ULSD Prices Drop Despite Looming Russian Supply Ban
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.
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Energy Markets Are Holding Steady To Start Tuesday’s Session
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Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
FOMC Rate Increase Rocks Equity Markets, Energy Futures Unshaken
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View AllEnergy Markets Are Holding Steady To Start Tuesday’s Session
Energy markets are holding steady to start Tuesday’s session after oil prices had their biggest rally of the year Monday.
Reports that Iraq had halted shipments on the Ceyhan pipeline through Turkey, which removed 400,000 barrels/day of exports from the world market temporarily were given much of the credit for the big move higher. The rally in oil came just a week after large speculators reduced their bets on higher prices to the lowest level in 7 years, providing yet another reminder of why the moves made by hedge funds is often seen as a contrary indicator of market direction.
Refined products touched a 2-week high overnight before pulling back to modest losses this morning but remain in the middle of their March trading range, which sets the stage for more choppy back and forth action as markets around the world search for direction and worry about what’s coming next.
California approved the bill that will create a new committee within the state’s energy commission that will oversee oil refiners and potentially levy penalties on them if they’re deemed to be making too much money on consumers. The state has already had a handful of refineries close down in the past 6 years, with another scheduled to close and convert to an RD facility in early 2024, and there’s no doubt that this new law may be yet another reason for the remaining facilities to consider closing their doors as well, which many will see as a victory.
The Dallas FED’s manufacturing Survey showed a small increase in production in March, after February showed a contraction for the first time since the COVID lockdowns. The business outlook remains mixed however as many noted uncertainties around the banking situation, along with continued supply chain and labor challenges as factors hindering growth.
New competitor for feedstocks? A moose breached the security gates at the refinery in Sinclair Wyoming Monday. No word if the animal was just lost, or searching for the soybeans that are now being used to make renewable diesel at that facility.
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Energy Futures Rebound to Start the Week
Energy futures are bouncing to start the week, following through on a recovery rally that saw Friday’s early losses wiped out and salvaged weekly gains.
Money managers have been bailing out of their bets on higher energy prices in recent weeks, and as the CFTC’s data is finally catching up after 2 months of delays, we can finally see those figures the same week they’re compiled. The past two weeks alone have seen a reduction of more than 100,000 WTI contracts held by large speculators, bringing the total net length to the lowest level since January 2016.
The COT data also shows large reductions in producer hedging during this latest selloff in a sign that the industry may believe that prices won’t stay this low for long.
A WSJ article over the weekend highlighted how the options traders may have exacerbated the push lower over the past two months and could help spark a recovery rally later in the year.
Baker Hughes reported an increase of 4 oil rigs drilling in the US last week, snapping a 5-week slide that had pushed drilling activity to a 9-month low. The Permian basin accounted for 3 of the 4 rigs added last week.
Iraq won a 9-year lawsuit against Kurdish oil shipments, and that result has temporarily halted shipments of oil from the autonomous Kurdish region via the Turkish Ceyhan pipeline system.
Saudi Arabia announced an expansion of its partnership with China, increasing its multi-billion investment in new refining infrastructure in the world’s largest oil buyer. We’ve already seen multiple new refinery projects come online in both countries over the past two years, and this new agreement will continue the trend of additional capacity in the eastern hemisphere while the west continues to see declines.
Click here to download a PDF of today's TACenergy Market Talk.
Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
Oil prices are leading a slide lower to end the week after the US government walked back plans to buy oil since it’s dropped below $70, and the latest ripples in the banking crisis push stocks lower and the dollar sharply higher after it touched a 2-month low Thursday.
Even though the correlation between energy prices and stocks or currencies has been weak lately, or even opposite of normal in the case of the dollar, there still seems to be more influence lately as the fear trade has funds flowing back and forth between markets depending on whether or not risk-taking is in style that day.
The US Energy Secretary told congress that the agency won’t be refilling the SPR this year, despite previous pledges by the White House to buy oil when it dropped to $70, since the agency is still working through congressionally mandates sales of oil from the reserve. That news seems to be contributing to the downside in WTI and Brent prices as traders hoping to front run the DOE are now going to have to wait a while longer to do so.
Even though ULSD prices are up 17 cents from the lows set last week, they’re still on the verge of their lowest weekly settlement since January of 2022 should prices end the day near current levels. Given that this week’s recovery rally failed to take out the highs seen in previous weeks, charts continue to look bearish for distillates. Another run at $2.50 looks more likely and a break below that level, when the May contract takes the prompt position in another week, may be a foregone conclusion.
As has been the case for most of March, RBOB look as bad as ULSD on the charts, although that certainly isn’t helping so far today with gasoline futures outpacing the losses in diesel. Unless we see RBOB end the day down a dime or more (it’s down a nickel currently) the weekly trend will still be higher, and the charts will still be giving favor to another push towards $2.80-$3 this spring.
The LA spot market saw a healthy bounce in gasoline basis values Thursday following multiple refinery upsets in the area reported to local regulators. Meanwhile, the California Governors new plan to create an oversight committee to prevent price gouging – a major change from earlier proposals to levy a new tax on oil producers and refiners – passed through the Senate on Thursday. If this new bill is fully passed, it will allow the Governor to appoint that committee himself. A 1,000-page prediction of how that plan will work is available for less than $10 on Amazon.
Click here to download a PDF of today's TACenergy Market Talk.