Bearish Fundamentals, Hawkish FED Sentiment Leave Energy Futures Searching For Direction

It’s been a choppy morning for energy futures so far, bouncing back and forth between small gains and losses after more inventory builds and a hawkish outlook from the FED both combined to put a stop to the recovery rally Wednesday.

Refined products were trading up 4-5 cents/gallon ahead of the DOE’s weekly report yesterday morning, but quickly wiped out most of those gains after the agency showed more builds in refined product inventories which have reached their highest levels for June since 2021. Refiners did cut run rates for the first time in 6 weeks, but the declines were minor and overall throughput rates remain at the top end of the seasonal range. The DOE’s estimate for product demand did tick modestly higher as well, but those gains weren’t enough to stop the trend of steadily increasing stocks.

Meanwhile, the EIA is still struggling to get its accounting system to keep pace with the U.S. market, as its adjustment factor swings from adding around 8 million barrels the week prior to taking away around 8 million barrels this week. A surge in oil imports to a 5-year high (thanks Transmountain Pipeline) helped oil inventories continue to increase despite that huge drop in the adjustment factor and a drop in exports last week.

The FED left interest rates alone Wednesday and signaled it was likely there would only be 1 rate cut in 2024. Odds of a 25-point cut at the July 31 FOMC meeting dropped from 21% to 8% after the announcement according to the CME’s Fedwatch tool.

The tropics are getting active already in what’s expected to be a very busy year for storm activity. There’s a system that moved over Florida this week, and while it’s only given 20% odds of being named, it dumped more than a foot of rain on parts of the state. So far the Pt Everglades terminal facilities seem like they’ve weathered the big rain much better than when several of them ended up under water from flash flooding a year ago. There’s another system given 40% odds of developing off the Mexican coast, but early forecasts have it shifting west into Mexico and not targeting the U.S. Gulf Coast.

Valero reported an upset at its McKee TX refinery following a Thunderstorm Wednesday, but it appears no operating units were forced to slow down from that event. Meanwhile, Marathon’s Galveston Bay refinery is working its way back towards the lead in the race to have the most TCEQ filings, with yet another upset reported yesterday, this time in a sulfur recovery unit which was able to return to service in roughly 5 hours.

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