ULSD Prices Drop Despite Looming Russian Supply Ban

Market TalkTuesday, Jan 31 2023
Pivotal Week For Price Action

ULSD continues to lead the energy complex lower as January winds to a close, dropping from a high of $3.58 one week ago to a low of $3.0570 this morning. Crude oil and gasoline prices have also come under heavy pressure, but have lagged far behind the moves in ULSD, which has pushed prompt diesel crack spreads by down by $12/barrel in just a week.

Why exactly diesel prices got so weak so fast is a bit of a mystery given that inventories remain well below their seasonal ranges, refineries across the country are running below normal levels due to a rash of unplanned issues, and the embargo on Russian diesel shipments starts this weekend. 

The warmer than expected winter has certainly eased concerns of more severe shortages of natural gas and heating oil across Europe and the US North East, but European natural gas prices have been rebounding as temperatures are expected to drop again next week, and French workers are attempting to block more fuel deliveries today as part of the ongoing strikes against state pension reform. 

Recession expectations could be a factor in this pullback, as they were during the last 2022 selloff as earnings season is showing that US consumers are slowing down purchases, while the FED is poised for another rate hike tomorrow.   

Liquidations by the hedge funds that added new bets on higher prices last week, just in time for this pullback could also be at play, although we won’t get to see that data again until Friday. 

The drop could be a sign of the classic “buy the rumor, sell the news” trading phenomenon with the upcoming Russian embargo, particularly given that exports have surged in recent weeks as buyers race to beat the deadline. 

There’s also a real possibility that there simply is not a fundamental reason at all for this price pullback, and it has more to do with the big speculative funds that can be the fair weather fans of commodity markets, or the trading algorithms that account for most daily volume being programmed to sell after an 82 cent rally from a low of $2.76 in early December to $3.58 last week.

Whatever the cause, ULSD is now breaking its weekly trendline that propelled prices higher for 7 weeks, and sets up a test of the January lows at $2.92 if they can’t manage a bounce in the next day or two.  Then again, if they do bounce, this 50 cent pullback in 5 trading days may be seen as nothing more than the latest big swing in an extraordinarily volatile market and a good buying opportunity for anyone that has a fuel budget.

Pretty much everyone expects the FED to raise rates by 25 basis points tomorrow, with the CME’s fedwatch tool showing a 99% probability of that outcome, and 85% that they’ll raise another 25 points in March.   The big question is whether or not the FED will be done raising rates after that, with traders fairly evenly split in their bets on the rates beyond the next two months.

Exxon, Marathon and P66 all reported earnings for Q4 today, and surprised no-one with their strong results, even though refining margins pulled back from the record levels set earlier in the year. 

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

Market Talk Update 1.31.23

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

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.

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

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.

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