The Fall Rally In Energy Prices Officially Ended Thursday After Huge Reversal In Morning Trade

Market TalkFriday, Nov 5 2021
Pivotal Week For Price Action

The fall rally in energy prices officially ended Thursday after a huge reversal in morning trade wiped out 7 cent gains for refined products, leading to more heavy selling the afternoon.   The complex is attempting to find a bottom this morning with modest gains, but the trend lines were broken this week, and the charts continue to favor lower prices in the weeks ahead.  

In addition to the bearish technical outlook, the big physical players seem to be figuratively buying this selloff and literally not buying it as basis values in most US cash markets dropped for a 2nd straight day, adding to the severe losses in futures.  

If you buy gasoline in the North East, you’re probably wondering why your prices went up yesterday even when RBOB dropped a nickel. Ethanol is the culprit as the price spike went completely off the rails yesterday, with values in the NYH area surging more than 50 cents on the day, after already jumping more than 40 cents this week. That jump in prices was enough to override the drop in gasoline, despite the 90/10 ratio between the two components.  The forward curve chart below shows how incredibly steep the backwardation has become thanks to increased production, and a profound inability to transport that product, with $1/gallon separating prices in Chicago over just a few months, and New York values are nearly $1 more expensive than that today.

OPEC & Friends made no changes to their current output agreement Thursday, and will meet again in the month. This lack of change was credited with both yesterday’s price pullback, and the rally overnight, which tells you how much those headlines are worth.  While the White House wasted no time in expressing their discontent with the cartel’s decision to only add 400,000 barrels/day of oil every month to global supplies, the Saudi Energy Minister clearly seemed to be growing weary of the criticism: “Oil is not the problem,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters. “The problem is the energy complex is going through havoc and hell.”

Another one bites the dust: Shell announced yet another refinery closure, with plans to shutter part of its German refining complex in the coming years, which would take roughly 150mb/day of capacity offline.  P66 meanwhile announced it would begin repairs to its Belle Chasse facility that was swamped by Hurricane Ida, although it’s still not clear whether or not that plant will ever operate as a refinery again.

US payrolls increased by 531k in October, and the previous two months estimates were revised sharply higher in today’s jobs report, knocking both the official (U3) and real (U6) unemployment rates down a couple of tenths. Equity markets and the US Dollar jumped following the report which was stronger than most predicted, and energy futures seemed to not care much.   This report could be another double edged sword however as the FED has made it clear this week that they’re looking for stronger employment as a signal before raising rates next year.

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

Market Talk Update 11.05.21

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