Rallying Distillate Futures Push Energy Complex Higher

Market TalkMonday, Jan 23 2023
Pivotal Week For Price Action

The rally marches on to start a new week with refined products up 3 cents so far on the day, reaching their highest levels since mid-November. Both fundamental and technical indicators suggest this rally may have more room to run, as more refinery issues crop up in the US and Europe, and prices have broken through their near term resistance on the charts.

Diesel prices are up 58 cents from their January 4th lows, following the largest selloff to start a year in 3 decades with nearly 3 weeks of strong gains. This also puts distillate prices nearly 75 cents higher than they were at their December lows, and the charts suggest there’s plenty of room to move higher still with a run at $3.70 or even $4 looking likely in the next several weeks.  

The gasoline price rally isn’t quite as impressive, with RBOB futures “only” rising 43 cents off of their January lows, and 64 cents since bottoming out in December. Considering that we’re just moving through the worst few weeks of the whole year for gasoline demand however, that rally is still an impressive feat, leaving the door open for a run at $2.80 or $3 over the next month. While the charts are now favoring higher prices, numerous technical indicators are flashing “overbought” status, meaning a sharp pullback is to be expected along the way and could happen this week. As long as the upward trend-lines aren’t broken, that pullback should be a decent buying opportunity.   

The squeeze is on. Money managers made substantial increases in the net length held in energy contracts last week, driven in large part by a big reduction in short positions for WTI and Brent as the price rally marched on. In total, more than 45,000 short contracts were covered as the big speculators that had been betting on lower prices threw in the towel.  For Brent, speculative length has reached a 4 month high, and will hit a year high next week if the recent upward trend can hold. 

We have seen large increases in open interest so far in 2023 as lower volatility seems to be encouraging some traders to dip their toes back in the water, but the overall positions remain low compared to the past 5-7 years.

Baker Hughes reported a large decline in oil rigs last week, with the total US count dropping by 10, bringing it to a 2 month low at 613. Natural gas rigs meanwhile saw a large increase of 6 on the week, bringing that weekly total to 156. Given the long lead times needed to get enough people, equipment, and sometimes funding in place for a drilling rig, it seems the current drop in oil rigs may be a reflection of the market pessimism 2 months ago when WTI traded down to the $70 mark, or it could be a sign of shifting to favor natural gas production as the world was expecting a harsh winter heating season that simply has not yet materialized.

A fire broke out at the PBF refinery outside of New Orleans Saturday, but was quickly extinguished without any injuries. So far there are no reports on whether or not operations have been curtailed following that fire. 

Today’s interesting read from the WSJ: A debate over whether or not blending more biofuels will benefit the environment. 

Protesting unions in France are threatening to cut off electricity supplies and shut down refineries, as the country continues to struggle with either making people work 2 more years before getting their state pension or going bankrupt.  Those protests continue to offer a reason for buyers to bid up refined product futures as the Atlantic basin is stretched thin for refinery output already.

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Market Talk Update 01.23.2023

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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

Pivotal Week For Price Action