The Recovery Rally Continues In Energy Markets To Start Wednesday’s Session

The recovery rally continues in energy markets to start Wednesday’s session, with diesel futures up nearly 40 cents/gallon already this week, while gasoline futures are up 12, and WTI is up more than $5/barrel. 

A less strong inflation reading, which is helping push the dollar lower, the reopening of Chinese cities, and some surprisingly positive notes on the global economy from OPEC and the IEA are all seeming to contribute to the fundamental argument for this rebound which is about to face its first technical test to the upside as ULSD and WTI run into the downward sloping trend-line formed over the past 6 weeks of selling.  

So far today traders are shrugging off the API report that showed inventory builds across the board last week. Crude oil stocks saw a large build of 7.8 million barrels (more than half of which can be attributed to the latest SPR release) while distillates increased by 3.9 million and gasoline inventories ticked up by 877,000 barrels. The EIA’s weekly report is due out at its normal time, but based on the lack of API reaction, and the looming FOMC announcement this afternoon, it may have less impact than normal.

OPEC reported its crude oil output dropped by 744,000 barrels/day in November as Saudi Arabia, UAE, Kuwait and Iraq made good on their agreement to cut output, while others like Venezuela and Libya continue to struggle with production. The cartel’s outlook for demand was increased as GDP figures for both the US and Europe surpassed expectations, which helped offset the impact of the lockdowns in China. The report also highlighted the rapidly changing forward curves for crude oil and refined products after months of steep backwardation, and the rapidly declining refining margins as output surges following the end of a busy fall maintenance season. Last but certainly not least, the OPEC report noted that the tanker market remains very strong as the “…ongoing shift to longer haul routes due to trade dislocations [aka Russia] limited tanker availability.”

The IEA’s monthly oil market report increased global demand estimates for the end of this year, and next, as strong gasoil (aka diesel) usage due to gas-to-oil switching offsets economic weakness in Europe and Asia. This report also highlighted the rapid drop in refining margins as November production globally surged to the highest levels since the early days of the COVID outbreak. The IEA summarized the outlook for the next few months by saying that while seasonal factors and economic concerns have pushed prices lower for now, another price rally can’t be ruled out as the full impact of the Russian embargoes next year remains to be seen.

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