ULSD Continues To Look The Most Vulnerable This Morning, Already Giving Back 4 Cent Overnight Gains

Market TalkMonday, Nov 6 2023
Pivotal Week For Price Action

After a big Friday selloff, energy futures were trying to rally overnight only to see momentum wane once again in the morning hours. 

While stocks and bonds seemed to cheer the weakening labor market Friday, more specifically its potential to put an end to the FED’s rate hikes, energy contracts seemed to pay more attention to another weak reading from the manufacturing sector, and its negative ramifications for diesel demand as ULSD futures dropped a dime on the day.

ULSD continues to look the most vulnerable this morning, already giving back 4 cent overnight gains. There is a descending triangle pattern on the weekly charts that has the potential to send diesel prices back to the lows around $2.30 where they bottomed out last spring, although this pattern is getting long in the tooth, which could negate it completely if we don’t see a break-out in the next week. For gasoline, a break below October’s low trade at $2.15 would set up a good opportunity to see sub $2 gasoline before Thanksgiving.

Saudi Arabia and Russia agreed to extend their voluntary production cuts through year end, which gave crude oil prices a bid overnight, although slowing refinery runs in China and India seems to be keeping a lid on the crude buying for now.

Money managers reduced their net length in most energy contracts last week, with a huge influx of new money betting on lower WTI prices the most noteworthy change in speculative positions.   RBOB was the only one of the big 5 contracts to see an increase in length last week, driven primarily by short covering in what may be profit taking by funds who got what they were looking for in the latest gasoline selloff, and aren’t betting on another big move lower. 

Baker Hughes reported a decline of 8 oil rigs active in the US last week, wiping out 3 weeks’ worth of increases, and lowering the total rig count to the lowest level since January 2022.  There was a notable shift in activity from Texas (which was down 7 rigs on the week) to New Mexico (up 4) with the net change for the Permian basin down 3.  Natural gas rigs have been holding relatively steady for the past month, adding or subtracting one rig/week.

Tough couple of days in Memphis:  On Friday, ENT reported that the Valero refinery would need to perform unplanned repairs at its refinery, then on Saturday a fuel truck caught fire just outside of the loading rack, which forced the terminal to shut down for a couple of hours. 

Meanwhile, Valero Port Arthur and Marathon El Paso refineries both reported tank leaks over the weekend to the TCEQ, but neither event seems to have interrupted production at the facilities.

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Market Talk Update 11.06.2023

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Pivotal Week For Price Action
Market TalkFriday, Dec 1 2023

“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week

“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year. 

Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports. 

Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.

Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.  

Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums. 

Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.

The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.

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

Pivotal Week For Price Action
Market TalkThursday, Nov 30 2023

No Official Word From OPEC Yet On Their Output Agreement For Next Year

Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.   

There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move. 

We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.

It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.

Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.

Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.

The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver. 

The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.  

Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.

More refineries ready to change hands next year?  With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.

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