January CPI Applies Downward Pressure On Energy Futures
Energy markets were mixed overnight with diesel prices continuing to rally after a healthy bounce in Monday’s session, while gasoline and crude oil prices had modest losses. The sellers stepped in more eagerly after the latest read on inflation suggests that the FED has more work to, not less, in order to tame prices.
January’s CPI report showed inflation at .5% for the month and 6.4% for the past year, which was slightly higher than the “official” estimates, and we saw some modest selling of 2-3 cents in refined products in the 10 minutes following that report, which temporarily wiped out the gains in ULSD. Equities have been choppy in the wake of the report as well, so we could be in for yet another back-and-forth trading session.
Monday saw a pullback in oil prices after the White House announced another sale of crude oil from the SPR of 26 million barrels, equivalent to about 1.5 days’ worth of domestic demand. The latest sale, after the SPR has already been drawn down to its lowest level in 40 years, is not part of a new strategy to lower prices, but rather part of a congressional mandate made years ago that’s still being enforced.
OPEC’s monthly oil market report kept estimates for global oil supply & demand unchanged from last month but noted that stronger than expected economic activity to end 2022 in several key economies. The cartel’s oil output ticked lower by 49,000 barrels/day during January with cuts by Saudi Arabia and Iraq offsetting increases in Nigeria, Venezuela, Angola and Kuwait. The report also highlighted the substantial strengthening of refinery margins last month and predicts that global output will continue to drop in the next month due to heavy maintenance, much of which was deferred last year during the record margin environment.
The EIA’s monthly drilling productivity report forecasts that oil and gas production will increase in all of the major shale basins across the US in March, even though rates for new wells and legacy production are both seeing year on year declines. The count of drilled but uncompleted (DUC) wells is also increasing, which bodes well for the predictions that US oil production will reach a record this year, even though rates are still about a million barrels/day below pre-pandemic levels.
Israel is exporting its first crude oil cargo ever, as development of new offshore fields in the Mediterranean progress thanks to an agreement on territorial boundaries brokered last year. More output from the Lebanese side of the boundary is expected to come online later this year, offering some much-needed alternatives for European buyers.
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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.