The Furious 2 Month Rally That’s Added More Than 40% To Most Energy Contracts Is Taking A Breather This Morning

Market TalkMonday, Feb 7 2022
Pivotal Week For Price Action

The furious 2 month rally that’s added more than 40% to most energy contracts is taking a breather this morning, with refined product prices showing modest gains, but pulling back 3-4 cents after hitting fresh 7 year highs overnight, while crude oil contracts slip into the red after reaching their own multi-year highs on Friday. 

Signs of progress in nuclear negotiations with Iran are getting credit for the pullback this morning, even though both the US and Iran suggest they’re still a long way off from a deal that would allow most of Iran’s potential oil exports to resume.

The squeeze on prompt ULSD continues with March futures up more than 1.5 cents on the day, even as the rest of the curve trades lower. The spread between March & April HO futures is now almost 13 cents/gallon, and nearly 25 cents separates the March and June contracts.  Tight diesel supplies and strong demand leave the market vulnerable to a price spike near term that could easily surpass the $3 mark, but the severe backwardation also suggests that when the diesel bubble bursts, the drop will be spectacular.

Speaking of a squeeze, a cyberattack in Europe’s largest oil hub is causing vessel delays, and adding yet another reminder that Russia is Europe’s largest supplier of both energy and hackers.    

Money managers continue to steadily add to their net length in refined products, with RBOB and Gasoil contracts both standing at their highest levels for large speculators in more than a year. Brent was the only contract of the big 5 petroleum futures to see a reduction in managed money net length last week.

Baker Hughes reported a net increase of 2 rigs drilling for oil in the US last week, with Texas and North Dakota both adding 3 rigs, while several other states had small declines. While the EIA and IEA both still project that US oil production will reach an all-time high later this year, a WSJ article suggests that the end of the shale boom is in sight and will keep production growth limited despite high prices.

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Market Talk Update 2.7.22

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Pivotal Week For Price Action
Market TalkWednesday, Jun 7 2023

Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf

Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce. 

A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling. 

New tactic?  Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour

The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates. 

The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.   

The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning. 

We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkTuesday, Jun 6 2023

Energy Prices Retreat, Global Demand Concerns Loom

So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.

The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.  

RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.  

Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours.  That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.  

Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.

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