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, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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