Most Energy Contracts Are Seeing Modest Gains To Start Thursday’s Session
Most energy contracts are seeing modest gains to start Thursday’s session after the FED and fundamentals both gave a big boost to buyers Wednesday.
The only contract moving into the red this morning is June HO which is seeing its premium to outer months come back to something resembling sanity, while the majority of the complex moves higher.
While the FOMC announcement sent stocks on one of their biggest daily rallies on record, energy contracts were already staging a strong rally as the weekly inventory reports from the API and DOE remind buyers that there are no short term solutions to the supply crunch.
A surge in gasoline imports helped PADD 1 inventories tick higher after reaching a multi-year low last week, while the rest of the US saw healthy declines. Diesel does not have the luxury of international length coming to the rescue, pushing total US inventories to a fresh 8 year low, while PADD 1 stocks fell to a new record low. The arbitrage window from just about anywhere in the US to the East Coast is wide open for those with a truck, train or boat, the people to drive them and the nerves to ship into a market that’s trading $1.30/gallon lower in September than it is today.
The PADD 1 refiners that survived several bleak years are being rewarded for their perseverance with diesel margins that are being measured in dollars per gallon instead of dollars per barrel, and have increased run rates to their highest level since the start of the pandemic as a result. While other refiners have discussed delaying maintenance this summer to continue operating in this rare margin environment, run rates in each of the other 4 PADDs declined on the week which certainly isn’t helping the tight supply situations in most markets.
As expected, the FOMC announced a 50 point rate increase Wednesday, the first increase of that size in almost 22 years. What surprised just about everyone however was that the FED chair took the idea of a 75 point hike at the upcoming meetings off the table, which sparked a huge rally in equities that seemed to spill over into energy contracts as well. The CME’s Fedwatch tool shows that essentially no one is betting on a Fed Funds rate of 1.75% or higher in July, whereas yesterday before the announcement, 99% of the wagers were at or above that level.
While the FED probably can’t do anything to flatten the front end of the backwardated diesel curve, it is likely that the rally in equities could encourage more buying in the forward months for crude oil and diesel as a slower pace of interest rate hikes seems to reduce the likelihood of a recession.
Meanwhile, don’t expect politicians to sit back and not pretend to do nothing about high fuel prices in an election year. Congress is taking another run at making OPEC illegal as the mid-terms draw near. Read here to see what it would take to actually make this a law after numerous failed attempts in previous decades, and what the risks are if it happens.
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View AllEnergy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.