The Big Bounce Continues For Energy Futures, With ULSD Prices Leading The Charge Again
The big bounce continues for energy futures, with ULSD prices leading the charge again, trading 36 cents above the lows set last Thursday. The rally in RBOB has been less impressive, but gasoline prices are still up more than 20 cents from Monday’s lows, keeping the door open for another push higher.
The monthly data deluge of monthly and weekly inventory reports that started yesterday is giving the world a harsh reminder that there just is no short term solution available to the energy supply crunch, and the charts continue to favor higher prices now that support held up once again.
The API reported large declines of around 5 million barrels for both diesel and gasoline stocks yesterday, while crude inventories were estimated to have a large increase of 7.7 million barrels.
OPEC’s oil production increased by 54mb/day in March, just a fraction of what the cartel was targeting as it continues its return from voluntary production cuts that started during the COVID demand collapse. The supply chain problems that seem to be hitting just about every industry these days, and the reality that oil production isn’t as simple as its often made out to be, seem to be at play here as well, with several countries seeing declines in their production even as they’re trying to increase. Make no mistake, if these countries were able to cash in on prices north of $100 they would be doing it - as OPEC used to have to work hard to keep these countries from over-producing their agreed-upon quotas in prior years.
The OPEC monthly report also dropped its forecast for both global supply and demand for the balance of the year due to the war in Ukraine. It’s worth noting that despite the reduced supply estimates, non-OPEC oil production is still expected to grow this year, just not by enough to offset the expected loss of Russian supply. The report also highlighted the surge in refining margins caused by the tight diesel (particularly Jet Fuel) markets around the world. See the charts below for more from the OPEC report.
The DOE/EIA’s monthly report also revised its global demand estimates lower as the economic models it uses predict a slow-down in GDP growth as a result of the war, and the high prices for food and energy that are coming along with it. The report predicts that US retail gasoline prices will stay at record highs this summer, but below the levels we saw in 2014 after adjusting for inflation, before declining through 2023. The EIA’s forecast suggests that it will still take another year for US oil producers to reach pre-COVID levels, but that global production increases will be enough to build inventories every quarter through next year, despite the assumed drop in Russian supplies.
You think our inflation is bad? Take a look at the last chart from the EIA’s STEO report below showing international natural gas prices, which are running 7-10 times the prices for natural gas in the US.
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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.
Click here to download a PDF of today's TACenergy Market Talk.
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.