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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“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.
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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.