It’s Been A Busy And Choppy Start To Trading In August As The Energy Complex Tests The Lower End Of Its Summer Trading Range

Market TalkMonday, Aug 1 2022
Pivotal Week For Price Action

It’s been a busy and choppy start to trading in August as the energy complex tests the lower end of its summer trading range, creating some big swings in the early going. RBOB gasoline was down almost a dime around 7am central, but has cut those gains in half in 30 minutes. ULSD prices were down 8 cents at 7, rallied to down 3 as of 7:30, then were down almost 7 again by 7:45.  

RBOB faces an immediate technical test to start the month, with the contract roll bringing prices from a high of $3.71 on Friday, to a test of $3 today. The $3 range has 3 layers of chart support, marking the July low of $3.02, the psychologically meaningful $3 mark, and the 200 day moving average at $2.99.  IF these layers of support break, it looks like we’ll see another 15 cent drop in short order, with a move into the $2.70s possible. Speaking of which, the September RBOB contract is the last summer-spec contract of the year, and the October contract is already trading in the high $2.70s this morning thanks to the combination of steep backwardation and RVP transition. Cash markets are adding to the bearish feel for gasoline prices, with several regional values already around $2.65 this morning, which will mean retail prices below $3.50 coming soon for many consumers if the trend holds.

WTI is also facing another test at its 200 day moving average, after bouncing off of that level in 6 of the past 8 trading sessions. If US oil prices don’t find a way to rally soon (as in this week) it looks like we’ll be talking about oil in the $80s some-time in August.

While gasoline and oil prices look weak on the charts, ULSD is looking relatively strong, with a more neutral outlook. The roll from the expiring August contract did move prompt prices into the lower half of the summer trading range, but there’s still more than 12 cents to fall before chart support gets tested for diesel.

The CFTC’s commitment of traders report shows that money managers continue to have mixed feelings on energy price bets, with the only consistency seen in recent weeks being a lack of open interest outstanding. The open interest for refined products is holding at its lowest levels since 2015, which was when the US fracking boom helped petroleum prices go bust.  Here too ULSD looks the most bullish with new speculative longs entering the market last week, while other funds covered short positions, leading to large increase in net length held by money managers on the week.

Baker Hughes reported a net increase of 6 oil rigs and 2 natural gas rigs last week, ending a 2 week lull in new drilling activity. Texas led the increase with 6 new rigs added last week, 2 each in the Permian and Eagle Ford plays. The total US oil rig count surpassed 600 for the first time since April of 2020 (you might remember this as the month when WTI traded negative) and leaves the possibility that the rig count could reach pre-pandemic levels by year end.

It’s been almost a month since we saw a named storm in the Atlantic, and the NHC suggests this will be another quiet week. Despite the calm waters, forecasters are still calling for an above average hurricane season, and it’s not just the Gulf Coast refining complex that seems extra vulnerable this year:  A WSJ article highlights how a shortage of transformers could spell trouble for turning the lights back on after a storm hits. 

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Market Talk Update 08.01.2022

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Pivotal Week For Price Action
Market TalkWednesday, Jul 17 2024

Energy Markets Are Trying To Find A Price Floor After Gasoline And Crude Oil Staged A Healthy Bounce To Minimize The Heavy Losses

Energy markets are trying to find a price floor after gasoline and crude oil staged a healthy bounce to minimize the heavy losses we saw early in Tuesday’s session. WTI is leading the move higher early Wednesday, up nearly $.90/barrel in the early going, while RBOB prices are up just under a penny.

Diesel continues to look like the weak link in the energy chain both technically and fundamentally. Tuesday the API reported a 4.9 million barrel build in diesel stocks, while gasoline inventories were only up 365,000 barrels, and crude oil stocks declined by more than 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning and it’s likely we’ll see a reduction in oil output and PADD 3 refining runs thanks to shut ins ahead of Hurricane Beryl, but otherwise the storm appears to be a relative non-issue with only 1 notable refining hiccup, that wasn’t even as bad as a midwestern Thunderstorm.

Chicago basis values rallied Tuesday after reports that Exxon had shut down the 250mb/day Joliet refinery following severe storms that knocked out power to the area Sunday. RBOB differentials surged nearly 9 cents on the day, while diesel diffs jumped more than a nickel. With 3 large refineries in close proximity, the Chicago cash market is notoriously volatile if any of those facilities has an upset. Back in May there was a one-day spike in gasoline basis of more than 50 cents/gallon after Joliet had an operating upset so don’t be surprised if there are bigger swings this week if the facility doesn’t come back online quickly.

Moving in the opposite direction, California basis values are heading the opposite direction with the transition to August scheduling pressuring CARBOB differentials in LA and San Francisco to their biggest discounts to prompt RBOB futures in more than 18 months. Gasoline imports into PADD 5 have held well above average levels over the past 2 months, which has more than offset the loss of the P66 Rodeo refinery’s output after it completed its conversion to RD production, in another sign of how growing refining capacity in China and other Asian countries may become more influential to the US. California regulators may also pat themselves on the back that their new plans to force refineries to report their gross profit monthly, in addition to the rules requiring all bulk trades in the state be reported must be driving the lower gasoline differentials, assuming they figure out what a basis differential is.

Meanwhile, California’s Carbon Allowance values have tumbled to their lowest levels in a year after a CARB presentation last week suggested the agency would be delaying long-anticipated tightening of the Cap and Trade program until 2026.

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

Pivotal Week For Price Action
Market TalkTuesday, Jul 16 2024

The Sell-Off In Energy Markets Continues, With Refined Products Reaching Their Lowest Levels In A Month Early In Tuesday’s Session

The sell-off in energy markets continues, with refined products reaching their lowest levels in a month early in Tuesday’s session. Reports of slowing growth in China, the world’s largest oil purchaser, is getting much of the credit for the slide in prices so far this week, although that doesn’t do much to explain why refined products are outpacing the drop in crude.

ULSD futures are leading the early move lower, trading down a nickel on the day, and marking a 19 cent drop since July 4th. There’s not much in the way of technical support for ULSD, so don’t be surprised if this sell-off continues to pick up steam.

With today’s slide, RBOB futures are down 17 cents from where they were trading on July 4th, and are just a couple of cents from testing their 200-day moving average. Should that support break, it looks like there’s a good chance to test the June lows around $2.29.

Physical markets are not offering any strength to the futures market with all 6 of the major cash markets for diesel across the US trading at a discount to ULSD futures, while only 1 gasoline market is trading at a premium to RBOB futures. That combination of weakness in futures and cash markets is going to be troubling for refiners who are seeing margins reduce during what is traditionally a strong time of year.

The EIA highlighted the energy trade between the US and Mexico in a report Monday, showing that despite so many claims of energy independence from Mexican officials, the actual amount of refined fuels and natural gas bought from the US continues to increase. That’s good news for many US refiners who have become more dependent on Mexican purchases to find a home for their output.

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