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 AllEnergy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
Click here to download a PDF of today's TACenergy Market Talk.
The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.