Futures Seek Direction Amid Lukewarm Technicals, Mixed Monetary Policies

The search for direction continues in energy markets, with refined products starting the day with modest gains again Thursday, after a back-and-forth Wednesday session saw early gains turn into losses later in the day. The neutral technical outlook remains in place after ULSD prices failed to make much of an effort to challenge the top end of their 7-week-old trading range, which sets the stage for more back and forth action in the days ahead.

The FED held interest rates steady Wednesday, after 10 straight increases, but made it clear that more rate increases were coming with 12 of 18 voters all seeing the need for more increases this year. The ECB meanwhile raised rates to a 22 year high with a 25 point increase this morning to try and combat inflation, while China’s central bank took the opposite approach and reduced a key lending level to try and get their economic recovery back on track.

The EIA’s refining capacity figure finally caught up to the Exxon Beaumont expansion only 3 months after the fact, showing an increase of 240mb/day in PADD 3 capacity last week, and bringing the utilization percentage back to reality. Total US refinery runs dipped for the first time in 6 weeks but remain above average and year-ago levels thanks in large part to that new capacity coming online.

Gasoline consumption estimates aren’t great, but they are holding above the 5-year average and year-ago levels and export activity remains strong, which is keeping inventories well below average levels despite the strong refinery runs. Gasoline days of forward cover remain at the bottom of the seasonal range, shifting the supply concerns for most of the country from diesel a year ago, to gasoline today. We have seen a large increase in PADD 1 gasoline imports the past two weeks however, which has pulled East Coast inventories off the low end of their seasonal range and helped relieve some of the steep backwardation that had been building in the NYH.

Besides the weekly inventory report, the DOE also highlighted the plight of West Coast diesel demand in its This Week in Petroleum article. The report details how the lack of details on the surge in renewable diesel production is skewing the official figures, which show total diesel inventories much lower than reality, and demand at a 20 year low since most of the RD is not factored into the official estimates yet. 

The IEA’s monthly oil report predicted that global oil demand will reach a new record high this year at 102.3 million barrels/day, with China’s rebound the driving force in those figures, while developed nations remain in a “slump”. The report also suggested that new refining capacity in Oman and Kuwait, and the shift of discounted Russian supply to Asian markets will continue to skew activity away from the Atlantic basin. Meanwhile, a new medium term report from the IEA made longer term estimates for fuel consumption, highlighting once again that while transportation demand for fuels is set to slow in the coming years, the need for plastics will keep petroleum demand growing for decades to come.

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