Many In The Market Caught Off-Guard

Oil prices have spiked $5 a barrel, and refined products are up 12 cents/gallon since early Thursday morning after OPEC & friends announced they would not change their output cut agreement, which caught many in the market off-guard. The rally has propelled each of the big 4 petroleum futures contracts to their highest levels in more than a year, just a couple of days after it looked like the four month old trend might be breaking down.
The big rally in energy contracts comes in spite of a large selloff taking place in equity markets, which continue to act spooked by interest rates higher than 1%. You can make a strong argument that the two agencies most capable of moving energy prices with their policy are OPEC and the U.S. Federal reserve. Yesterday, we saw both in action with OPEC surprising the market to the upside, while the FED Chair apparently didn’t do enough to calm the stock markets. Given the two asset classes have had a strong positive correlation for most of the past year, this recent divergence could end up creating more volatility for energy contracts in the weeks to come, while a strong rally in the U.S. Dollar could finally pop the energy balloon.
Looking past the headlines of the OPEC announcement, there is some reason to pause given that the Saudi’s are still not convinced demand globally is capable of handling normal production levels. Then again, there is certainly a political angle to everything the cartel does, and it’s also possible that the U.S. reaction (or what critics call a lack of reaction) to the Saudi leadership’s role in the killing of Jamal Khashoggi could have played into this decision as well. A Bloomberg note this morning suggests that the move by the Saudi’s is a bet that U.S. oil producers will behave differently this time, even though they’ve behaved the same way for the past 150 years which has helped create the epic boom and bust cycles this market is famous for.
The refinery recovery efforts continue to progress with additional units coming online daily, but hiccups are common, and re-supply is not coming fast enough for those still scrambling to find allocation across Texas and neighboring states. The impacts on rack prices are spread much further however with markets from Arizona to Virginia all feeling the trickle down impacts of the heart of refining country shutting down for two weeks. Group 3 diesel differentials continue to stand out, spiking to premiums north of 30 cents Thursday morning before trading lower to end the day. That market has 20 cents of backwardation between now and the end of March, as traders bet that resupply should largely be complete by April, even though supplies continue to tick lower in the region this week.
Chicken or the egg: RIN values continue to set new multi-year highs this week, which is either helping drive the rally in refined products, or being driven by that rally depending on who you ask. There’s little news over the RFS program or the various legal challenges to it, and grain prices have been fairly flat, so it seems this rally could simply be the market betting that this new administration is unlikely to do anything that would help lower this de-facto tax on refiners.
Click here to download a PDF of today's TACenergy Market Talk.
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Week 48 - US DOE Inventory Recap

The API Reported Gasoline Inventories Dropped By 898,000 Barrels Last Week
Gasoline and oil prices are attempting to rally for a 2nd straight day, a day ahead of the delayed OPEC meeting, while diesel prices are slipping back into the red following Tuesday’s strong showing.
The API reported gasoline inventories dropped by 898,000 barrels last week, crude inventories declined by 817,000 barrels while distillates saw an increase of 2.8 million barrels. Those inventory stats help explain the early increases for RBOB and WTI while ULSD is trading lower. The DOE’s weekly report is due out at its normal time this morning.
A severe storm on the Black Sea is disrupting roughly 2% of the world’s daily oil output and is getting some credit for the bounce in futures, although early reports suggest that this will be a short-lived event.
Chevron reported that its Richmond CA refinery was back online after a power outage Monday night. San Francisco spot diesel basis values rallied more than a dime Tuesday after a big drop on Monday following the news of that refinery being knocked offline.
Just a few days after Scotland’s only refinery announced it would close in 2025, Exxon touted its newest refinery expansion project in the UK Tuesday, with a video detailing how it was ramping up diesel production to reduce imports and possibly allow for SAF production down the road at its Fawley facility.
Ethanol prices continue to slump this week, reaching a 2-year low despite the bounce in gasoline prices as corn values dropped to a 3-year low, and the White House appears to be delaying efforts to shift to E15 in an election year.
Click here to download a PDF of today's TACenergy Market Talk.

Values For Space On Colonial’s Main Gasoline Line Continue To Drop This Week
The petroleum complex continues to search for a price floor with relatively quiet price action this week suggesting some traders are going to wait and see what OPEC and Friends can decide on at their meeting Thursday.
Values for space on Colonial’s main gasoline line continue to drop this week, with trades below 10 cents/gallon after reaching a high north of 18-cents earlier in the month. Softer gasoline prices in New York seems to be driving the slide as the 2 regional refiners who had been down for extended maintenance both return to service. Diesel linespace values continue to hold north of 17-cents/gallon as East Coast stocks are holding at the low end of their seasonal range while Gulf Coast inventories are holding at average levels.
Reversal coming? Yesterday we saw basis values for San Francisco spot diesel plummet to the lowest levels of the year, but then overnight the Chevron refinery in Richmond was forced to shut several units due to a power outage which could cause those differentials to quickly find a bid if the supplier is forced to become a buyer to replace that output.
Money managers continued to reduce the net length held in crude oil contracts, with both Brent and WTI seeing long liquidation and new short positions added last week. Perhaps most notable from the weekly COT report data is that funds are continuing their counter-seasonal bets on higher gasoline prices. The net length held by large speculators for RBOB is now at its highest level since Labor Day, at a time of year when prices tend to drop due to seasonal demand weakness.
Click here to download a PDF of today's TACenergy Market Talk.