Refined Product Prices Have Dropped To Their Lowest Levels In 4 Months As Fears Of A Slowing Economy

Market TalkTuesday, Aug 2 2022
Pivotal Week For Price Action

Refined product prices have dropped to their lowest levels in 4 months as fears of a slowing economy, and new tensions between the world’s two biggest economies, seem to be weighing heavily on various assets. The big drops this week have put the energy complex on the verge of a technical breakdown, but so far buyers continue to buy the dip, and keeping the chance of a continued sideways summer trading pattern intact. 

Monday’s ISM Manufacturing survey got some of the credit for the big selloff in energy prices.  Even though the survey showed that manufacturing in the US continued to grow, the pace was the slowest in 2 years, despite strong growth in energy production. The survey also suggested that post pandemic inventory restocking was winding down, which is likely to weigh on purchasing in the coming months. Right on cue, a Reuters article this morning notes that the country’s largest warehouse market is running out of room as consumer purchasing slows and inventories swell.  

Retail fuel prices are set to continue dropping, and will soon be $1/gallon less than their June peak, which will be a key component to inflation readings decreasing. Perhaps the big question for the US economy, and energy prices for the rest of the year, is whether or not that drop in retail prices is enough to keep consumers from tightening their purse strings any further.

Diesel futures are potentially setting up a bearish descending triangle pattern on the charts, with a floor just below the $3.30 mark that could lead to a drop below $3 in the next few weeks should it break. Given the lack of diesel supplies globally, it’s hard to imagine this chart pattern could trump fundamentals, but relatively weak basis values across large parts of the US suggest we’re seeing at least a temporary reprieve in most of the inventory shortages, now we’ll just have to see if that lasts through the hurricane and harvest seasons. 

The price to lease space on Colonial pipeline’s main gasoline line reached a 7.5 high this week as shippers race to take advantage of the huge premiums for gasoline in NY Harbor vs the US Gulf Coast. These premiums are yet another reminder of how the world’s supply and transportation network has been upended in recent months, after years of Colonial’s main line being unallocated and space trading for negative values since Europe was able to supply the excess gasoline consumed on the US East Coast. The forward price curve suggests the double digit premiums for line space will be short lived, but values could stay positive through the winter as that’s typically the strongest time of year as producers need to find new homes for their gasoline.         

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Market Talk Update 08.02.22

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Pivotal Week For Price Action
Market TalkWednesday, Jul 17 2024

Energy Markets Are Trying To Find A Price Floor After Gasoline And Crude Oil Staged A Healthy Bounce To Minimize The Heavy Losses

Energy markets are trying to find a price floor after gasoline and crude oil staged a healthy bounce to minimize the heavy losses we saw early in Tuesday’s session. WTI is leading the move higher early Wednesday, up nearly $.90/barrel in the early going, while RBOB prices are up just under a penny.

Diesel continues to look like the weak link in the energy chain both technically and fundamentally. Tuesday the API reported a 4.9 million barrel build in diesel stocks, while gasoline inventories were only up 365,000 barrels, and crude oil stocks declined by more than 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning and it’s likely we’ll see a reduction in oil output and PADD 3 refining runs thanks to shut ins ahead of Hurricane Beryl, but otherwise the storm appears to be a relative non-issue with only 1 notable refining hiccup, that wasn’t even as bad as a midwestern Thunderstorm.

Chicago basis values rallied Tuesday after reports that Exxon had shut down the 250mb/day Joliet refinery following severe storms that knocked out power to the area Sunday. RBOB differentials surged nearly 9 cents on the day, while diesel diffs jumped more than a nickel. With 3 large refineries in close proximity, the Chicago cash market is notoriously volatile if any of those facilities has an upset. Back in May there was a one-day spike in gasoline basis of more than 50 cents/gallon after Joliet had an operating upset so don’t be surprised if there are bigger swings this week if the facility doesn’t come back online quickly.

Moving in the opposite direction, California basis values are heading the opposite direction with the transition to August scheduling pressuring CARBOB differentials in LA and San Francisco to their biggest discounts to prompt RBOB futures in more than 18 months. Gasoline imports into PADD 5 have held well above average levels over the past 2 months, which has more than offset the loss of the P66 Rodeo refinery’s output after it completed its conversion to RD production, in another sign of how growing refining capacity in China and other Asian countries may become more influential to the US. California regulators may also pat themselves on the back that their new plans to force refineries to report their gross profit monthly, in addition to the rules requiring all bulk trades in the state be reported must be driving the lower gasoline differentials, assuming they figure out what a basis differential is.

Meanwhile, California’s Carbon Allowance values have tumbled to their lowest levels in a year after a CARB presentation last week suggested the agency would be delaying long-anticipated tightening of the Cap and Trade program until 2026.

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

Pivotal Week For Price Action
Market TalkTuesday, Jul 16 2024

The Sell-Off In Energy Markets Continues, With Refined Products Reaching Their Lowest Levels In A Month Early In Tuesday’s Session

The sell-off in energy markets continues, with refined products reaching their lowest levels in a month early in Tuesday’s session. Reports of slowing growth in China, the world’s largest oil purchaser, is getting much of the credit for the slide in prices so far this week, although that doesn’t do much to explain why refined products are outpacing the drop in crude.

ULSD futures are leading the early move lower, trading down a nickel on the day, and marking a 19 cent drop since July 4th. There’s not much in the way of technical support for ULSD, so don’t be surprised if this sell-off continues to pick up steam.

With today’s slide, RBOB futures are down 17 cents from where they were trading on July 4th, and are just a couple of cents from testing their 200-day moving average. Should that support break, it looks like there’s a good chance to test the June lows around $2.29.

Physical markets are not offering any strength to the futures market with all 6 of the major cash markets for diesel across the US trading at a discount to ULSD futures, while only 1 gasoline market is trading at a premium to RBOB futures. That combination of weakness in futures and cash markets is going to be troubling for refiners who are seeing margins reduce during what is traditionally a strong time of year.

The EIA highlighted the energy trade between the US and Mexico in a report Monday, showing that despite so many claims of energy independence from Mexican officials, the actual amount of refined fuels and natural gas bought from the US continues to increase. That’s good news for many US refiners who have become more dependent on Mexican purchases to find a home for their output.

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