Risk Is Back In Style This Week - Refined Products Up Alongside Stock Market's Global Surge

Market TalkTuesday, Oct 4 2022
Market Talk Updates - Social Header

Risk is back in style this week as refined products are up 16-20 cents to start the week alongside a surge in stock markets around the world.  After months of going their own way, the correlation between energy futures and the S&P 500 has approached the 80% mark recently, indicating that we’re entering another phase of being in a “risk on” or “risk off” environment with assets of many sorts heading the same direction daily depending on the mood, which often is driven by expectations for central bank easing (risk on) or tightening (risk off).

Rumors of an OPEC production cut ahead of tomorrow’s meeting are getting much of the credit for the run-up in energy prices, even though the cartel’s actual output has been lagging far behind targets this year.  That sets up a scenario where the member countries could increase actual output, while still lowering their official quotas, and laugh all the way to the bank if the market is in fact rallying because of those headlines.

$3.49 is looking like pivotal resistance for the ULSD contract this week, both because it ended up as the high water mark on two failed rallies in each of the past two weeks; and because it now represents the 200-day moving average.   IF diesel prices are able to break through that resistance there’s an argument to be made that a “W” pattern is forming on the charts that could end up meaning prices rally back to $4.50 this winter.  Cash markets are signaling that physical supplies are dwindling, with USGC values surging more than 23 cents Monday, pushing basis values to an unusual 8-cent premium over futures.  While those levels are still cheap in comparison to the West Coast (trading 50 cents over) or NYH Values (16 cents over) they’re a clear signal that backwardation is back, and significantly higher prices may soon follow. 

California gasoline prices started their return trip to reality Monday after the Air Resource Board and the major pipeline systems in the state confirmed an early switch to winter-grade gasoline products, and one of the refineries experiencing disruptions over the past few weeks was reported to be back online. Proving they have a keen grasp of the situation, CARB actually mentioned Hurricane Ian as one of the main issues causing the state’s prices to be so high.   Prompt values for CARBOB were valued just over a $2/gallon premium Monday night, down some 40 cents from last week’s highs, but still $1.30 or more above the next highest price outside of the West Coast.    

While the mystery of who sabotaged the Nord Stream pipelines remains, a plausible theory is that Russia now stands to benefit because it can declare Force Majeure on those lines and not face financial penalties for not honoring its contracts, as it did when they decided to shut the pipelines down in retaliation for Europe’s backing of Ukraine. 

A WSJ article Monday noted how China is taking advantage of its economic slowdown to reroute US natural gas to Europe.  Maybe they will end up sending Russian natural gas there as well.

The NHC is tracking two more storm systems this week, both of which have good odds of being named, but neither one looks like it will threaten the US. 

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

Martket Talk Update 10-04-22

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday

Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.  

The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news. 

There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.

The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.   

Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.

Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours.  It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much. 

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

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week

The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today. 

The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.

IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year

US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule.  Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.

Chicken or the egg?  Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands.  Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.

Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check.  The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior.   The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.

As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.

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