Energy Futures Rallying To Start November Trading With ULSD Once Again Leading The Way Higher After Another Inventory Draw

Market TalkWed, Nov 01, 2023
 Energy Futures Rallying To Start November Trading With ULSD Once Again Leading The Way Higher After Another Inventory Draw

The latest escalations in the Middle East have energy futures rallying to start November trading with ULSD once again leading the way higher after another inventory draw.

So far, the rally hasn’t tested the downward sloping trend lines on the weekly charts, although the early momentum makes a run at that chart resistance feel inevitable in the early going. Peg the $3 range as the pivotal level for ULSD, while RBOB faces a similar test around $2.30.  If those trend lines break, there’s another 20+ cents of room to run higher on the charts, while another failure suggests there’s quite a bit more downside ahead.

Yemen’s Houthi rebels took credit for a missile and drone attack against Israel overnight, which Israel says they thwarted.  At first glance, this is an easy reason for energy futures to rally as it’s a confirmed escalation of the war in the Middle East.  When you dig deeper however, you may recall that Saudi Arabia has been at war with the Houthis for more than a decade, and their participation may all-but-guarantee that the Saudi’s won’t side with the nations fighting Israel this time around, and this could actually end up being bearish for prices. 

The FOMC will make its latest announcement later this afternoon but given the low correlation between price moves in equities, currencies and energy prices lately this seems to have a low likelihood of moving prices in a big way today. The CME’s FedWatch tool shows that hardly anyone is betting on a change in interest rates at today’s meeting, with 97% probability of a hold priced into Fed Fund futures. The outlook for the next few months is less certain, with roughly 1/3 of the money betting on at least 1 more 25-point increase.

The API reported gasoline stocks drew by 357,000 barrels last week, while distillate inventories drew by 2.3 million barrels and crude inventories increased by 1.3 million.  The EIA’s weekly report is due out at its normal time today, before it will be delayed for system upgrades next week. 

Bad to Worse:  Shippers have been struggling to deal with a big drop in capacity through the Panama Canal due to a record drought this year, which took daily movements down from 39 ships/day to 31. Canal operators just signaled that things are about to get much worse, with plans to cut movements to just 18 ships/day in February, a 54% drop from 2022 levels. This slowdown is impacting all sorts of industries as the canal handles roughly 3% of all global trade, and the Renewable Diesel space seems to be particularly hard hit by this disruption as new Gulf Coast production struggles to find a way to get to the West Coast to take advantage of the extra credit values that are necessary to make that product competitive with traditional diesel.

LA spot diesel basis rallied 10 cents Tuesday after reports to the AQMD of unplanned flaring at PBF’s refinery in Torrance. ENT later reported that a hydrogen unit was taken offline following a fire, reducing production at the facility’s distillate hydrocracker, which encouraged buyers to step in after watching basis values drop by 60 cents throughout October.

Ethanol prices have continued their slide this week, ending October with values below $2/gallon in Chicago and New York, the first time we’ve seen that since April 2021. Low corn prices and decent margins for producers seem to be contributing to the price slide as producers may be encouraged to keep ethanol production high even as we approach the winter demand doldrums. 

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 Energy Futures Rallying To Start November Trading With ULSD Once Again Leading The Way Higher After Another Inventory Draw