Refined Product Futures Attempting A Recovery Rally After Monday Sell-Off
Refined product futures are attempting a recovery rally this morning after a big Monday sell-off pushed prices to 3-week lows. A few cash markets for gasoline around the U.S. ticked down to their lowest levels of the year during Monday’s rout as the big physical players are backing off purchases ahead of winter. Today is expiration day for November RBOB and ULSD contracts, so if your cash market hasn’t already transitioned, make sure you’re watching the HOZ and RBZ contracts for direction.
Oil prices are now trading lower than they did when the war broke out 3.5 weeks ago as there continue to be no signs of supply disruption beyond the war zone. Charts continue to favor lower prices in the weeks ahead, with the downward trend lines that started at the end of summer still intact and a bearish wedge pattern is forming that threatens a big move lower should the October lows break.
The Dallas FED’s manufacturing survey showed “tepid” growth for a 2nd month in October, following several months of contraction. Chemical manufacturers noted the uncertainty surrounding the Middle East war, and how it could help prices, but also could hurt the world economy.
Flint Hills reported another upset at its Corpus Christi West refinery over the weekend that affected operations at an FCC unit. It’s unclear what caused this upset, or if it was related to last week’s power-loss-induced shutdown. There have been a rash of issues at the Corpus-area refineries the past couple of months, but so far there have not been major impacts on supply in the San Antonio/Austin/DFW corridor they serve.
A storm brewing in the Caribbean will bear watching for the next few days. The system is now given 70% odds of being named, and while the European forecasting model has it plowing into Central America, the US GFS model suggests it may just brush Central America before hooking north and east back towards Florida. It still seems like a long shot this will be a threat to the Gulf of Mexico oil production and refining zones, but with the wide range of forecasts – not to mention the huge forecasting error last week with Hurricane Otis, anything seems possible at this point.
Marathon reported another strong quarter with average refining margins north of $26/barrel and 94% utilization. The company did not break out the earnings for its renewables segment but did note it was on pace to increase output at the Martinez renewable refinery to roughly 47mb/day by the end of the year.
BP also had strong results from its refining group during the quarter, but its stock is pointing lower this morning as its results continue to lag behind expectations, and the company had to write off more than $500 million on a failed wind project in New York. A WSJ article this morning suggests the terrible results this quarter for EV and Wind producers will lead to the next round of government bailouts to avoid their grand plans from going bust.
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Week 19 - US DOE Inventory Recap
Another Wave Of Selling Pushed Energy Futures To Fresh Multi-Month Lows On Tuesday
The search for a bottom continues after another wave of selling pushed energy futures to fresh multi-month lows on Tuesday. While most of the futures complex remains on the edge of a technical breakdown, we still haven’t seen the snowball effect of selling that signals the bulls (or more likely their trading algorithms) have finally thrown in the towel.
The most important technical test of the day comes from the RBOB futures contract that managed a modest bounce off of its 200-day moving average Tuesday, and could make a case for a recovery rally if it’s able to sustain a move higher from here. If that layer of support breaks however, there’s not much on the charts to prevent another 20 cents of losses.
We’re seeing a bit of the opposite reaction this morning to the May CPI report that came in just below expectations than we did yesterday when the PPI report showed inflation was still running hot. Both refined products added a penny in the first few minutes following the report, tagging along with a bounce in US equity futures. The annual inflation rate from the CPI came in at 3.4%, which is still well above the FED’s target of 2%, but the monthly rate of .3% was slightly lower than many estimates around .4%. Both the PPI and CPI reports showed the spring rally in fuel prices leading the tick up in inflation, which give us good reason to believe we’ll see lower numbers in June now that both gasoline and diesel futures have dropped 40 cents from their April highs.
ULSD futures hit their lowest level since July 5th of last year, which was just before the contract rallied more than $1/gallon in the next two months. Physical traders are also acting bearish on diesel contracts with more heavy selling in the LA and Group 3 markets which dropped to 14 cent discounts to futures Tuesday, but were left in the dust by Chicago values that collapsed to a 30 cent discount.
The latest crash in Chicago diesel basis combined with futures trading near a 10 month low pushed cash prices to the lowest level we’ve seen since December 2021, offering a seasonally unusual opportunity for those that are still waiting to lock in their fuel price for the next year.
The diesel overhang is also witnessed in the ongoing collapse in California LCFS credit values which reached an 8 year low Tuesday at $45/MT yesterday, down from $140/MT just over 2 years ago. The drop in LCFS values combined with last year’s collapse in RINs and the upcoming change to the blender’s tax credit has already caused the closure of a few biodiesel plants, a re-conversion of a refinery back to traditional fuels, and then Tuesday the world’s largest RD producer issued a profit warning due to a continued decrease in both diesel prices, and the subsidies for renewables. For those that lived through the early days of the ethanol industry that included multiple cycles of bankruptcies and frequent regulation changes wreaking havoc, this cycle on the diesel side of the barrel feels oddly similar.
The IEA continues to bang a bearish drum to try and counteract OPEC’s bullishness in their monthly reports, citing weak demand in Europe as a driver of OECD nations moving into fuel consumption contraction in the first quarter of 2024. The tax-payer funded agency also acknowledged the drop in refinery margins in April as the distillate glut continues across much of the world, while also noting that refinery run rates are set to increase further in the back half of the year. The report also noted that even if OPEC & Friends (now Rebranded as DoC) maintain their output cuts through 2025, growth in output from the US, Guyana, Canada and Brazil will be enough to keep world supply outpacing demand.
RIN prices got a quick bounce this week after a Federal Court denied a refinery suit against the EPA’s RFS rules for 2020-2022, but already gave back those gains yesterday, with D4 and D6 values holding around the $.45/RIN mark, down slightly from this time last year when they were worth about $1.50.
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Energy Prices Are Trading At Multi-Month Lows
Energy prices are trading at multi-month lows and are on the verge of a technical breakdown this morning after Monday’s attempted rally fizzled, and concerns over high inflation and low demand both seem to be keeping buyers at bay.
The complex was trading modestly lower overnight, and then the slide picked up steam following the April Producer Price Index (PPI) report which showed stubbornly high inflation of .5% for the month (which would annualize to 6%) giving the FED another reason to hold off on cutting interest rates. The bright side to this report is that the main contributor to April’s higher inflation reading was higher energy prices, and with the sharp pullback we’ve seen over the past month that component of pricing pressure should come down in the May report.
OPEC continues to bang a bullish drum in its monthly oil market report, increasing its economic estimates for Q1 of this year, and holding its forecasted demand growth steady at 2.8% and 2.9% for 2024 and 2025 respectively. The report also noted big decreases in clean-product tanker rates with east of Suez prices down 10% and West of Suez rates down 20%, in a sign that the physical market is not stressed over the potential shipping disruptions around the Middle East. Refinery margins declined across all major global markets as an end to a busy spring maintenance season and new capacity increased output.
What’s up Doc? The cartel also made a tweak to its monthly report and will now be highlighting output and demand for the countries participating in the Declaration of Cooperation (DoC…aka OPEC & Friends) to demonstrate solidarity and unity, which may signal that some in OPEC are getting nervous that the members may become more uncooperative in the coming months. Total OPEC output dipped by 48mb/day during April with declines in Nigeria and Iraq offsetting increases in Iran and the Congo. Total DoC output declined by 246mb/day during the month with Russia’s output declining by 154mb/day and Kazakhstan’s output down by 50mb/day.
Space on Colonial’s main diesel line (Line 2) settled in positive territory for the first time this year, as the building contango for distillates helps to incentivize shippers. There also appears to be another buildup of un-wanted inventory of distillates in several regional markets with basis values in LA, Chicago and the Group 3 market all reaching multi-month lows this week.
Some of the weakness in diesel prices can be blamed on recent wet weather delaying planting in several states, and those delays are also helping corn and ethanol prices rebound to approach their highest levels of the year.
New tariffs on Chinese EV’s are making headlines this week, but it’s a potential tariff on Used Cooking Oil (UCO) from China that could have a larger impact near term on the fuel industry as US grain processor think it’s unfair that China dares recycle oil to the detriment of their food to fuel factories.
Speaking of EV’s, the EIA this morning wrote that the US share of electric and hybrid vehicle sales decreased on the first quarter of 2024 after more than 3 years of steady growth.
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