This Week’s Rally Has Refined Products Eyeing New Bull Market
Gasoline prices are trying to lead the energy complex higher for a 4th straight day, despite some bearish demand figures in yesterday’s DOE report. ULSD Prices were resisting the pull higher, trading in negative territory most of the night, but have recently pulled back into the green, and would mark a 5th straight increase if they can stay there.
Despite the strong rally this week, refined products still have more work to do to erase the heavy losses we saw to start the year, which could make the next few sessions pivotal in determining if we’re in the early stages of a new bull market, or just stuck in a sideways range. Multiple short term technical indicators have moved into bullish territory this week, so it looks like we’ll at least see an attempt to take out the highs for the new year soon.
After the largest drop on record last week, the EIA’s estimate for total US petroleum demand did not recover much in the latest report, and is starting the new year nearly 3 million barrels/day (roughly 14%) lower than where it was to begin 2022. Gasoline is the biggest culprit in the weak domestic consumption figures, barely bouncing after last week’s huge drop, and still hovering near levels we saw during the first year of the pandemic when most companies were still working from home.
So why did gasoline prices rally a dime on a day when the government told us that demand is terrible? Possibly because the last week and first week of the year are always the worst times for consumption, and they’re now in the rearview mirror. Or, perhaps because the same report showed that more than 1 million barrels/day of refinery production remains offline as a handful of facilities are struggling to return to service after the Christmas blizzard. Or, even more likely it had no fundamental reason at all, and was driven by momentum chasing algorithms programmed to buy as the complex moved further away from the lows set last week.
Diesel demand did see a healthy bounce last week, and was estimated to be slightly above year ago levels last week. All 5 PADDs are starting the year well below their 5 year average inventory levels, but most have recovered substantially over the past few months compared to the extreme tightness we witnessed for large parts of 2022. While a warm winter has been a huge help to get distillate stocks back to more manageable levels in Europe and the US East Coast, if the refinery runs can’t crank back up to normal levels in the next couple of weeks, more shortages look like a certainty.
The exception to the shortage concerns remains on the West Coast, where the unrelenting deluge continues to hammer demand, while refineries have been able to continue operating, which has pushed regional gasoline inventories to unusually high levels to start the year.
The December CPI reading showed inflation at 6.5% in the US over the past 12 months, with “core” inflation readings at 5.7%. Both figures were in line with estimates, so they did not create big swings in either energy or equity markets in the immediate aftermath of the report. Rapidly falling gasoline and fuel oil prices helped the monthly figure drop by .1% in December, after rising energy prices were the biggest driver of inflation for most of the past 2 years.
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View AllEnergy 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.
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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.