HO And WTI Reach Fresh 3-Month Highs As Inflation Outlook Improves

ULSD and WTI prices are both trading at fresh 3-month highs this morning as energy and equity markets seems to be embracing an improving outlook on inflation, and shrugging off inventory builds in the early going. 

The push higher this week opens a big of a technical window for WTI to make a run at the 200 day Moving Average, which is currently around $77.55, and managed to harshly repel 2 other rallies over the past year. 

ULSD has clawed its way back into the $2.60 range that held prices for most of March and April and there’s an argument that this opens the door to another 15-30 cents of more gains in the coming few weeks. Given that diesel inventories haven’t been able to recover much despite the freight recession this year, there’s also a fundamental argument being made that ULSD prices are poised to rally as we approach the busier demand seasons for distillates. It’s also worth noting that the correlation between ULSD daily price moves and the S&P 500 has reached a 2 year high this week, so for now, it looks like diesel prices may simply be following the stock market, which is adding to the bullish outlook today. 

The S&P 500 is trading at a 15 month high this morning after the June CPI report calculated inflation at 3% for the past 12 months, which was slightly below the “official” estimates. If it weren’t for the big drop in energy prices over the past year however, the inflation rate would be north of 5% which may eventually cause a pullback in the early rally if traders realize this better-than-predicted figure simply isn’t as good as it seems.

The API reported inventory builds across the board last week as the holiday hangover for fuel demand took hold. The industry group estimated inventory increases of 3 million barrels for crude oil, 2.9 million for distillates, and 1 million barrels for gasoline. The EIA’s weekly estimates are due out at their normal time this morning, and there’s a good chance we’ll see a big pullback in demand figures after gasoline consumption reached an 18-month high to end June, but evidence at the rack levels suggests its dropped sharply in the first third of July.

The DOE increased its outlook for US GDP growth for 2023 and 2024 in its latest Short Term Energy Outlook which helped increase the outlook for fuel prices. The agency also highlighted a change in operable refining capacity over the coming year now that Lyondell has pushed back plans to shutter its Houston refinery, but also failed to note the upcoming conversion of the P66 Rodeo CA facility to renewable production which will result in a net decrease of roughly 100mb/day. The report lowered the forecast for renewable diesel production next year due to the EPAs final ruling on the RFS through 2025 that increased targets for advanced biofuels, but not by enough to satiate the appetites of the government credit harvesters.   

Today’s interesting read: If you weren’t already convinced that ESG was a farce, read this note on how investors who don’t read the fine print ended up financing Saudi Aramco.

Click here to download a PDF of today's TACenergy Market Talk.