Momentum Is Waning In Refined Product Markets

Market TalkTuesday, Oct 19 2021
Pivotal Week For Price Action

Momentum is waning in refined product markets this week after prices stalled out early Monday and are slipping modestly lower again this morning. While the pullback of 5-6 cents from the 7 year highs set early Monday morning are noteworthy, we’ll need to see prices drop another 7-8 cents in the coming days before they threaten the bullish trend lines that have been in place since the August pullback. In other words, so far this week’s selling looks more like a correction to an overbought market, rather than a reversal of that upward trend.

While refined products are struggling, both WTI and Brent are moving higher this morning, putting downward pressure on crack spreads. Unfortunately for refiners, there’s a double whammy on their margins this week as RIN values reached their highest settlement in nearly 6 weeks yesterday, even though RIN values and crack spreads often move in the same direction.    

Keep an eye on calendar spreads this week, as severe backwardation in futures that’s steadily grown over the past month’s rally seems to be having strong influence on regional cash markets and inventory levels. What we’re seeing today in the RBOB market, with November prices down a penny more than February values, could be a sign of what’s to come once the supply squeeze has passed. For both ULSD and RBOB, we could see 5-10 cents price drops in front month values just to get the curve back to a more normal level. 

This phenomenon is perhaps most glaring in the Group 3 diesel market, where basis values for ULSD dropped to 8 cents below futures, a level we’re used to seeing during the demand doldrums in winter, not during the peak of harvest season where we are today. The weakness in Midwestern diesel values seems to be trickling down to the gulf coast, as shippers will want to avoid moving barrels north to sell at a net loss, which should eventually correct the pricing mismatch.

An EIA report this morning highlights how improvements in drilling and well completion over the past decade allow for more oil to be produced in the Permian basin with lower costs.  Meanwhile, the EIA’s monthly drilling rig report highlights that output per rig is forecast to drop slightly in the coming month as producers sacrifice efficiency during the restart race, but total output is expected to continue climbing along with the drilling rig count. 

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Market Talk Update 10.19.21

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Pivotal Week For Price Action
Market TalkMonday, Dec 5 2022

The Officially Imposed Sanctions Against Russian Oil Exports Are Taking Credit For This Morning’s Gains In Energy Prices

The officially imposed sanctions against Russian oil exports are taking credit for this morning’s gains in energy prices. Brent futures, the benchmark for European crude oil, are leading the pack higher so far today, trading up nearly 3%. West Texas Intermediate futures, along with both American refined product contracts, are tagging along with 1.5-2.5% gains.

OPEC’n’friends decided to stay pat on their Production Reduction™ policy through the end of the year, which aims to remove about 2 million barrels per day from global oil inventories. The relatively muted response in energy futures action suggests the ban on Russian crude and the continued reduction in cartel oil supply were both largely priced in.

It seems we have averted disaster last Friday as Washington passed legislation to prevent rail workers from going on strike. While the vast majority of refined products are transported to market hubs via pipeline, the required ethanol component of retail gasoline is by-and-large supplied via railcars.

Heating Oil futures stand out as the lone contract of the ‘big five’ that saw increased bullish bets from money managers last week, mostly due to the trimming of short positions rather than the addition of long positions. It seems fewer and fewer traders are willing to bet on lower diesel prices heading into the winter, where distillates act as backup supply for heating homes.

Market participants in crude oil futures fell to lows not seen since 2016 last week. It seems the global uncertainty surrounding energy supply and infrastructure has some potential players taking a wait-and-see approach rather than betting on price direction.

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Pivotal Week For Price Action
Market TalkFriday, Dec 2 2022

The Energy Complex Is Trading Mostly Lower So Far This Morning

The energy complex is trading mostly lower so far this morning, with prompt month RBOB futures leading the way. Brent crude oil is struggling to hold on to overnight gains and it is exchanging hands on the green side of even, if only just.

The easing of quarantine protocols in China is taking partial credit for the weekly gain in WTI futures this morning, despite the emergence of reports and images showing provisional camps set up to enforce isolation and curb the latest spread of the pandemic.

The “ban” on Russian crude oil, set to take effect on Monday, has yet to reach final approval in Europe. Poland seems to be one of the last holdouts and has not been shy about wanting the price cap to be as low as possible.

Sunday’s OPEC+ meeting, which will reportedly be held virtually, is also getting some play in the headlines this morning. While some consider the setting of the meeting to telegraph no change in the cartel’s production policy, others posit the group is considering cuts ahead of next week’s oil ban.

The Bureau of Labor Statistics published the November jobs report this morning, an increase in nonfarm payrolls of 263,000 while unemployment rate held pat at 3.7%. The stock market did not like that: S&P 500 futures dropped 1.4% on the news as traders expect higher-than-expected job growth to buttress the Fed’s intent on continuing to raise interest rates.

The EPA published their proposed volume obligations under the Renewable Fuel Standard for the next three years and is now seeking public opinion on their target levels. Their report also estimates that the RIN obligations will reduce US oil imports by ~170,000 barrels per year. Is that a typo? We imported 6 million barrels per day last week, for reference.

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Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.