Oil Prices Trade At Highest Values In Over A Year
Oil prices are trading at their highest values in more than a year this morning, and refined products are nearing one year highs of their own in what appears to be a technically driven rally after prices bounced hard off of the bullish trend lines Monday, and broke through chart resistance yesterday.
A decline in oil inventories reported by the API is getting some of the credit for the continued rally, with the industry group reporting a 4.3 million barrel draw in crude stocks. Gasoline and diesel stocks had smaller declines of 240,000 and 1.6 million barrels respectively. One thing to watch out for is that we saw a huge draw in last week’s DOE report largely driven by a surge in exports and decline in imports. If those trade flows normalize this week, we could see a large build in crude stocks that might throw a little cold water on the bulls.
One odd thing about this rally is that it’s happening despite a strong move higher in the U.S. Dollar, which typically would put downward pressure on commodities in general, and energy contracts in particular. The correlation between the currency and energy contracts has flipped to positive in recent weeks, another sign that the most recent runup may be more technical for energy than fundamental as buyers of U.S. dollar-denominated oil are now paying more for the product, and their exchange rate.
Another odd thing about this rally? It’s happening despite RIN values pulling back sharply, falling more than a dime from the multi-year highs they reached last week. RIN values and product prices often move in the same direction as the federal renewable fuel credits act like a tax to refiners who don’t have the capability to blend their own ethanol, bio and other renewable products, which means a rise in RIN prices requires a rise in crack spreads for the margins to stay even.
A third oddity about this rally is that it’s coming in the wake of a major winter storm that is hitting demand hard all along some of the country’s most populated areas on the east coast, while another major cold snap moves in right behind it that’s likely to further reduce consumption. Despite that, we’re seeing RBOB lead the move higher even as we could be in for the worst week of gasoline demand in some markets since Christmas.
The storm does not seem to have done any lasting damage to supply infrastructure in the North East, with no extended terminal or refinery downtime. In fact, it does not appear that there are any major refinery outages being reported that might cause the spike in RBOB outright prices and time spreads that we’re seeing this week. Actually, the only newsworthy refinery reports are that the refinery formerly known as Hovensa, is increasing its output, bringing a new competitor back to the Atlantic basin for the first time in years.
A strong recover rally in U.S. equity markets after some heavy selling last week seems to be adding to the bullish sentiment, but equities are pointing to a flat open so that doesn’t seem to explain the early strength in RBOB today.
Given the equity headlines over the past week, you might think that the RBOB rally could be a short squeeze, but since large speculators have actually been building their net long position to the highest level in a year over the past several weeks, that doesn’t seem to be a likely cause.
At this point, it doesn’t matter much what’s causing the rally to continue, until that bullish trend line is broken, it seems the path of least resistance is for energy prices to keep moving higher despite all the potential headwinds. The big test for RBOB and ULSD remains the February 2020 highs around $1.68 and $1.72. If the break there, we could see another 15-20 cents of upside, but a failure could mean a move back into the $1.40s based on nothing more than a natural technical correction of the three month old rally.
Click here to download a PDF of today's TACenergy Market Talk.
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“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.