refineries to report their gross profit monthly, in addition to the rules requiring all bulk trades in the state be reported must be driving the lower gasoline differentials, assuming they figure out what a basis differential is.

Meanwhile, California’s Carbon Allowance values have tumbled to their lowest levels in a year after a CARB presentation last week suggested the agency would be delaying long-anticipated tightening of the Cap and Trade program until 2026.

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

Pivotal Week For Price Action
Market TalkTuesday, Jul 16 2024

The Sell-Off In Energy Markets Continues, With Refined Products Reaching Their Lowest Levels In A Month Early In Tuesday’s Session

The sell-off in energy markets continues, with refined products reaching their lowest levels in a month early in Tuesday’s session. Reports of slowing growth in China, the world’s largest oil purchaser, is getting much of the credit for the slide in prices so far this week, although that doesn’t do much to explain why refined products are outpacing the drop in crude.

ULSD futures are leading the early move lower, trading down a nickel on the day, and marking a 19 cent drop since July 4th. There’s not much in the way of technical support for ULSD, so don’t be surprised if this sell-off continues to pick up steam.

With today’s slide, RBOB futures are down 17 cents from where they were trading on July 4th, and are just a couple of cents from testing their 200-day moving average. Should that support break, it looks like there’s a good chance to test the June lows around $2.29.

Physical markets are not offering any strength to the futures market with all 6 of the major cash markets for diesel across the US trading at a discount to ULSD futures, while only 1 gasoline market is trading at a premium to RBOB futures. That combination of weakness in futures and cash markets is going to be troubling for refiners who are seeing margins reduce during what is traditionally a strong time of year.

The EIA highlighted the energy trade between the US and Mexico in a report Monday, showing that despite so many claims of energy independence from Mexican officials, the actual amount of refined fuels and natural gas bought from the US continues to increase. That’s good news for many US refiners who have become more dependent on Mexican purchases to find a home for their output.

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