It’s Been A Volatile Week For Energy And Prices As The Fear Trade Continues
It’s been a volatile week for energy and prices as the fear trade continues to manifest itself in various ways as the trio of monthly energy market reports had some mean things to say about demand, and worse to say about supply.
The November ULSD contract is at it again this morning, rallying more than a dime overnight only to fall 18 cents from those highs and trade sharply lower even before the September CPI report that showed inflation remains stubborn, sending equity markets sharply lower. There was a similar wave of selling in the contract late in Wednesday’s session that knocked the Nov/Dec spread back from a $.3975/gallon high to settle at $.31…only to see the spread rally right back to $.35 this morning.
While those values are extreme, the premise is simple: If you have the ability to ship diesel, will it be worth more to you to sell it in Europe – which is desperate for more supply – or the US East Coast, which is becoming so. NYH basis markets continue to try and entice those barrels, reaching a 53 cent/gallon premium to November futures for prompt barrels, creating a spread of nearly 90 cents between now and December. With those types of price moves in the front half of the month, all bets are off for what prices could do as the November contract approaches expiration, and price swings like we saw back in the spring cannot be ruled out.
The EIA’s monthly report (STEO) had all sorts of bad news, lowering both supply estimates due to OPEC’s announcement and lackluster production in the US, and demand due to large declines in GDP expectations globally next year. Perhaps worst of all however is that the report called for a colder than average winter and noted how that will translate for much larger heating bills for consumers due to tight natural gas and diesel supplies.
On the bright side, the report did do a nice job answering the political theatre questions posed by California’s elected appointed chair of the state’s energy commission on why gasoline prices were so high. See the note below.
The IEA sounded even more distraught in their monthly oil market report, citing “The relentless deterioration of the economy…” for a large reduction in their global demand estimates while calling what we’re experiencing “the worst global energy crisis in history” . The report also had a harsh reminder that Europe’s actual embargoes on Russian supplies haven’t taken full effect yet and the continent still hasn’t found a replacement option for roughly half of that fuel.
Right on cue: Europe’s largest refinery had a major malfunction overnight, which will only compound the issues stemming the ongoing refinery strikes in France and the race to stock up supplies for winter with options ranging between bad and worse.
The API reported a large draw in US diesel inventories of more than 4.5 million barrels last week while gasoline stocks increased by 2 million barrels, and crude inventories added 7 million barrels, thanks to another 8 million barrels being released from the SPR. The DOE/EIA’s weekly report is due out at 10am central. Why the report is delayed 24.5 hours after a federal holiday is as much of a mystery as the latest federal holiday itself.
Tropical Storm Karl is making its course reversal in the Gulf of Mexico and heading away from US oil production and refining assets. While US supply is dodging another bullet, the storm is targeting the recently commissioned, though still not operational, Olmeca refinery near the port of Dos Bocas. While this storm probably won’t get strong enough to do significant damage, it could continue to delay efforts to finish the refinery that is already far behind schedule and billions over budget.
Federal investigators reported that a corroded pipe was to blame for the explosion and fire that destroyed the PES refinery, way back in 2019 before shutting down refineries went mainstream.
Click here to download a PDF of today's TACenergy Market Talk.
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View AllRefined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.