It’s An Unusually Quiet Start For Energy Prices Wednesday, Ahead Of A Busy Day Full Of Economic And Inventory Data Later This Morning
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.
Click here to download a PDF of today's TACenergy Market Talk.
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View All“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.