Inflation Fears Seem To Be Taking Credit For The Selloff In Both Energy And Equity Markets
After a soft finish Monday, energy futures have moved modestly lower again this morning after another failed rally attempt overnight. Inflation fears seem to be taking credit for the selloff in both energy and equity markets as the last meeting of the year for the FOMC has investors suddenly seeming nervous.
A lot has changed in the past month as the FED seems to have changed its stance while inflation continues to hit new 40 year highs and unemployment has dropped sharply. While almost no-one expects a rate increase at this meeting, the CME’s FEDWATCH tool shows that a majority now expect at least one rate increase by May, whereas a month ago only 1/3 expected to see an increase by then. While so far the FED’s pivot hasn’t had a big impact on equity or energy values, there’s a case to be made that a hawkish FED is reason to sell any rallies, whereas over most of the past two years a money printing FED was a reason to buy any dips.
Speaking of which, futures sold off sharply in the 2 minutes following the release of the PPI reading for November that showed producer prices have climbed 9.6% over the past 12 months, a record high for that reading, which will no doubt catch the attention of the FOMC, and provide another data point for those that want to tighten up monetary policy.
The FED meeting seems to be overshadowing the monthly data deluge from the alphabet soup of oil market reporting groups.
OPEC’s monthly oil market report was highlighted by a forecast that Omicron is, “…expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges.” The report did shift the growth estimates originally marked for Q4 2021 to Q1 2022, but kept the overall demand estimates for next year unchanged.
The IEA’s monthly oil market report took a more bearish tone, reducing its demand estimates for both 2021 and 2022 due to restrictions on international travel caused by the surge in COVID cases, and projecting that global supplies are set to outpace that demand starting in December. The report highlights the recovery in US oil production as a leading cause for the supply increases, and notes that the world’s 3 largest producers could all reach record levels next year.
Bothe the OPEC and IEA reports highlighted an increase in global refinery runs over the past few months, and note that Omicron is likely to hurt those refinery margins as facilities will once again have to get creative to find a home for their excess jet fuel.
The EIA’s monthly drilling report is projecting that both oil and gas production in the Permian basin will reach record highs in January, while none of the other major US shale basins is even close to recovering to pre-COVID production levels. This article on the boom in export facilities along the gulf coast offers a look into why the focus remains on the Permian, and into the efforts to try and prevent those export facilities from being built.
RIN markets continue to struggle to digest the changes to the RFS program announced last week. D6 ethanol RINs remain the most volatile, dropping 20 cents before the announcements, then rallying 40 cents after the announcements, only to drop 20 cents over the past 2 days. D4 RINs meanwhile have a large backwardation, with 2021 values trading some 20 cents above 2022 values.
The EPA this morning published a notice of opportunity to comment on their proposed denial of all petitions for small refinery waivers to the RFS, which claimed that since all market participants face the same RIN prices, no disproportionate economic hardship exists for those smaller plants. Assuming the proposal sticks, that would add roughly 4.5 billion RINs to the total obligated amount needed over the past 3 years.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Markets Are Pointing Modestly Higher To Start Friday’s Session
Energy markets are pointing modestly higher to start Friday’s session, in a meager attempt at a recovery rally at the end of what would be the worst week in over two months if prices settle near current values. The liquidation of speculative bets placed on higher energy prices ahead of the direct conflict between Israel and Iran continues to appear to be the driver of the weakness, and we’ll have to wait and see if this modest bounce is a sign that the liquidation is over, or just a pause before it picks up again. Most contracts remain in a precarious technical position with the potential for a slide towards $70 for WTI and $2.20 for both refined products if the buyers don’t get serious soon.
Stocks are pointing sharply higher after a slowdown in job growth reported in the April Non-Farm payroll report. The BLS reported an increase of 175,000 jobs for the month, down sharply from the 315,000 jobs added in March, and the February & March estimates were revised down a combined 22,000. Both the “official” (U-3) and “real” (U-6) unemployment rates ticked up by .1% to 3.9% and 7.4% respectively. The immediate positive reaction to negative news suggest that the bad news is good news low-interest-rate junkies believe this may help the FED’s dilemma of the US economy being too strong to cut rates. The big jump in equities has not seemed to spill over into energy contracts yet, as crude and refined product contracts changed very little following the report.
San Francisco diesel basis spiked 15 cents Thursday to reach the highest level of any market in the country so far this year at 35 cents over prompt futures. While there aren’t yet any refinery upsets reported to blame the spike on, PBF is undergoing planned maintenance at its Martinez facility, and of course P66 just finished converting its Rodeo plant to RD after Marathon converted its Martinez facility in the past couple of years, meaning there are at most only 2 out of the previous 5 refineries in the region operating near capacity these days. The question now is how quickly barrels can shift north from Southern California which continues to show signs of a supply glut with weak basis values and spot to rack spreads.
PBF continued the trend of Q1 refinery earnings that were sharply lower, but still healthy by longer-term historical standards. The company noted that its Saint Bernard (the parish, not the dog) Renewables facility co-processing at its Chalmette refinery had received provisional approval from CARB to lower its CI scores and help improve the amount of LCFS subsidies it can receive. That facility is operating at 18mb/day which is roughly 86% of its capacity.
Cenovus highlighted the restart of its Toledo and Superior refineries in improved refinery run rates in Q1 2024 vs Q1 2023 and noted that it had ramped up production at units that were slowed down for economic reasons in December and January (you may remember this as the time when midcontinent basis values were trading 50 cents/gallon below futures). The company did note that the January deep freeze slowed operations at Superior, but did not mention any change in operating rates despite numerous upsets at its 50% owned Borger refinery.
Dress rehearsal for a busy hurricane season? So far there are no reports of refinery issues caused by the flooding in the Houston area this week. At this point, most of the flooding appears to be far to the north of the refining hubs on the Gulf Coast but with more storms in the forecast and 88 counties already declaring disaster status, this will be something to watch for the next few days.
Click here to download a PDF of today's TACenergy Market Talk.
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.