US Stock Markets Saw Their Biggest Daily Reversal In Almost 2 Years Thursday
US stock markets saw their biggest daily reversal in almost 2 years Thursday, turning heavy early losses into huge gains. Those swings trickled over into energy markets, adding to the volatility we’ve already become accustomed to in October.
While the swings in futures so far in October have been impressive, the moves in basis values have been epic. After witnessing a $2/gallon collapse in West Coast gasoline values last week, we’ve saw some historic moves in diesel Thursday.
Pretty much everyone that watches West Coast spot markets knew that LA CARB diesel was in for a big drop Thursday, after the other diesel contracts in the region had dropped sharply earlier in the week, but pricing agencies left the CARB diesel unchanged due to a lack of trading activity. While everyone knew a big drop was coming, it’s safe to say that pretty much nobody expected those values to drop more than 78 cents in a day, from +5300 to -2500, which marks a record single day decline for distillates. Ironically, this move happened on the same day that the DOE reported West Coast diesel stocks reached a 3 year low.
We’ve seen bigger drops in gasoline basis in a single day (just last week actually), but I don’t know that any US cash market has ever seen such a swing from a big positive number (which implies very tight supplies) to a big negative (which usually accompanies a glut of product) in just one session. Of course the extreme moves in the ULSD calendar spreads are heavily influencing the daily basis swings, as -2500 vs November futures is the equivalent +1500 vs December futures, and that’s historically a strong basis value for this time of year on the West Coast.
In the other corner of the country, and side of the extreme moves, NY Harbor basis values continued their runaway rally, adding another 25 cents Thursday to now trade 75 cents over November Futures, also known as $1/gallon more than LA CARB diesel , after trading a penny below its West Coast counterpart just 1 day prior. That 75 cent premium is the 2nd highest level recorded for NYH ULSD, and could certainly threaten the record north of $1.22 that was set during the chaotic spring trading after the war in Ukraine broke out. The spread between ULSD values today in New York and at year end is approaching $1.30/gallon.
November ULSD futures came within 5 points of reaching their August high of $4.1154 Thursday, before pulling back slightly ahead of the close, and moving lower overnight. That move is close enough to complete the “W” pattern on the daily charts and may set up a period of sideways trading as traders consolidate positions. That $4.11 level is looking pivotal for the back half of October as a break there leaves room on the charts for a run to $4.50, while a failure will make this look like a short term double top that could push prices sharply lower. Given the chaos in cash markets, expect some more fireworks over the next 2 weeks.
Notes from the DOE’s weekly status report:
US Crude stocks climbed on the week, and nearly reached the 5 year seasonal average for the first time in 18 months. That said, the increase was once again primarily driven by the ongoing release of barrels from the SPR, which are totally more than 7 million barrels every week. US oil production dipped for the 2nd time in 3 weeks and is holding at levels we saw 6 months ago.
Diesel stocks in the US dropped once again, and touched 24.2 days of supply based on the DOE’s demand estimate, which marks the lowest level in the 20+ years of data available. US production of diesel is holding at nearly 1.5 million barrels/day more than the country consumes but record exports are continuing to cause traders to need to pay up to keep barrels at home.
Gasoline demand estimates from the DOE dropped by 1.2 million barrels/day last week, from the top end of the seasonal range, to below the levels we saw this time in 2020. That number is a good reminder of how challenging it is to reliably calculate demand on a short term basis, and that the driving season has officially closed and consumption typically creeps lower for the next 3 months.
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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.
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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.