Risk Is Back In Style This Week - Refined Products Up Alongside Stock Market's Global Surge

Risk is back in style this week as refined products are up 16-20 cents to start the week alongside a surge in stock markets around the world.  After months of going their own way, the correlation between energy futures and the S&P 500 has approached the 80% mark recently, indicating that we’re entering another phase of being in a “risk on” or “risk off” environment with assets of many sorts heading the same direction daily depending on the mood, which often is driven by expectations for central bank easing (risk on) or tightening (risk off).

Rumors of an OPEC production cut ahead of tomorrow’s meeting are getting much of the credit for the run-up in energy prices, even though the cartel’s actual output has been lagging far behind targets this year.  That sets up a scenario where the member countries could increase actual output, while still lowering their official quotas, and laugh all the way to the bank if the market is in fact rallying because of those headlines.

$3.49 is looking like pivotal resistance for the ULSD contract this week, both because it ended up as the high water mark on two failed rallies in each of the past two weeks; and because it now represents the 200-day moving average.   IF diesel prices are able to break through that resistance there’s an argument to be made that a “W” pattern is forming on the charts that could end up meaning prices rally back to $4.50 this winter.  Cash markets are signaling that physical supplies are dwindling, with USGC values surging more than 23 cents Monday, pushing basis values to an unusual 8-cent premium over futures.  While those levels are still cheap in comparison to the West Coast (trading 50 cents over) or NYH Values (16 cents over) they’re a clear signal that backwardation is back, and significantly higher prices may soon follow. 

California gasoline prices started their return trip to reality Monday after the Air Resource Board and the major pipeline systems in the state confirmed an early switch to winter-grade gasoline products, and one of the refineries experiencing disruptions over the past few weeks was reported to be back online. Proving they have a keen grasp of the situation, CARB actually mentioned Hurricane Ian as one of the main issues causing the state’s prices to be so high.   Prompt values for CARBOB were valued just over a $2/gallon premium Monday night, down some 40 cents from last week’s highs, but still $1.30 or more above the next highest price outside of the West Coast.    

While the mystery of who sabotaged the Nord Stream pipelines remains, a plausible theory is that Russia now stands to benefit because it can declare Force Majeure on those lines and not face financial penalties for not honoring its contracts, as it did when they decided to shut the pipelines down in retaliation for Europe’s backing of Ukraine. 

A WSJ article Monday noted how China is taking advantage of its economic slowdown to reroute US natural gas to Europe.  Maybe they will end up sending Russian natural gas there as well.

The NHC is tracking two more storm systems this week, both of which have good odds of being named, but neither one looks like it will threaten the US. 

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