Refined Products Are Leading The Energy Complex Lower To Start The New Year

Market TalkTuesday, Jan 3 2023
Pivotal Week For Price Action

Refined products are leading the energy complex lower to start the new year, after a strong finish to a wild 2022. Energy futures start the year in neutral technical territory, with a break above $3.40 for ULSD and $2.50 for RBOB needed to regain their upward momentum. 

Unseasonably warm weather across large parts of the US and Europe are easing heating demand, pushing natural gas and diesel prices lower, while also helping US refineries recover from the Christmas blizzard. We did see gulf coast basis values rally alongside futures last Friday, suggesting that some refiners are being forced to buy product they would have otherwise produced themselves. Despite that bump higher, it still appears that the impact of those disruptions will remain fairly muted as we’re in the worst 2 weeks of the year for consumption, which gives a bit more leeway to the supply network. 

Concerns about a global recession continue to loom over energy and equity markets, with the IMF chief over the weekend suggesting that 1/3 of the world’s economy to contract this year as the US, Europe and China all slow simultaneously.  

The good news is that with fuel prices dropping nearly $2/gallon from their summer highs, and nearly $1/gallon in the past 2 months, the US consumer has some extra money in their pocket to start the new year, which will help minimize the impact of a slowdown. Whether or not these lower prices can be sustained, particularly with the world’s largest oil consumer attempting to reopen its economy for business, is a major question mark for the next few months.

The forward curve charts below show that 2023 will still have backwardation as a major theme that shippers will have to deal with, even though some prompt contracts have slipped into contango as we move through the winter demand doldrums.   

Refiners with operable facilities are starting the year on a strong note with healthy margins owing to the global shortage of distillates, and the recent storm disrupting operations after US facilities proved they could step up production this fall. New refining capacity from Asia and the Middle east will put downward pressure on those crack spreads and create ripple effects in the global market this year, but it’s still unclear how that will shake out given the lack of transportation options caused the Russian splinter effect

Speaking of which, the EIA published a note this morning highlighting how Russia’s invasion of Ukraine has impacted commodity markets of all varieties over the past 10 months. 

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Market Talk Update 01.03.2023

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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.