Latest Rally Faces Skepticism as Crude Climbs and Products Lag

The rally in energy futures ran out of steam Tuesday afternoon, but traders are giving it another go to start Wednesday’s session. WTI just reached a fresh 2 month high at $66.48 but refined products continue to lag crude oil prices and have not yet surpassed the highs set yesterday morning. A new trade deal and cooling inflation are both getting some of the credit for the latest rally as traders seem to be ignoring more builds in refined product inventories, although the relatively tame size of the price moves over the past week suggests there are still many that may not be buying into this rally as a new bull trend.

For real this time? A new deal was announced between the U.S. and China, although like many things these days the details are scarce, and implementation may prove challenging as it did the first time around.

The EIA’s short term energy outlook continued to highlight the uncertainty surrounding trade negotiations and their impacts on energy markets, among many other industries. The biggest change this month was a huge reduction in ethane exports and production based on the current ruling by the feds to ban exports to China. If that policy (which no doubt is a key negotiating point this week) holds, the EIA predicts a 12% drop in ethane production next year and a 51% drop in exports. The agency also increased its forecast for global inventory changes this year (meaning more supply than previously expected) but lowered it for next year as they predict OPEC’s output increases will lag behind target levels. The agency also estimates that average U.S. gasoline prices will continue to decline through next year even though west coast prices are expected to increase by 5% or more.

Despite the drop in drilling activity, the EIA only expects relatively minor declines in U.S. oil production with both 2025 and 2026 forecast to hold just below the recent record highs and average 13.4 million barrels/day. The forecast also calls for natural gas prices holding in the $4-$5 range and U.S. LNG export capacity ramps up from 12 billion cubic feet per day last year to 16 billion next year.

The API estimated more product builds last week with gasoline inventories up just under 3 million barrels, while distillates increased by 3.7 million. The industry group estimated that oil inventories declined by a modest 370,000 barrels, after a 3 million barrel drop last week. The EIA’s weekly status report is due out at its normal time this morning, and will be unaffected by next week’s Juneteenth federal holiday since it falls on Thursday this year.

May’s CPI report showed inflation cooling thanks again to the large drop in gasoline prices, which helped offset a big jump in natural gas prices (which is the downside to the increase in LNG exports) and stubbornly high inflation in most other non-energy categories. The total annual increase was 2.4%, not far from the FED’s 2% target while all items less food and energy held at 2.8% for the past 12 months.

Marathon reported an upset in an FCC unit at its Galveston Bay (FKA Texas City) refinery, which is the largest refinery in the U.S. and a frequent flier on the TCEQ emission event reporting site. This latest event was caused by a spent slide valve causing the FCC unit to trip offline, with flaring lasting at least 12 hours.

Meanwhile, the Motiva chemical plant adjacent to the country’s 2nd largest refinery in Pt Arthur Texas reported multiple flaring events Tuesday after an unplanned shutdown of an olefins unit which was later restarted. Based on the limited information in the reports there’s no sign that operations at the refinery complex were impacted in any way.

California’s LCFS values reached a 5 year low Tuesday as the industry awaits word on CARB’s new proposals to make the program more stringent to work off a record overhang of credits, and uncertainty lingers in the battle between state and federal officials over the program itself, which isn’t even on the radar anymore given the drama playing out in parts of LA.