How Long Will This Crude Chaos Last?
May WTI is up $34/barrel this morning, the biggest rally in the 37 year history of the NYMEX contract. May WTI futures are up $34 this morning, and yet are still trading at a negative $3.50/barrel.
This ultimate lesson in the realities of futures contracts tied to physical delivery was provided in Monday’s epic 350% percent price drop, when the May WTI contract (which expires today) not only traded negative for the first time ever shortly after 1 p.m. central, but then traded at negative $40/barrel less than 20 minutes later.
Storage tanks at Cushing, OK – the delivery hub for the WTI contract - are on pace to reach maximum capacity in about a month – right when the May WTI contract would be due to deliver – meaning buyers became scarce as their ability to hold any additional barrels ran out and sellers were forced to pay in order to find someone to take those contracts off their hands. I’m sure there are plenty who will disagree with this point, but it seems that the negative value are a sign of free markets behaving as they should, and the physical delivery tied to futures contracts the ultimate tool to keep a market from being easily manipulated.
It’s likely we may never know who was caught in that unenviable position of paying nearly $1/gallon to sell crude oil futures, but it is certainly possible that the move may have caused, or perhaps was caused by, bankrupt companies being forced to liquidate positions. Perhaps a former FBI director will be hired to tell the tale someday like we saw in the aftermath of the 2008 debacle.
If you’re wondering how long this crude chaos may last, take a look at the forward curve chart below, and see the relative lack of reaction in values six months and more in the future, which also helps explain the minimal reaction in major oil company stock prices during Monday’s meltdown.
Today’s heavy selling in RBOB and ULSD seems to be at least in part the aftershocks of the WTI crash, with market players waking up to the reality that negative values can and do happen, and with U.S. gasoline inventories at record highs, there is a chance we could see a lack of storage options continuing to wreak havoc on both physical and futures prices until the country reopens.
Diesel prices meanwhile have reached a 17-year low overnight, caught up in the larger petroleum price swoon, even though U.S. diesel stocks are near the low end of their seasonal range. In some U.S. markets, we've already seen the lack of gasoline space creating diesel shortages due to pipeline and tankage constraints, and it appears that trend is likely to continue.
Click here to download a PDF of today's TACenergy Market Talk.
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Crude Oil Inventories Climbed Above Year-Ago Levels For The First Time In 2024
Sell by May then go away.
The old trading adage looked good for energy markets in 2024 as the new month started off with the biggest daily sell-off of the year so far. WTI and ULSD contracts are now in “rally or else” mode on the charts with sharply lower prices a strong possibility now that technical support layers have broken down. RBOB doesn’t look quite as bearish on the charts, but seasonal factors will now act as a headwind as we’re well into the spring peaking window for gasoline prices, and we’ve already seen a 27 cent drop from the highs. If RBOB can hold above $2.50 there’s a chance to avoid a larger selloff, but if not, a run towards $2.20 for both gasoline and diesel looks likely in the months ahead.
The selling picked up steam following the DOE’s weekly report Wednesday, even though the inventory changes were fairly small. Crude oil inventories continue their steady build and climbed above year-ago levels for the first time in 2024. Demand for refined products remains sluggish, even after accounting for the RD consumption that’s still not in the weekly reports, and most PADDs are following a typical seasonal inventory trend. The Gulf Coast saw a healthy build in diesel inventories last week as the export market slowed for a 3rd straight week. Refinery runs dipped modestly last week following a handful of upsets across the country, but overall rates remain near normal levels for this time of year.
The Transmountain pipeline expansion began operations yesterday, completing a 12-year saga that has the potential to materially change refining economics for plants in the US that relied heavily on discounted Canadian crude to turn profits over the past decade.
The P66 Borger refinery reported another operational upset Monday that lasted a full 24 hours impacting a sulfur recovery unit. Last week the company highlighted how the plant’s fire department helped the surrounding area when the largest wildfire in state history came within feet of the facility.
The EPA approved a new model to determine life cycle carbon intensity scores this week, which cracks open the door for things like ethanol to SAF, which were previously deemed to not reduce emissions enough to qualify for government subsidies. The new model would require improved farming techniques like no-till, cover crop planting and using higher efficiency nitrogen fertilizer to limit the damage done by farms that no longer rotate crops due to the ethanol mandates. Whether or not the theoretical ability to produce SAF comes to fruition in the coming years thanks to the increased tax credit potential will be a key pivot point for some markets that find themselves with too much RD today, but could see those supplies transition to aviation demand.
The FED continues to throw cold water on anyone hoping for a near term cut in interest rates. The FOMC held rates steady as expected Wednesday, but also highlighted the struggles with stubbornly high inflation. The CME’s Fedwatch tool gave 58% odds of at least one rate cut by September before the announcement, and those odds have slipped modestly to 54% this morning.
Week 17 - US DOE Inventory Recap
The Energy Complex Is Trading Modestly Lower So Far This Morning With WTI Crude Oil Futures Leading The Way
The energy complex is trading modestly lower so far this morning with WTI crude oil futures leading the way, exchanging hands $1.50 per barrel lower (-1.9%) than Tuesday’s settlement price. Gasoline and diesel futures are following suit, dropping .0390 and .0280 per gallon, respectively.
A surprise crude oil build (one that doesn’t include any changes to the SPR) as reported by the American Petroleum Institute late Tuesday is taking credit for the bearish trading seen this morning. The Institute estimated an increase in crude inventories of ~5 million barrels and drop in both refined product stocks of 1.5-2.2 million barrels for the week ending April 26. The Department of Energy’s official report is due out at it’s regular time (9:30 CDT) this morning.
The Senate Budget Committee is scheduled to hold a hearing at 9:00 AM EST this morning regarding a years-long probe into climate change messaging from big oil companies. Following a 3-year investigation, Senate and House Democrats released their final report yesterday alleging major oil companies have internally recognized the impacts of fossil fuels on the climate since as far back as the 1960s, while privately lobbying against climate legislation and publicly presenting a narrative that undermines a connection between the two. Whether this will have a tangible effect on policy or is just the latest announcement in an election-yeardeluge is yet to be seen.
Speaking of deluge, another drone attack was launched against Russian infrastructure earlier this morning, causing an explosion and subsequent fire at Rosneft’s Ryazan refinery. While likely a response to the five killed from Russian missile strikes in Odesa and Kharkiv, Kyiv has yet to officially claim responsibility for the attack that successfully struck state infrastructure just 130 miles from Moscow.
The crude oil bears are on a tear this past week, blowing past WTI’s 5 and 10 day moving averages on Monday and opening below it’s 50-day MA this morning. The $80 level is likely a key resistance level, below which the path is open for the American oil benchmark to drop to the $75 level in short order.
Click here to download a PDF of today's TACenergy Market Talk.