It’s An Unusually Quiet Start For Energy Prices Wednesday, Ahead Of A Busy Day Full Of Economic And Inventory Data Later This Morning

Market TalkWednesday, Nov 2 2022
Pivotal Week For Price Action

It’s an unusually quiet start for energy prices Wednesday, ahead of a busy day full of economic and inventory data later this morning, and an FOMC announcement this afternoon.

Unsubstantiated rumors that China may change their COVID-zero policy – which has kept a lid on demand in the world’s largest oil importer this year – was the easy headline to point to for the rally in crude and gasoline prices Tuesday, probably because that’s a much easier explanation than the realities of money flows in the market, particularly on the first trading day of a month. 

Other rumors that Iran may be planning an attack on Saudi Arabia, perhaps to turn attention away from the violent crackdown on protesters, were also given credit for a brief increase in overnight prices, although those moves proved short lived. 

The API reported a drawdown of 6.5 million barrels of oil in the US last week, as the SPR releases wind down and offer less of a supplement to commercial supplies. Gasoline stocks were reported to drop by 2.6 million barrels while distillates increased by 865,000 barrels.  The DOE/EIA’s weekly report is due out at its normal time. 

The majority of the global market is expecting the FOMC to announce another 75 point rate increase today – the 4th consecutive increase of that size - with the CME’s FedWatch tool showing an 86% probability of that increase priced in to FED Fund futures.  The big question is if the FOMC will signal a slowdown in hikes in future meetings, with the market fairly split between a 50 and 75 point hike at December’s meeting. The FED Chair is set to give a news conference at 1:30 central, which can often create more volatility than the announcement itself.

Tropical Storm Lisa is heading towards Belize, and a new long range model gives that storm a chance to redevelop after crossing the Yucatan into the Gulf of Mexico next week, so we’ll need to keep an eye on that storm for a few more days. Tropical Storm Martin has formed in the North Atlantic, but is moving away from the US and does not pose a threat to land. In addition to the two late season tropical storms, the NHC is giving low (20%) odds of another system forming in the Caribbean over the next 5 days. The official Hurricane season ends November 30, leaving just about 4 weeks for the market to hold their breath that we make it through without a disruption to the supply network that’s wound historically tight.

For those that don’t like reading, the WSJ has published a video noting the complexities (aka loopholes) in sanctions that continue to allow Russian oil to end up in the US, and why the new sanctions set to take place in December may force another shift in supply. The refinery highlighted in that video has become a hot topic of conversation over the past week as Italy races to do what it can to keep it operating. Looking forward, as China and India continue to buy more Russian crude, and expand their refining capacity, it’s easy to see how more and more US imports of refined products could be starting out as crude oil in Russia. 

For those that do like reading, take a look at this thorough explanation from RBN energy of what’s thrown diesel markets out of whack this year, and why an export ban would be counterproductive. 

Grain markets are breathing a sigh of relief after Russia agreed to rejoin the truce on shipments in the Black Sea, which may help cool the recent run up in ethanol prices. Then again, the rail strike that was “narrowly averted” in September continues to crop up as 2 unions have refused to ratify that agreement, setting the stage for another showdown later this month that could have widespread impacts on the distribution of ethanol and numerous other commodities.  

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Market Talk Update 11.02.2022

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Pivotal Week For Price Action
Market TalkMonday, Dec 5 2022

The Officially Imposed Sanctions Against Russian Oil Exports Are Taking Credit For This Morning’s Gains In Energy Prices

The officially imposed sanctions against Russian oil exports are taking credit for this morning’s gains in energy prices. Brent futures, the benchmark for European crude oil, are leading the pack higher so far today, trading up nearly 3%. West Texas Intermediate futures, along with both American refined product contracts, are tagging along with 1.5-2.5% gains.

OPEC’n’friends decided to stay pat on their Production Reduction™ policy through the end of the year, which aims to remove about 2 million barrels per day from global oil inventories. The relatively muted response in energy futures action suggests the ban on Russian crude and the continued reduction in cartel oil supply were both largely priced in.

It seems we have averted disaster last Friday as Washington passed legislation to prevent rail workers from going on strike. While the vast majority of refined products are transported to market hubs via pipeline, the required ethanol component of retail gasoline is by-and-large supplied via railcars.

Heating Oil futures stand out as the lone contract of the ‘big five’ that saw increased bullish bets from money managers last week, mostly due to the trimming of short positions rather than the addition of long positions. It seems fewer and fewer traders are willing to bet on lower diesel prices heading into the winter, where distillates act as backup supply for heating homes.

Market participants in crude oil futures fell to lows not seen since 2016 last week. It seems the global uncertainty surrounding energy supply and infrastructure has some potential players taking a wait-and-see approach rather than betting on price direction.

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

Pivotal Week For Price Action
Market TalkFriday, Dec 2 2022

The Energy Complex Is Trading Mostly Lower So Far This Morning

The energy complex is trading mostly lower so far this morning, with prompt month RBOB futures leading the way. Brent crude oil is struggling to hold on to overnight gains and it is exchanging hands on the green side of even, if only just.

The easing of quarantine protocols in China is taking partial credit for the weekly gain in WTI futures this morning, despite the emergence of reports and images showing provisional camps set up to enforce isolation and curb the latest spread of the pandemic.

The “ban” on Russian crude oil, set to take effect on Monday, has yet to reach final approval in Europe. Poland seems to be one of the last holdouts and has not been shy about wanting the price cap to be as low as possible.

Sunday’s OPEC+ meeting, which will reportedly be held virtually, is also getting some play in the headlines this morning. While some consider the setting of the meeting to telegraph no change in the cartel’s production policy, others posit the group is considering cuts ahead of next week’s oil ban.

The Bureau of Labor Statistics published the November jobs report this morning, an increase in nonfarm payrolls of 263,000 while unemployment rate held pat at 3.7%. The stock market did not like that: S&P 500 futures dropped 1.4% on the news as traders expect higher-than-expected job growth to buttress the Fed’s intent on continuing to raise interest rates.

The EPA published their proposed volume obligations under the Renewable Fuel Standard for the next three years and is now seeking public opinion on their target levels. Their report also estimates that the RIN obligations will reduce US oil imports by ~170,000 barrels per year. Is that a typo? We imported 6 million barrels per day last week, for reference.

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

Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.