Refined Products Are Trading Down A Couple Of Cents In The Early Going While Crude Oil Contracts Are Seeing Modest Gains As July Trading Comes To A Close

Market TalkMonday, Jul 31 2023
Pivotal Week For Price Action

Refined products are trading down a couple of cents in the early going while crude oil contracts are seeing modest gains as July trading comes to a close, in what should end up being the strongest month in almost a year for energy contracts.  

RBOB gasoline futures came within 65 points of reaching the $3/gallon mark Friday, before stalling out and pulling back to around $2.93 this morning. The July contract expires today, and August is trading more than 6 cents lower, reducing the chances of another run at $3 gasoline futures near term, while physical prices across the 3 West Coast spot markets are all well above that level. Most cash markets are already trading vs August futures, so watch that contract for price direction today if you’re not already.  

ULSD futures topped out at $2.9748 Friday before sliding to around $2.93 this morning but aren’t seeing anywhere near the backwardation of gasoline (another sign of the dramatic changes from a year ago) and the charts suggest a decent chance diesel futures can still make a run at $3 over the next several days. Just like gasoline, west coast ULSD spot markets are all trading north of $3, while markets east of the Rockies range from $2.86-$2.95 this morning. 

Money managers continue to jump on the energy bandwagon, adding length across the board last week in crude and refined products. The net length (bets on higher prices) for RBOB and ULSD is at the highest level of the year, with the late-comers still willing to buy after the strong July rally. From a historical perspective, the outstanding length held by the big speculators is relatively mild, so it’s not yet a contrary indicator that the trend may soon run out of steam.

Open interest continues to recover in RBOB ULSD and Brent contracts as easing volatility and margin requirements encourage funds to return to the market after many were forced out during last year’s chaos. The exception to the OI recovery rule is WTI, which is still running roughly ½ million contracts lower than anything we saw from 2016-2021.

The reason for the slump in the classic NYMEX crude oil contract appears to be the rapid expansion in trading activity for new WTI contracts FOB Houston and Midland as the export market for domestic crude grades increases. Both the CME Group (NYMEX parent) and ICE (Home of the Brent contract) are racing to take advantage of the changing patterns, and both exchanges have reported record trading activity in their new WTI contracts over the past week.

Baker Hughes reported a drop of 1 oil rig and 3 natural gas rigs drilling in the US last week, continuing the trend of slow but steady attrition in the rig count that’s been happening for most of the year. Unlike the past 3 weeks however, the Permian basin didn’t lead the slide, and actually increased by 1 rig on the week. Don’t expect a rapid recovery in rig counts with oil prices north of the $80 mark given the long lead times needed to acquire equipment and crews, but we may see the declines come to an end if prices can hold near current levels.

California Carbon Allowance (CCA) prices spiked to a record high last week after the Air Resources Board (CARB) announced plans to make the Cap & Trade program more stringent.  California’s Low Carbon Fuel Standard (LCFS) credit values meanwhile continue to languish as new production of renewables, most notably renewable diesel, creates a surplus off credits and the state’s plans to also make that program more stringent are less clear.

The National Hurricane center is tracking two potential storm systems in the Atlantic this week, one of which is given 80% odds of being named, while the other has just 20%. Both systems look like they’ll stay far enough out to sea to not be a threat to land, while the map suggests they could end up merging off the coast of New England. Two storm systems converging off of the New England coast…seems oddly familiar.

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Market Talk Update 07.31.2023

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Market TalkFriday, Sep 29 2023

The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures

The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.

The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.

We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.

The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.

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Pivotal Week For Price Action
Market TalkThursday, Sep 28 2023

Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day

The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.

There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.

As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.

Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.

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