Weak Data From China Is Getting Blamed For The Soft Start In Both Energy And Equity Markets This Morning
Diesel prices are moving lower for a 4th straight day and are down 19 cents from Thursday’s high trade after chart support failed to hold on Monday. Gasoline and crude oil prices were following diesel’s lead lower this morning, with RBOB futures down nearly a dime since Friday before bouncing back to break-even levels around 7:30 central.
Weak data from China is getting blamed for the soft start in both energy and equity markets this morning. While sales, production and investment all moved higher on the year, the numbers were well below what many forecasters were expecting, and more troubling was their Bureau of Statistics stopped reporting unemployment figures for youth, which had recently soared to record highs. The weaker economic activity isn’t slowing down Chinese refineries however as the new capacity brought online in the past 2 years helped hold output near record levels in July and continue heavy export activity despite seasonally strong domestic demand.
The bounce in gasoline prices off of overnight lows followed US retail sales data for July that showed the strongest gain since January, even though that report seems to have done little to move equities off of their lows for the day. The correlation between daily moves in energy and equity markets had largely fallen apart over the past couple of weeks, which seems to be helping RBOB shrug off the drop in stocks so far.
The volatility index for WTI has dropped to its lowest level since 2019 as global markets seem to be finding some sense of temporary equilibrium after the chaos of the COVID years and shock of the Russian invasion changing the direction of the global energy trade.
What a difference a week makes: Group 3 Unleaded basis values have dropped nearly 30 cents over the past week as concerns about a supply squeeze ahead of the fall RVP transition seem to be subsiding. Neighboring Chicago RBOB prices followed the Group’s strong rally over the past month, and now look like they could be set to collapse in sympathy as well. West Coast basis levels remain elevated heading into the transition, with last year’s September spike north of $2/gallon premiums still fresh on many minds.
Add another competitor to the renewable feedstock wars: A recent test showed Hydrotreated Vegetable Oil (which is what the rest of the world calls Renewable Diesel) lowered emissions 83% when replacing traditional bunker fuels on ships. That should come as no surprise to anyone who has been watching the rapid growth in RD production the past few years, and the question for producers is simply which market will provide the most incentive (aka environmental credits) for their RD, SAF or marine HVO.
The NHC is still tracking 2 potential storm systems this morning. The good news is the first system that could form in the Caribbean, is only given 10% odds of developing, and the 2nd storm that has slightly higher odds (30%) looks like it’s moving far enough north that it should stay over open water if it does develop further.
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View AllThe Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.