The Energy Futures Recovery Rally Ran Out Of Steam Tuesday

Market TalkWednesday, Nov 15 2023
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The recovery rally in energy futures ran out of steam Tuesday, with early gains turning into afternoon losses, and that selling has carried through the overnight session. The whiplash action is putting the charts back in neutral territory short term, while longer term charts still suggest a good chance of more selling before year end. 

U.S. stock markets had their best day in nearly 7 months and the U.S. dollar had its biggest sell-off since July, both of which are often seen as bullish indicators for energy contracts. The correlations between those asset classes has been weak-at-best lately however, and yesterday was another case of energy contracts going their own way in the end, after following the lead of stocks for a couple of hours.

Here’s another theory: One often overlooked indicator of price movements for oil is the spread between 5 year treasury bonds and 5 year TIPs, which is a proxy for inflation expectations. Since some traders use oil and other energy commodities as an inflation hedge, there’s been a strong correlation between the 5 year spread (expectation for inflation) and oil prices. Now that inflation expectations are softening, the passive bid under oil prices for those “inflation hedgers” may also be going away. See Chart below.

Another reason for the whiplash action in ULSD this week was likely the unexpected shutdown of Kuwait’s huge 615mb/day Al-Zour refinery which started production last year and has become a major supplier of diesel to Europe, backfilling for barrels that used to come from Russia. That facility being knocked offline no doubt helped spur the 10 cent price surge Monday, but now that it’s scheduled to be back fully online next week, prices are easing once again.   

The API reported a build in crude oil and gasoline inventories last week of 1.3 million and 195,000 barrels respectively, while diesel stocks drew by 1 million barrels. The EIA will release two weeks’ worth of data at 9:30 eastern as it is back on its normal reporting schedule after a system upgrade. 

Although there have been a rash of unplanned refinery hiccups in the past week stretching across PADD 3, basis values continue to slump and suggest that the return of numerous refineries after the busiest fall maintenance schedule in 4 years is setting us up for a glut of some products. Colonial line space values are also reflecting this reality with both gasoline and diesel values soaring in recent weeks as Gulf Coast producers suddenly seem to be struggling to find options, while East Coast inventories remain relatively tight. 

Already there are reports that some units coming back online may not return at full capacity given the sudden weakness in crack spreads and swelling inventories, particularly for gasoline. 

The NHC is tracking 2 potential storm systems as we reach the last 2 official weeks of Hurricane season. Neither storm looks to be a threat to energy supplies, but it will bring heavy rain to the East Coast and looks like it might put a damper on the typical demand rush heading into Thanksgiving week.

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

Market Talk Update 11-15-23

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Market TalkFriday, Dec 1 2023

“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week

“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year. 

Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports. 

Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.

Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.  

Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums. 

Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.

The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.

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

Pivotal Week For Price Action
Market TalkThursday, Nov 30 2023

No Official Word From OPEC Yet On Their Output Agreement For Next Year

Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.   

There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move. 

We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.

It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.

Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.

Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.

The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver. 

The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.  

Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.

More refineries ready to change hands next year?  With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.

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