Divergence Seems To Be The Theme Of The Week For Energy Prices

Divergence seems to be the theme of the week as energy prices are having a hard time finding direction as October trading winds down, and we’re seeing some markets struggling with excess supply, while others deal with shortages. 

We’re seeing this play out in futures where yesterday HO and WTI contracts staged a strong recovery rally, and managed small gains on the day after free falling in the morning, only to fall back into the red today. RBOB was the only contract unable to recover into positive territory Thursday, but then rallied 3 cents overnight, only to give up those gains in the past hour.  The low trades set in Thursday’s session offer a good short term support level that the bulls need to hold if they’re going to have a chance to regain the upward momentum lost early in the week. 

We’re also seeing divergence in basis values as West Coast markets have seen strong rallies this week after multiple weather-related refinery hiccups last weekend, while Midwestern values are dropping to multi-year lows. Ordinarily, this type of price spread between regions would mean fleets of tanker trucks long hauling fuel to take advantage of (and eventually help close) the arbitrage window, but given the driver shortages, those options are limited and may keep these spreads wider for longer. On the other hand, Chicago basis values may find some indirect support after a fire was reported at the Cenovus (FKA Husky) refinery in Lima OH that injured 4 workers.

While gasoline prices have dropped more than 10 cents after reaching a 7 year high to start the week, ethanol prices continue to set new records north of $3/gallon as logistical bottlenecks continue to plague suppliers. Even though ethanol prices have had a strong week, RINs have come under heavy selling pressure once again as the industry continues to wait impatiently for the long-overdue ruling on RFS volumes.

It’s the last trading for November product futures, and when the December RBOB contracts takes the prompt position Monday, it will start out some 7 cents below where October goes off the board.  We’ve already seen most cash markets adjust to this steep backwardation with big jumps in basis values when transitioning to the December futures reference, but this phenomenon will still cause confusion next week for those watching the prompt contract only and then wondering why their rack price didn’t drop.

Lots of earnings reports to sift through this week, and no surprise that with prices near 7 year highs, most producers are seeing their best earnings in several years.  One surprise announcement alongside an earnings release was that World Fuels is buying Flyers Energy group for $773 million.  

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