The Missing Story Of A Year That Smashed Pretty Much Every Record In the Books
Energy prices are limping to the finish line of the wildest year on record. If you only look at the ending prices, you would probably wonder what all the fuss is about. WTI is only up 4% on the year, while Brent and RBOB futures are up a pedestrian 7%. Of course, that misses the story of a year that smashed pretty much every record in the books.
An average trading day in 2022 saw gasoline price move more than 13 cents/gallon, while distillates swung by an average of almost 19, which is nearly 4 times their long-term average range. We had multiple times throughout the year where futures and/or cash markets moved by more than $1/gallon throughout a single session. That extreme volatility, combined with increasing margin rates from the exchanges, and higher interest rates, led to many traders being forced out of these markets or choosing to sit on the sidelines for the rest of the year (or longer) since they couldn’t handle those swings, which pushed open interest for these contracts to a 6 year low.
So, what’s ahead in 2023? It’s hard to imagine the world will face another shock like the largest war in Europe since WW2, or a global pandemic, so there’s a strong chance we’ll have less volatility. The war in Ukraine, COVID, and interest rate policy all look like they’ll remain major themes that can influence prices. There’s a large amount of new refining capacity that has either come online in the past few months or is scheduled to in the next year which should also help calm refined product markets. The challenge for the US and Europe is that 90% of new capacity is coming from Asia and the Middle East.
Short term it looks like the US dodged another supply bullet as the damage from the Christmas Blizzard - that impacted just about every single refinery east of the Rockies - looks to be limited. Even though several plants will need another week or two to complete repairs, and at least one refinery will be offline for months, the larger complexes along the gulf coast – which accounts for roughly half of all US capacity – seem to have escaped with relatively minor damage.
If you haven’t already been bombarded with notices, here’s a reminder the Federal Superfund tax is being reinstated in 2023 and will start showing up as a line item on your invoices. Please note the tax only applies to the petroleum portion of the fuel, so any ethanol, biodiesel, or renewable diesel should not have that fee apply. In addition, if you’re in the state of Washington, the new clean fuel programs start Sunday, which are estimated to add approximately 50 cents/gallon to refined product prices, with most suppliers embedding this in their daily prices.
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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.
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.