Energy Futures Had A Big Rally On Friday

Market TalkTue, Dec 27, 2022
Energy Futures Had A Big Rally On Friday

Energy futures had a big rally on Friday, and are following through with higher prices to start the short week as a pair of major supply disruptions, one actual and another potential, grip the market.  ULSD continues to lead the move higher and came within striking distance of setting a new high for December overnight, marking a rally of more than 60 cents/gallon since bottoming out 2.5 weeks ago.  

Russia threatened to cut its oil output in retaliation for sanctions on Friday, which sounds scary but may actually have to do more with limited options to sell and transport some of the nation’s production than a strategic plan to strike back at nations participating in the embargo.

Numerous refineries were knocked offline by the winter storm last week, including several of the largest in the country.  Refineries accounting for approximately 18% of total US capacity had units reported offline over the weekend, although the total number of facilities impacted is likely to be much higher, which could place this event in the top 5 all time for disruptions.  The steady stream of reports of refineries dropping had basis values for gasoline and distillates rallying in addition to the strong move higher in futures on Friday as the big physical shippers were scrambling to find replacement barrels. 

Much warmer temps are sweeping the country allowing damage to be assessed and restarts to begin.  While there’s never a good time for a mass refinery disruption, the week between Christmas and New Years typically has the weakest demand of the year, so may limit the impact of these shutdowns on the market.  The timing is also likely to encourage some of those facilities to move up maintenance to take advantage of units already being offline and demand being weak.  Oil and natural gas output was also hit by the huge storm, but it appears that the electric grids held up well in most cases, unlike what we experienced in early 2021. 

The disruptions weren’t limited to production and refining facilities.  Numerous terminals and pipelines across the country were reporting various issues, and vessel traffic in and around the NY Harbor was temporarily halted as the storm passed.  Here too the impacts may have been much worse if they hadn’t happened just after the pre-holiday rush and just before Christmas day, which marks the slowest day for terminal loadings of the entire year.

Money managers were jumping back on the energy bandwagon last week with large percentage increases in net length seen across the board.  While the percentage increases are large, the starting positions were fairly small, so the actual number of contracts added was less impressive.  New length and short covering were consistent for crude and products, while open interest continues to hover near 6 year lows. 

Baker Hughes reported 2 more oil rigs and 1 more natural gas rig drilling in the US last week, after both counts had declined in the prior 2 weeks.  Drilling activity in the US has stagnated over the past couple of months as lower prices and various supply chain and labor shortages continue to have producers acting conservatively.

Keystone pipeline received approval to restart its shuttered line on Friday, with flows to the Cushing OK hub expected to resume this week. 

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Energy Futures Had A Big Rally On Friday