The Recovery Rally Continues In Energy Markets To Start Wednesday’s Session

Market TalkWednesday, Dec 14 2022
Pivotal Week For Price Action

The recovery rally continues in energy markets to start Wednesday’s session, with diesel futures up nearly 40 cents/gallon already this week, while gasoline futures are up 12, and WTI is up more than $5/barrel. 

less strong inflation reading, which is helping push the dollar lower, the reopening of Chinese cities, and some surprisingly positive notes on the global economy from OPEC and the IEA are all seeming to contribute to the fundamental argument for this rebound which is about to face its first technical test to the upside as ULSD and WTI run into the downward sloping trend-line formed over the past 6 weeks of selling.  

So far today traders are shrugging off the API report that showed inventory builds across the board last week. Crude oil stocks saw a large build of 7.8 million barrels (more than half of which can be attributed to the latest SPR release) while distillates increased by 3.9 million and gasoline inventories ticked up by 877,000 barrels. The EIA’s weekly report is due out at its normal time, but based on the lack of API reaction, and the looming FOMC announcement this afternoon, it may have less impact than normal.

OPEC reported its crude oil output dropped by 744,000 barrels/day in November as Saudi Arabia, UAE, Kuwait and Iraq made good on their agreement to cut output, while others like Venezuela and Libya continue to struggle with production. The cartel’s outlook for demand was increased as GDP figures for both the US and Europe surpassed expectations, which helped offset the impact of the lockdowns in China. The report also highlighted the rapidly changing forward curves for crude oil and refined products after months of steep backwardation, and the rapidly declining refining margins as output surges following the end of a busy fall maintenance season. Last but certainly not least, the OPEC report noted that the tanker market remains very strong as the “…ongoing shift to longer haul routes due to trade dislocations [aka Russia] limited tanker availability.”

The IEA’s monthly oil market report increased global demand estimates for the end of this year, and next, as strong gasoil (aka diesel) usage due to gas-to-oil switching offsets economic weakness in Europe and Asia. This report also highlighted the rapid drop in refining margins as November production globally surged to the highest levels since the early days of the COVID outbreak. The IEA summarized the outlook for the next few months by saying that while seasonal factors and economic concerns have pushed prices lower for now, another price rally can’t be ruled out as the full impact of the Russian embargoes next year remains to be seen.

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Market Talk Update 12.14.22

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Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

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Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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