Pivotal Test For The Energy Complex In The Back Half Of The Week

Buy the dip was the theme of Tuesday’s session as nickel losses for refined products in the morning were wiped out in the afternoon.  So far today we’re seeing a similar pattern, with 4 cent losses overnight being cut nearly in half this morning. This back and forth action after prices hit fresh 7 year highs Monday sets up a pivotal test for the energy complex in the back half of the week.   Reports that the Chinese government was planning to intervene to halt the surge in electricity prices had coal prices dropping sharply, and was getting credit for sell-off overnight.

If the bulls can continue surviving these selloff attempts, the charts continue to favor higher prices, and a run towards $90 for crude seems like the path of least resistance. If they can’t regain the upward momentum this week however, expect to see products drop by about a dime in short order and make a more serious test of the upward sloping trend lines.  

The API was said to show decreases of 3 million barrels for both gasoline and diesel last week, while crude stocks increased more than 3 million barrels. Based on the market reaction, that report didn’t mean much as refined products are leading the slide lower, further compressing crack spreads that have come under pressure this week, after a strong rally earlier in October.  A Reuters article this morning highlighted how stronger crack spreads are encouraging refiners globally to increase run rates, which are expected to continue increasing through the winter.

The DOE’s weekly status report is due out at its normal time this morning. A few things to watch for in today’s report: US Crude production may have climbed back to Pre-Ida levels last week, even though roughly 250mb/day of production capacity in the Gulf of Mexico remains offline, showing the ramp up in onshore output the past two months. Also watch refinery runs to see how facilities are recovering from a rash of unplanned maintenance events over the past month that have contributed to tighter than normal supplies in many markets. Last, look at the swings between PADD 3 and PADD 1 refined product inventories to see the impact of the Plantation pipeline shutdown. The backwardation in NY Harbor spot prices through the end of Thanksgiving has shrunk by nearly a nickel this week suggesting the squeeze is behind us.

While refined product prices have stalled out this week, ethanol prices continue to surge, with spot prices on the East and West coasts both rallying north of $3/gallon this week. That strength in ethanol seems to be contributing to strength in the RIN markets, which are at their highest levels since Labor day. 

Surging natural gas & coal prices have been front page news over the past month, and have contributed heavily to the rally in oil and refined products. An EIA note this morning highlighted the expected growth in natural gas demand from non-OECD countries in Asia (primarily China and India) and how US exports are set to double in the next decade to help meet that demand. 

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