The Bulls Are Taking Advantage Of The Low-Volume Week
The bulls are taking advantage of the low-volume week, rallying refined products nearly 3% over the past couple of trading sessions. Expectations of higher demand growth from China and India seems to be how we are justifying the buying strength so far this morning. American and European crude oil benchmarks are adding about $1 per barrel so far today.
While still very contagious, the Omicron variant seems to be affecting people less intensely than the Delta variant and the original coronavirus. It seems global governments are taking a softer stance on the latest novel strain, some eliminating social distancing protocols altogether. The Center for Disease Control has reduced the quarantine time for positive cases from ten days to five, leading energy bulls to believe that drivers will be getting on the road that much quicker.
Money managers increased their net long positions in the ‘big three’ American energy contracts last month, according to the report published by the CFTC yesterday. The net length in WTI futures held by the Producer/Merchant category of traders ticked lower last week but remained in the ballpark of 5-year highs. Given the price action over the past couple of weeks a redesignation of who’s called the ‘smart money’ might be in order.
Prompt month gasoline futures have punched through a couple moving averages this morning, marking bullish sentiment. Diesel futures have now made up everything lost on Black Friday’s selloff and are poised to make a run at the October high of $2.60. While technical strength seems to be the name of the game this week, it is important to note that price action on low volume should be taken with a grain of salt. We could see a short term correction next week once the holidays are over.
Click here to download a PDF of today's TACenergy Market Talk.
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Wholesale Gasoline Prices Across Most Of The US Reached Their Lowest Levels In 2-Years Thursday
Wholesale gasoline prices across most of the US reached their lowest levels in 2-years Thursday, after the morning recovery rally fizzled in the afternoon. RBOB gasoline futures dipped below the $2 mark briefly, before settling just above it, while cash prices in several major markets dropped below $1.80 for the first time since December 2021, while crude oil and diesel prices reached fresh 6-month lows.
The bulls are giving it another go this morning, pushing futures up 5-cents for gasoline and 6- cents for diesel, trying to snap the streak of 6-straight daily losses for ULSD, although we’ll need to see products double their early gains to erase the weekly decline.
Energy prices didn’t react much initially to the November Payroll report that estimated 199,000 jobs were added during the month, while the official unemployment rate dipped to 3.7% from 3.9% and the U-6 rate dropped to 7% from 7.2%. Equity futures moved modestly lower immediately following that report as labor market resilience throws cold water on recent hopes for interest rate cuts, but as has often been the case for several months now, energy prices are managing to shrug off the move in stocks.
Big negative basis values continue to be the theme across the Gulf Coast and Mid-Continent, with USGC, Group 3 and Chicago all trading at 20+ cent discounts to futures for both gasoline and diesel. Those negative values are weighing on refining margins with USGC crack spreads approaching their lowest levels in 2 years, which will almost certainly curtail some refinery run rates through the winter months. East Coast refiners meanwhile are finding themselves in a strong position as shipping bottlenecks keep PADD 1 inventories low and their crack spreads remain in the mid $20/barrel range despite the recent pull back in futures.
The long-awaited Dangote refinery is reportedly receiving its first cargo of crude oil today. That new 650mb/day refinery would be the world’s largest single train refinery, but is already years behind schedule, and many still doubt its ability to run anywhere near capacity. We’ve already seen the impact Kuwait’s 615mb/day Al Zour refinery can have on markets across the Atlantic basin, so whether or not the Nigerian facility can ramp up run rates could have a major influence on product prices next year.
Click here to download a PDF of today's TACenergy Market Talk.
West Coast Gasoline Inventories Dropped Sharply Last Week And Are Now Holding Below Their 5-year Seasonal Range
Energy futures are bouncing this morning as buyers are finally stepping in after RBOB futures touched a 2-year low Wednesday, while WTI and ULSD both hit their lowest levels in 5 months. There are headwinds both fundamentally and technically, but so far, the market isn’t acting like a collapse is imminent and as the table below shows this is right about the time when gasoline prices bottomed out the past two years.
Saudi Arabia and Russia released a joint statement this morning, following Vladimir Putin’s trip to the Kingdom, urging OPEC & friends to join their output cut agreement, which takes the risk of a price war that could send prices plunging (as we’ve seen twice in the past decade) off the table for now and seems to be contributing to WTI climbing back above the $70 mark and Brent getting back above $75.
The DOE reported a healthy bounce back in fuel demand estimates after the annual Thanksgiving holiday hangover, but that wasn’t enough to prevent refined product inventories from continuing to build as refiners continue to return from maintenance and increase run rates. The builds in gasoline inventories particularly suggest it could be a tough winter for some refiners who are already having some challenges clearing their extra barrels.
The exception on gasoline comes in PADD 5. West Coast gasoline inventories dropped sharply last week and are now holding below their 5-year seasonal range, which is dramatically lower than year-ago levels which set the top end of that range. Those tight stocks help explain why West Coast values are the most expensive in the country by a wide margin and leave little cushion to deal with unplanned maintenance which helps explain the jump in CARBOB basis values this week.
On the diesel side of the barrel, the recent themes of tight supplies on the East Coast, ample supply in the Midwest and Gulf Coast, and a Wild Card on the west coast since we don’t see Renewable Diesel inventories in the weekly figures continues. Take a look at the PADD 2 gasoline and diesel charts below and it’s easy to understand why we’re seeing cash prices in both Group 3 and Chicago approaching multi-year lows with 20-30 cent discounts to futures becoming the rule rather than the exception.
The market seemed to shrug off the drop in total US crude oil stocks, as Cushing OK stocks increased for a 7th straight week, and the decline was largely driven by the largest negative adjustment value on record, which went from a positive 1.2 million barrels/day last week to negative 1.4 million barrels/day this week. The EIA has done a lot of work trying to fix the bugs in its report system and to better define what exactly it’s reporting, but clearly there’s still more work to be done.