Refined Products Are Leading The Energy Complex Lower To Start The New Year

Market TalkTue, Jan 03, 2023
Refined Products Are Leading The Energy Complex Lower To Start The New Year

Refined products are leading the energy complex lower to start the new year, after a strong finish to a wild 2022. Energy futures start the year in neutral technical territory, with a break above $3.40 for ULSD and $2.50 for RBOB needed to regain their upward momentum. 

Unseasonably warm weather across large parts of the US and Europe are easing heating demand, pushing natural gas and diesel prices lower, while also helping US refineries recover from the Christmas blizzard. We did see gulf coast basis values rally alongside futures last Friday, suggesting that some refiners are being forced to buy product they would have otherwise produced themselves. Despite that bump higher, it still appears that the impact of those disruptions will remain fairly muted as we’re in the worst 2 weeks of the year for consumption, which gives a bit more leeway to the supply network. 

Concerns about a global recession continue to loom over energy and equity markets, with the IMF chief over the weekend suggesting that 1/3 of the world’s economy to contract this year as the US, Europe and China all slow simultaneously.  

The good news is that with fuel prices dropping nearly $2/gallon from their summer highs, and nearly $1/gallon in the past 2 months, the US consumer has some extra money in their pocket to start the new year, which will help minimize the impact of a slowdown. Whether or not these lower prices can be sustained, particularly with the world’s largest oil consumer attempting to reopen its economy for business, is a major question mark for the next few months.

The forward curve charts below show that 2023 will still have backwardation as a major theme that shippers will have to deal with, even though some prompt contracts have slipped into contango as we move through the winter demand doldrums.   

Refiners with operable facilities are starting the year on a strong note with healthy margins owing to the global shortage of distillates, and the recent storm disrupting operations after US facilities proved they could step up production this fall. New refining capacity from Asia and the Middle east will put downward pressure on those crack spreads and create ripple effects in the global market this year, but it’s still unclear how that will shake out given the lack of transportation options caused the Russian splinter effect

Speaking of which, the EIA published a note this morning highlighting how Russia’s invasion of Ukraine has impacted commodity markets of all varieties over the past 10 months. 

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Refined Products Are Leading The Energy Complex Lower To Start The New Year