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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Baker Hughes Reported A Net Increase Of 5 Operating Oil Production Rigs Last Week
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Baker Hughes Reported A Net Increase Of 5 Operating Oil Production Rigs Last Week
NYMEX HO is the sole energy futures contract trading higher this morning, exchanging hands ~1.5 cents higher than Friday’s settlement. It’s refined product counterpart, along with both American and European crude oil benchmarks, are trading lower to start the week. Uncertainty surrounding the plausibility of further, voluntary supply cuts by OPEC+ members is taking credit for the weakness in WTI prices this morning.
Baker Hughes reported a net increase of 5 operating oil production rigs last week, bringing the total number of active platforms to 505. While this is good news for US energy security and for any producer that managed to hedge future production north of $100, others are viewing the increase in drilling as an incremental environmental hazard.
The fight over year-round access to E15 is raging on in the Midwest. Eight states in the breadbasket are pushing the EPA to reduce restrictions on the purchase of the increased ethanol ratio fuel. The Attorneys General from Iowa and Nebraska are asking a regional court to force the EPA’s ruling while the Agency claims it needs more time.
Money managers increased their net long position in both gasoline and diesel futures last week. Bets to the downing increased for WTI, however, as speculators bank on the latest round of supply cuts by OPEC+ being much ado about nothing.
Click here to download a PDF of today's TACenergy Market Talk.
“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.