We’re Seeing Another Mixed Bag For Energy Markets This Morning After A Wild Tuesday Session

Market TalkWednesday, Oct 12 2022
Pivotal Week For Price Action

We’re seeing another mixed bag for energy markets this morning after a wild Tuesday session that saw a stunning recovery in refined product prices. Strong gains overnight have been largely wiped out after the September PPI report showed that inflation is not going away, which moves the hopes of a FED pivot further into the future. RBOB prices have pulled back a nickel from their overnight highs and WTI is down nearly $2 since the report. ULSD meanwhile continues to find its own path, up nearly 7 cents despite the selling in other contracts, as the realities of an extremely tight diesel market continue to ripple across the globe.

The November ULSD contract has decoupled from the rest of the complex, staging an impressive 20+ cent rally Tuesday to settle higher even as most other ULSD contracts finished with heavy losses on the day. The spread from November to December futures has soared to nearly 35 cents this week, which would set records outside of the chaotic trading we saw in March in April. The big moves in the calendar spreads is creating more chaos in basis markets around the country as cash traders try to adjust to the big swings in futures spreads. Most notable today is that NYH ULSD is now trading 40 cents over the November futures, which puts the backwardation roughly 75 cents into December, or more than 1 cent per day. 

OPEC’s oil production ticked slightly higher in September, according to their monthly oil market report released this morning. The cartel’s total output was up 146mb/day for the month, with increases from Saudi Arabia, UAE and Nigeria offsetting declines in Iraq, Iran and Venezuela. It’s worth noting that the September output is still more than 1 million barrels/day below the August target that was used as the bar for the recently announced “production cuts”. The report lowered global demand estimates for 2022 due to ongoing lockdowns in China and economic challenges in Europe. The report also noted that China’s demand loss is allowing their refiners – which are some of the only plants in the world with spare capacity this year – to ramp up exports of refined products.  That change in product flow is one of several factors that have caused tanker rates in parts of the world to double compared to last year, which is also highlighted in this report. 

A US judge approved a long awaited plan to auction off shares of Citgo to settle several long-delayed judgements for companies that had their assets seized by Venezuela’s government. It’s worth noting that the auction wouldn’t take place until late 2023 at the earliest, and would only sell enough shares to pay off the outstanding judgements, not the entire company, which could allow the refiner to continue operating as they’ve been doing, rather than breaking it up into pieces as had been discussed for years. Meanwhile, the US continues to try and negotiate with Venezuela to find a way to bring some of the 2 million barrels/day of oil production back to the world market that’s been missing for the past 7 years as the beleaguered nation spiraled into social chaos.

Tropical Storm Karl formed in the Gulf of Mexico Tuesday, which would ordinarily be a reason for fuel markets to get nervous, particularly with the supply network already stretched very thin.  The good news with this storm is it is forecast to reverse course and head south into Mexico, so there is no threat to the oil production and refining assets on the US coast.

The EIA’s Short Term Energy outlook will be released later today, while the API and DOE/EIA weekly inventory reports are both delayed due to Monday’s quasi-holiday so the API will be out later this afternoon and the DOE report tomorrow.

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

Market Talk Update 10.12.22

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, Dec 9 2022

Energy Futures Are Seeing Modest Gains To Start Friday’s Session

Energy futures are seeing modest gains to start Friday’s session, limping towards the finish line of a week that’s pushed prices to their lowest levels of the year, and cut 20-30 cents off of refined products. 

WTI futures have had a fairly muted reaction to news that the Keystone pipeline was forced to shut after more than ½ million gallons reportedly spilled into a Kansas creek this week. A timeline for restart is still unclear, but so far the price action suggests refiners aren’t panicking about where they’ll find replacement barrels, and those north of the spill may be rewarded with discounted barrels that now find themselves stranded, such as Western Canadian Select which is now trading down to $50/barrel.  

If RBOB can finish in the green today, it would mark the first trading day so far in December where the gasoline contract didn’t end lower, after 6 straight losing sessions. Cash markets are also looking weak, as the spread between gasoline prices in New York and the Gulf Coast dropped to its lowest level since early October this week, putting downward pressure on the price to lease space on Colonial’s Line 1. With refiners running full out to capture huge diesel margins, gasoline is becoming an unwelcome byproduct in many markets, and could become oversupplied in some regions in the near future, which could force some plants to reduce run rates. 

Distillate prices are seeing a similar convergence with the spread between Gulf and East coasts now less than 30 cents/gallon, which is more than $1/gallon lower than it was a month ago. Softer demand for both products due to the seasonal slowdown in gasoline and unseasonably warm weather limiting Heating Oil consumption are both getting credit for these cash markets suddenly returning to something more closely resembling what we’re used to seeing. 

Bad news is good news for stock markets as any negative data points may give the FED reason to slow their interest rate hikes.  Yesterday we saw stocks rally after an increase in jobless claims in the US. Today we’re seeing stocks give back some of yesterday’s gains after the PPI report showed inflation is remaining stubbornly high and above many forecasts, giving the FED another reason to continue with its tightening. Energy contracts continue to have a weak correlation to daily moves in equity prices, so it’s not too surprising we are seeing a small rally today even though stocks are pulling back.

Chinese refiners are racing to take advantage of liberal quotas this year and are expected to reach a record level of refined fuel exports this month.  Those supplies have provided a much needed supplement for a world short on distillates, but there are many questions and few answers about what they’ll look like next year.

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

Pivotal Week For Price Action
Market TalkThursday, Dec 8 2022

Refined Product Prices Are Bouncing Moderately This Morning After Selling Off Heavily For A Fifth Consecutive Trading Session Yesterday

Refined product prices are bouncing moderately this morning after selling off heavily for a fifth consecutive trading session yesterday. Heating oil futures have dropped over 50 cents per gallon since the beginning of the month as traders reconcile rebounding national distillate inventories, a warmer-than-expected European winter, dismal Chinese demand outlook, and the execution of the ban on Russian oil exports. Gasoline futures have dropped just over 25 cents so far in December while the West Texas Intermediate crude oil contract has fallen just $5 per barrel since last week.

The Department of Energy reported a 5.2 million barrel draw in crude oil inventories last week, marking the fourth consecutive week of stockpile drawdowns. On the flip side, national gasoline and diesel stocks likewise grew for the fourth week in a row, which makes sense given refineries are running near their 5-year seasonal high. Total refined product demand continued to sink, as typical of this time of year before everyone jumps in their cars to drive to grandma’s for Christmas.  

Oil futures have fallen below the $80 mark this week and have now given up all gains seen since Russia invaded Ukraine. While China’s relaxation of their pandemic policy should provide some upward pressure on oil prices, in theory, it seems most aren’t convinced the lack of restrictions will translate to increased petroleum demand.

Premiums to ship gasoline and diesel on the Colonial Pipeline (the main US’s petroleum artery going from Houston to New York) have dropped significantly over the past few days. Shippers can now move gasoline up the Eastern seaboard for “only” 9 cents above the pipeline’s tariff, which is the lowest its been since October. Moving diesel to the Northeast will run you 7 cents over costs.

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

Pivotal Week For Price Action
Market TalkWednesday, Dec 7 2022

The Downward Price Action Seen In Monday’s Trading Session Continued Into Tuesday

The downward price action seen in Monday’s trading session continued into Tuesday and energy futures charts are poised to test some significant resistance levels. Most notably, the prompt month ULSD futures contract is set to test its 100-week moving average at the ~$2.80 level, beyond which the path is open for prices to fall down to the $2.20s.

WTI crude oil futures face a tough test these next couple months as it bears down on its 200-month moving average which, if broken, could lead prices down to the $65 range. The energy complex is bouncing this morning, albeit moderately, on the news that China is abandoning its COVID testing and quarantine protocols. The mild upward price action suggests traders are hesitant to believe that will translate to a return of energy demand.

The Energy Information Administration published its monthly Short Term Energy Outlook yesterday, highlighting its higher-than-expected global oil inventory level estimate for 2023. The EIA also noted that the execution of the ban on Russian seaborne petroleum products by the European Union has rendered the future of distillate remarkedly hazy. Price direction for diesel’s home-heating counterpart seems a little easier to forecast: moderately higher prices are expected through January as winter sets in and demand ramps up.

The American Petroleum Institute reported a sizeable 6.4 million barrel draw in US crude oil inventories last week, along with builds in refined product stocks of 5.9 million barrels and 3.6 million barrels of gasoline and diesel, respectively. The official report published by the Department of Energy is due to come out at its regular time this morning (9:30am CST) and its confirmation or contradiction of the API’s estimate will likely determine the day’s trading sentiment.

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