We’re Seeing Another Mixed Bag For Energy Markets This Morning After A Wild Tuesday Session
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.
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Refined Products Bounce Back And Forth Across The Break-Even Line To Start Friday’s Trading
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Week 23 - US DOE Inventory Recap
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View AllRefined Products Bounce Back And Forth Across The Break-Even Line To Start Friday’s Trading
The choppy action continues for energy markets with refined products bouncing back and forth across the break-even line to start Friday’s trading after some big swings Thursday.
RBOB futures led the rollercoaster ride Thursday, trading up 4 cents in the early morning hours, only to see those gains turn into 10 cent losses mid-morning, and then erasing most of those losses in the early afternoon following an ENT report of unplanned maintenance at the largest refinery on the East Coast.
The selling portion of the ride was blamed on a combination of an increase in jobless claims, and the disruptive impacts of the Canadian wildfires on the major population centers along the East Coast. While air traffic has been disrupted, so far there are not any reports of delays in ship traffic around the New York Harbor, and the strong basis and time spreads we’ve seen in NY have been easing this week, so it appears that this event is more concerning to the demand side of the equation than supply.
From a technical perspective, it’s not surprising to see this type of back-and-forth action as most petroleum contracts look to be stuck in neutral territory on the charts, which encourages trading programs to sell as prices get towards the top end of a range, and buy when it gets to the low end.
The Atlantic Hurricane season is off to a quiet start with no tropical development expected over the next week, but NOAA did issue an El Nino advisory Thursday that suggests the warm-water pattern in the Pacific could reach “supersized” levels and create all sorts of disruptive events. Perhaps most notable in the report is that forecasters don’t believe this year’s El Nino will have the same dampening impact on Atlantic hurricanes due to record warm temperatures in the water. Here’s a brief recap in case you missed the most memorable El Nino from 25 years ago.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline Futures Rally Despite Inventory Builds, Increased Throughput
Gasoline futures led another strong rally in the energy complex Wednesday and continued marching higher overnight before pulling back to near break-even levels around 7:45am central.
The RBOB contract has now wiped out the post-Memorial Day selloff, and erased the losses from the contract roll to July, setting up another test of the May highs at $2.73. If that resistance breaks, there’s a good chance we see another run at the $2.90 level, but if it holds we are probably still stuck in a sideways pattern as we move through the summer months. West Coast gasoline prices meanwhile have reached a 3-month high as surging basis values compound the move in futures.
The rally came despite healthy inventory builds for refined products and strong refinery runs across all 5 PADDs reported last week, with traders (or their algorithms) appearing to focus instead on healthy demand estimates in the DOE’s weekly status report. Gasoline also saw healthy exports last week, while diesel shipments overseas continued their decline which has helped keep downward pressure on diesel prices, which is essentially the polar opposite of what we were experiencing a year ago.
Lies, damned Lies and statistics: PADD 3 refinery utilization hit 98.8% of the official capacity figure last week, which would mark a 5 year high, except the numbers are wrong. The DOE still isn’t including recent capacity additions of almost 300mb/day in those stats, so the actual figure is about 3% lower. Don’t worry though, the lack of accurate data probably isn’t intentional. The DOE recently announced it was suspending data collection for some of its monthly reports as the agency is still struggling to overcome the IT Systems failure they experienced a year ago. Add this to the realization that the official crude production and petroleum demand figures have been incorrect due to a lack of clarity surrounding condensate production that comes along with oil output.
Speaking of which, the official US Oil output figure surged to the highest levels since the COVID lockdowns began more than 3 years ago last week. No word from the EIA if this means actual production increased, or if they’ve just changed the way they’re reporting the molecules coming out of the ground.
Irving Oil released a statement highlighting a strategic review of the company, that could include selling the business that’s been held by the Irving family for nearly 100 years. The Irving Refinery in New Brunswick is Canada’s largest at 300mb/day and is the largest importer of fuels into the northeastern US. Critics are arguing that the review is an attempt to politicize Canada’s Clean Fuel Regulation that could weigh on the refinery’s profitability when it goes into full effect in July or could simply incentivize the facility to send more product to the US.
RIN values saw their first bounce in a couple of weeks, with both D6 and D4 values climbing back above the $1.40 mark after their recent slide from the mid $1.50s. We’re still 6 days away from the EPA’s deadline to issue the final RFS ruling for the next couple of years.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.