Most Petroleum Contracts Are Seeing Modest Selling For A 2nd Straight Session As October Trading Winds Down
Most petroleum contracts are seeing modest selling for a 2nd straight session as October trading winds down, with the latest round of COVID lockdowns in China getting much of the credit for the pullback in prices in an otherwise very strong month of oil and refined product prices.
On October 4th we wrote that “IF diesel prices are able to break through that resistance [200 day MA] 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.” Of course, we were completely wrong in that claim as prompt values surged to a high of $4.68 on Friday, without even waiting for winter to start.
It’s the last day of October, aka expiration day for the November RBOB and ULSD contracts, which can often bring big price swings and bad jokes about spooky markets on Halloween. Calendar spreads remain incredibly strong with ULSD set to see a 90 cent decline when futures roll to December and RBOB will see a 40 cent drop from the roll tomorrow. Those price drops won’t translate to the cash markets, most of which have already begun trading off of December and seeing large basis swings to adjust to the wild moves in spreads. The silver lining is that only the NYH spot market is still trading at a premium to November futures, with most other spot markets $1 or more cheaper than prompt values in New York, so most of the country isn’t feeling the pain of this latest price spike.
Once bitten, twice shy: Money managers were bailing out of ULSD contracts last week, reducing long contracts by 10% and adding new shorts, despite that surge in prices, perhaps remembering the huge price drops that followed similar surges last spring. In fact, there have been 5 different $1/gallon or more drops in diesel prices since March, which makes it easier to understand why large speculators are renting the diesel contract rather than owning it. Money managers did make healthy increases to net length (bets on higher prices) in Brent, RBOB and WTI contracts last week, but open interest remains low as extreme volatility appears to be keeping many traders on the sidelines.
There’s about to be a hurricane in the Caribbean, but models keep that storm pointed towards Central America and far from being a threat to the US Gulf Coast refining center.
Baker Hughes reported a drop of 2 oil rigs and 1 natural gas rig actively drilling in the US last week. The Permian basin, which makes up the majority of the US rig count, did see 2 more rigs added, but reaching pre-pandemic levels before year-end looks like a long shot as the rate of growth has stalled for a few months.
Something to keep an eye on in the coming weeks: If Russia backs out of the Black Sea grain Initiative, grain and oilseed markets may be thrown into chaos once again, which in turn may up the stakes in the feedstock wars between producers of Renewable diesel, Biodiesel, SAF, and those just trying to feed their families.
Click here to download a PDF of today's TACenergy Market Talk.
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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.