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 TalkWednesday, Jun 7 2023

Energy 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.

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkTuesday, Jun 6 2023

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.