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.
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Refined Products Bounce Back And Forth Across The Break-Even Line To Start Friday’s Trading
Gasoline Futures Rally Despite Inventory Builds, Increased Throughput
Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Week 23 - US DOE Inventory Recap
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View AllRefined Products Bounce Back And Forth Across The Break-Even Line To Start Friday’s Trading
The choppy action continues for energy markets with refined products bouncing back and forth across the break-even line to start Friday’s trading after some big swings Thursday.
RBOB futures led the rollercoaster ride Thursday, trading up 4 cents in the early morning hours, only to see those gains turn into 10 cent losses mid-morning, and then erasing most of those losses in the early afternoon following an ENT report of unplanned maintenance at the largest refinery on the East Coast.
The selling portion of the ride was blamed on a combination of an increase in jobless claims, and the disruptive impacts of the Canadian wildfires on the major population centers along the East Coast. While air traffic has been disrupted, so far there are not any reports of delays in ship traffic around the New York Harbor, and the strong basis and time spreads we’ve seen in NY have been easing this week, so it appears that this event is more concerning to the demand side of the equation than supply.
From a technical perspective, it’s not surprising to see this type of back-and-forth action as most petroleum contracts look to be stuck in neutral territory on the charts, which encourages trading programs to sell as prices get towards the top end of a range, and buy when it gets to the low end.
The Atlantic Hurricane season is off to a quiet start with no tropical development expected over the next week, but NOAA did issue an El Nino advisory Thursday that suggests the warm-water pattern in the Pacific could reach “supersized” levels and create all sorts of disruptive events. Perhaps most notable in the report is that forecasters don’t believe this year’s El Nino will have the same dampening impact on Atlantic hurricanes due to record warm temperatures in the water. Here’s a brief recap in case you missed the most memorable El Nino from 25 years ago.
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Gasoline Futures Rally Despite Inventory Builds, Increased Throughput
Gasoline futures led another strong rally in the energy complex Wednesday and continued marching higher overnight before pulling back to near break-even levels around 7:45am central.
The RBOB contract has now wiped out the post-Memorial Day selloff, and erased the losses from the contract roll to July, setting up another test of the May highs at $2.73. If that resistance breaks, there’s a good chance we see another run at the $2.90 level, but if it holds we are probably still stuck in a sideways pattern as we move through the summer months. West Coast gasoline prices meanwhile have reached a 3-month high as surging basis values compound the move in futures.
The rally came despite healthy inventory builds for refined products and strong refinery runs across all 5 PADDs reported last week, with traders (or their algorithms) appearing to focus instead on healthy demand estimates in the DOE’s weekly status report. Gasoline also saw healthy exports last week, while diesel shipments overseas continued their decline which has helped keep downward pressure on diesel prices, which is essentially the polar opposite of what we were experiencing a year ago.
Lies, damned Lies and statistics: PADD 3 refinery utilization hit 98.8% of the official capacity figure last week, which would mark a 5 year high, except the numbers are wrong. The DOE still isn’t including recent capacity additions of almost 300mb/day in those stats, so the actual figure is about 3% lower. Don’t worry though, the lack of accurate data probably isn’t intentional. The DOE recently announced it was suspending data collection for some of its monthly reports as the agency is still struggling to overcome the IT Systems failure they experienced a year ago. Add this to the realization that the official crude production and petroleum demand figures have been incorrect due to a lack of clarity surrounding condensate production that comes along with oil output.
Speaking of which, the official US Oil output figure surged to the highest levels since the COVID lockdowns began more than 3 years ago last week. No word from the EIA if this means actual production increased, or if they’ve just changed the way they’re reporting the molecules coming out of the ground.
Irving Oil released a statement highlighting a strategic review of the company, that could include selling the business that’s been held by the Irving family for nearly 100 years. The Irving Refinery in New Brunswick is Canada’s largest at 300mb/day and is the largest importer of fuels into the northeastern US. Critics are arguing that the review is an attempt to politicize Canada’s Clean Fuel Regulation that could weigh on the refinery’s profitability when it goes into full effect in July or could simply incentivize the facility to send more product to the US.
RIN values saw their first bounce in a couple of weeks, with both D6 and D4 values climbing back above the $1.40 mark after their recent slide from the mid $1.50s. We’re still 6 days away from the EPA’s deadline to issue the final RFS ruling for the next couple of years.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.