Reversal Thursday Pares Week's Rally
That escalated quickly. The rally in ULSD futures picked up steam Wednesday, adding 12 cents on the day, and setting a new 6 month high nearly 30 cents above Tuesday’s low overnight. RBOB and WTI both joined in on the big move higher as well, with crude oil reaching a new high for the year, while gasoline prices continue to flirt with the $3 mark. Prices are taking a breather in the early going this morning, in what looks like a classic “Reversal Thursday” pattern that probably won’t mean much when the week ends.
Refined product prices did bounce a couple cents off their morning lows following the July CPI report which showed another month of relatively tame inflation. Perhaps most notable in this report is that energy prices were only up a 10th of a percent, which means the rally in gasoline and diesel prices hasn’t hit the official numbers yet. As the chart from the BLS below shows, energy prices have been the key governor on inflation over the past year, but with the recent rally, that’s about to change.
The rally in ULSD futures has created a flag pattern on the daily chart that suggests a run all the way to $3.50 could be coming soon, with the weekly charts suggesting the bulls still have things well under control after Tuesday’s big bounce.
After 4 straight weeks of below-average numbers, the DOE’s estimate for gasoline demand jumped last week to outpace both the 5-year average and year-ago figures. With just about 5 weeks left in the summer RVP season, and the big price bounce this week, this leaves the door open for a last push towards the $3 mark for RBOB futures, despite today’s pullback.
We’re also just under 5 weeks away from the peak of hurricane season. While the factors contributing to the record setting heat wave are also keeping a lid on tropical activity at the moment, forecasters still are calling for an active season, which will keep suppliers on the edge of their seat given the lack of supply cushion and excess refining capacity.
So far, refiners are keeping pace with last year’s output levels, despite numerous heat-related hiccups, and the recent earnings reports and the rally in crack spreads the past few weeks suggest they should continue to run hard through the fall after a busy spring maintenance period, provided that storms or other events don’t knock them offline.
If you look at only the PADD 5 diesel inventory chart below, it would come as little surprise that basis values are holding at their highest level of the year. Those stats are leaving out the big story however which is the rapid influx of new Renewable Diesel output that’s being shipped to West Coast markets to save the environment take advantage of the LCFS and Cap & Trade programs. Eventually the DOE will include those figures in its weekly report, as it did with Ethanol more than a decade ago, but in the meantime, both the inventory and demand estimates will be understated, which gives fundamental fans something to pin yesterday’s big rally on despite the sluggish diesel consumption estimates.
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View AllThe 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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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.