Volatility Creeps Higher

It’s a risk off type of day as another heavy wave of selling grips energy and equity markets around the world, pushing oil and gasoline prices to fresh three week lows after a solid recovery bounce in Tuesday’s session. Volatility is creeping higher after staying relatively subdued throughout most of the summer and fall, and many are suggesting that political turmoil could keep contributing to larger daily swings over the next couple of weeks.
Large builds in crude oil and gasoline inventories (4.6 million and 2.3 million barrels respectively) reported by the API are taking credit for the early wave of selling that’s wiping out Tuesday’s gains, while an even larger decline in diesel inventories of 5.3 million barrels appears to be largely ignored. Even more telling of the pessimism early on, nearly 9% of the country’s refining capacity looks to be within 50 miles of a Category 2 hurricane as it hits land this evening, and yet refined products are down 3-4%.
Hurricane Zeta now appears that it will likely reach Category 2 status with winds approaching 100 mph before hitting the coast this evening, but it is moving forward at a high rate of speed, so the rainfall totals are looking less impressive than what we see from slower moving storms, which will hopefully keep flooding in the region to lower levels.
It looks like New Orleans luck may have finally run out during this record-setting hurricane season as Zeta has stayed on course to pass near the city this evening. That puts the P66 Alliance refinery, Valero Meraux and PBF Chalmette facilities less than 10 miles from the eye of the storm as it moves over what passes for land along the Mississippi River Delta. Meanwhile, the Norco and Garyville refineries will be within 20-50 miles based on the current path. Alliance was reported to stay closed after Sally for maintenance and due to weak economics, and the other facilities are all running below capacity due to weak demand. A Reuters report Tuesday suggested the facilities will continue to operate through the storm, and so far no contrary reports have been released. Roughly half of Gulf of Mexico oil production has been shut in as a precaution.
The Colonial and Plantation pipeline operations are north and west of where the storm is projected to make landfall, so it seems like a low risk that supply further upstream will be directly impacted, which means markets along the southeast aren’t likely to see any disruption in fuel supplies. The other good news from the fast forward movement of this storm is it will only take a day to move through the Southeastern U.S., minimizing its negative impacts on fuel demand as well.
Spot gasoline prices in the group 3 market are now flirting with the $1/gallon mark, and based on the way the charts and seasonal demand patterns are setting up, it’s starting to seem inevitable that we’ll see that level broken in the near future, and that other regions may soon follow suit if RBOB futures can break below the June lows near $1.07, which is just a couple cents away from current levels.
Click here to download a PDF of today's TACenergy Market Talk.
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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.

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.
