The Group 3 Diesel Market Set A Record Last Week With Prompt Barrels Trading At A $1.15 Per Gallon

Market TalkMonday, Oct 23 2023
Pivotal Week For Price Action

It’s a quiet start for energy futures to begin the week as the world nervously watches events in the Middle East while big news is breaking elsewhere in the world.    

The Group 3 diesel market set a record last week with prompt barrels trading at a $1.15/gallon premium to futures as peak harvest demand coincided with multiple refinery upsets stretching from North Dakota to Oklahoma.  Meanwhile, the neighboring Chicago ULSD market continues to languish in excess supply, trading at a 25 cent discount to November futures as local refiners struggle to find a home for their production even before BP’s pipeline spill in Michigan last week took one pipeline option off the table for the region’s largest refinery.

Money managers showed a mixed reaction in the first full week of position data we’ve seen since the war broke out in Israel and Gaza. The large speculators reversed the liquidation trend in Brent crude and ULSD contracts as you might expect given the fear of supply disruption that’s been so well noted the past couple of weeks, but they also reduced their positions in WTI, RBOB and Gasoil, suggesting the big money bettors aren’t totally convinced of an all-out price rally. 

The net length held by speculators in RBOB reached its lowest level since the COVID lockdowns 3.5 years ago that saw refined products going for less than $1 while WTI traded negative. There’s a trading adage that suggests anytime the big speculators get a large position in either direction the market is about to change, and right on cue, RBOB gasoline futures rallied for 6 consecutive trading sessions following last week’s data compilation.

Contagious mergers? Less than 2 weeks after Exxon announced it was buying Pioneer for around $60 billion, Chevron announced it will buy Hess for $53 billion. Maybe next Exxon and Chevron could merge and call themselves Standard Oil.

Baker Hughes reported a net increase of 1 oil rig and 1 natural gas rig in the US last week, marking the first time we’ve seen 2 straight weeks of increases all year. While the net gain is minimal, this may signal that the rig count may have found its floor thanks to the recovery in prices and recent spending spree by the majors. 

More Gulf Coast refinery hiccups were reported late last week although unlike what we’re seeing in the Midwest, the impacts of these events seem to be minimal. P66 reported an FCC unit tripped offline at its Sweeny Facility Thursday.  Valero reported a coker was temporarily disrupted at its Port Arthur facility and the Alon (Delek) refinery in Big Spring Texas sprung a small leak in an FCC unit Friday.  

Citgo’s auction process will finally start this week after years of delays with a marketing campaign to sell the Venezuelan owned refiner and retail chain in what’s expected to be the largest court auction ever. 

Hurricane Tammy is turning North East away from the US this morning, but the latest models suggest the storm may turn South and West over the weekend and come back towards Florida next week. The good news is that the storm system will be moving north through cooler water this week which will reduce its strength and limit the threat it has to the US coast.

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Market Talk Update 10.23.2023

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Pivotal Week For Price Action
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