Futures Reacted Negatively To The DOE’s Weekly Report Wednesday

RBOB gasoline futures are trying to lead the energy complex on a recovery rally this morning after 2 days of heavy selling knocked prices down more than 12 cents/gallon. The market continues to seem conflicted on the short-term charts, with more choppy sideways action appearing likely as traders debate the supply fears of an imminent attack in the Middle East against the latest warning signs of an economic slowdown coming from the steel markets.

US stocks are pointing higher this morning after retail sales for July were reported to be up 1% which was significantly higher than most estimates, but that optimism doesn’t seem to be impacting energy prices so far as product futures are actually down slightly from where they were before that report.

Futures reacted negatively to the DOE’s weekly report Wednesday despite headline inventory draws in refined products and a tick higher in estimated demand. The selling could be blamed on PADD 1 stocks increasing slightly, or a surge in PADD 3 refining rates that foreshadow more product to come, or it could just mean traders (or their algorithms) just ignored the data altogether. We’re also about to start the last 2 weeks of trading for the September RBOB contract, which is the last summer-grade contract of the year, and the Sep/Oct (U/V) which I’ve dubbed the sunburn spread is notoriously volatile, which should make for some larger-than-average swings in RBOB prices to end August.

The big drop in PADD 2 diesel inventories was largely expected given the refinery downtime of the previous weeks, and the price action that had opened up the arb to ship barrels north which has been a rarity this year. Diesel demand continues to be reported at the bottom end of the seasonal range, and when factoring in the 5% or so that’s missing because Renewable Diesel isn’t factored into the weekly numbers, the total is closer to the 5 year average.

PADD 3 gasoline stocks saw another large decline, and have now gone from the above the top end of their seasonal range to the bottom in just 4 weeks. It would be easy to pin the drop in gasoline stocks on the rash of unplanned refinery issues we’ve seen over the past couple of weeks, but that would ignore the healthy in PADD 3 refinery runs over the past 2 weeks. Gulf Coast runs are now once again above the top end of their 5 year seasonal range despite numerous units being taken offline for unplanned repairs, proving once again how that region’s swelling capacity can act as a buffer to any potential upsets, and also showing why several refiners are planning on slowing runs in the coming quarter to avoid creating another product glut.

Cushing crude inventories dropped for a 5th week out of the past 6, which continues to put upward pressure on time spreads for WTI, which is now seeing more than $1.20/barrel of backwardation between the Sep and Oct contracts after a couple of months of a contango curve earlier in the year. The ongoing shift to send more US crude overseas as pipeline and port capacity expands may continue pressuring that spread as few barrels will head to the land-locked delivery hub.

The EIA this morning highlighted a dramatic slowdown in Chinese diesel fuel demand this year, driven by slower economic activity and to a lesser extent by truck fleets converting to LNG. That drop in demand from the world’s largest importer of crude oil could well be the largest factor in diesel markets trading near 2 year lows and flipping into a contango structure.