Why Are Gasoline Prices Moving Lower Today?
A bumpy and disorganized overnight trading session seems to be a fitting way to start the month of May, as much of the world treads cautiously towards the beginning stages of reopening after six weeks of lock-down. May Day celebrations around the world will keep trading volumes lighter than normal today, adding to the choppy action.
Most energy contracts were selling off overnight only to rally back in the past hour, with June WTI breaking north of the $20 mark for the first time since the Monday melt-down. Refined products are also struggling for direction, with nickel trading ranges in the early going and mixed results across the contracts.
A good lesion in the difference between futures and physical prices: The expiration of the May RBOB and ULSD contracts in the midst of a super contango means the June contracts are trading some seven to 11 cents higher than where May left off, but those values don’t carry over to cash markets which are seeing minimal change so far today. This phenomenon is often misunderstood, and not often talked about since in normal times the calendar spreads in futures are a small fraction of where they are today. Ask anyone who was invested in the U.S. Oil ETF last week if they understand this lesson now.
Small oil companies in the U.S. have been defying the odds for years, outpacing production estimates consistently thanks to new drilling technology. It’s little wonder that these companies are now once again exceeding estimates in their ability to shut-in production faster than expected, which should help alleviate some of the near term storage concerns. There’s a new lifeline for some of these producers as one of several new Federal Reserve lending programs has been opened to the industry this week.
The opposite of a small oil company, ExxonMobil, released earnings this morning, showing a quarterly loss for the first time in years due to a $2.9 billion non-cash write down of inventory values. The statement noted weaker refining margins both in the U.S. and around the world, but its total downstream margins were high thanks to “favorable mark-to-market derivatives and improved manufacturing on lower scheduled maintenance.”
Wondering why May RBOB settled lower Thursday even when prices were higher at the close? Read about the difference in settlement procedures on expiration day here. That will also help explain why gasoline prices are moving lower today, even while a comparison to May’s settlement makes it appear that RBOB futures are sharply higher on the day. April was a month that broke the charts, so it seems fitting to end it with more confusion.
Normal Daily Settlement Procedure
NYMEX RBOB Gasoline (RB) futures are settled by CME Group staff based on trading activity on CME Globex during the settlement period. The settlement period is defined as: 14:28:00 to 14:30:00 ET for the Active Month and 14:28:00 to 14:30:00 ET for calendar spreads.
Final Settlement Calculation for Expiring Contract
On the day of expiration, the expiring month will settle based on the VWAP of the outright CME Globex trades executed between 14:00:00 and 14:30:00 ET.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Markets Are Pointing Modestly Higher To Start Friday’s Session
Energy markets are pointing modestly higher to start Friday’s session, in a meager attempt at a recovery rally at the end of what would be the worst week in over two months if prices settle near current values. The liquidation of speculative bets placed on higher energy prices ahead of the direct conflict between Israel and Iran continues to appear to be the driver of the weakness, and we’ll have to wait and see if this modest bounce is a sign that the liquidation is over, or just a pause before it picks up again. Most contracts remain in a precarious technical position with the potential for a slide towards $70 for WTI and $2.20 for both refined products if the buyers don’t get serious soon.
Stocks are pointing sharply higher after a slowdown in job growth reported in the April Non-Farm payroll report. The BLS reported an increase of 175,000 jobs for the month, down sharply from the 315,000 jobs added in March, and the February & March estimates were revised down a combined 22,000. Both the “official” (U-3) and “real” (U-6) unemployment rates ticked up by .1% to 3.9% and 7.4% respectively. The immediate positive reaction to negative news suggest that the bad news is good news low-interest-rate junkies believe this may help the FED’s dilemma of the US economy being too strong to cut rates. The big jump in equities has not seemed to spill over into energy contracts yet, as crude and refined product contracts changed very little following the report.
San Francisco diesel basis spiked 15 cents Thursday to reach the highest level of any market in the country so far this year at 35 cents over prompt futures. While there aren’t yet any refinery upsets reported to blame the spike on, PBF is undergoing planned maintenance at its Martinez facility, and of course P66 just finished converting its Rodeo plant to RD after Marathon converted its Martinez facility in the past couple of years, meaning there are at most only 2 out of the previous 5 refineries in the region operating near capacity these days. The question now is how quickly barrels can shift north from Southern California which continues to show signs of a supply glut with weak basis values and spot to rack spreads.
PBF continued the trend of Q1 refinery earnings that were sharply lower, but still healthy by longer-term historical standards. The company noted that its Saint Bernard (the parish, not the dog) Renewables facility co-processing at its Chalmette refinery had received provisional approval from CARB to lower its CI scores and help improve the amount of LCFS subsidies it can receive. That facility is operating at 18mb/day which is roughly 86% of its capacity.
Cenovus highlighted the restart of its Toledo and Superior refineries in improved refinery run rates in Q1 2024 vs Q1 2023 and noted that it had ramped up production at units that were slowed down for economic reasons in December and January (you may remember this as the time when midcontinent basis values were trading 50 cents/gallon below futures). The company did note that the January deep freeze slowed operations at Superior, but did not mention any change in operating rates despite numerous upsets at its 50% owned Borger refinery.
Dress rehearsal for a busy hurricane season? So far there are no reports of refinery issues caused by the flooding in the Houston area this week. At this point, most of the flooding appears to be far to the north of the refining hubs on the Gulf Coast but with more storms in the forecast and 88 counties already declaring disaster status, this will be something to watch for the next few days.
Click here to download a PDF of today's TACenergy Market Talk.
Crude Oil Inventories Climbed Above Year-Ago Levels For The First Time In 2024
Sell by May then go away.
The old trading adage looked good for energy markets in 2024 as the new month started off with the biggest daily sell-off of the year so far. WTI and ULSD contracts are now in “rally or else” mode on the charts with sharply lower prices a strong possibility now that technical support layers have broken down. RBOB doesn’t look quite as bearish on the charts, but seasonal factors will now act as a headwind as we’re well into the spring peaking window for gasoline prices, and we’ve already seen a 27 cent drop from the highs. If RBOB can hold above $2.50 there’s a chance to avoid a larger selloff, but if not, a run towards $2.20 for both gasoline and diesel looks likely in the months ahead.
The selling picked up steam following the DOE’s weekly report Wednesday, even though the inventory changes were fairly small. Crude oil inventories continue their steady build and climbed above year-ago levels for the first time in 2024. Demand for refined products remains sluggish, even after accounting for the RD consumption that’s still not in the weekly reports, and most PADDs are following a typical seasonal inventory trend. The Gulf Coast saw a healthy build in diesel inventories last week as the export market slowed for a 3rd straight week. Refinery runs dipped modestly last week following a handful of upsets across the country, but overall rates remain near normal levels for this time of year.
The Transmountain pipeline expansion began operations yesterday, completing a 12-year saga that has the potential to materially change refining economics for plants in the US that relied heavily on discounted Canadian crude to turn profits over the past decade.
The P66 Borger refinery reported another operational upset Monday that lasted a full 24 hours impacting a sulfur recovery unit. Last week the company highlighted how the plant’s fire department helped the surrounding area when the largest wildfire in state history came within feet of the facility.
The EPA approved a new model to determine life cycle carbon intensity scores this week, which cracks open the door for things like ethanol to SAF, which were previously deemed to not reduce emissions enough to qualify for government subsidies. The new model would require improved farming techniques like no-till, cover crop planting and using higher efficiency nitrogen fertilizer to limit the damage done by farms that no longer rotate crops due to the ethanol mandates. Whether or not the theoretical ability to produce SAF comes to fruition in the coming years thanks to the increased tax credit potential will be a key pivot point for some markets that find themselves with too much RD today, but could see those supplies transition to aviation demand.
The FED continues to throw cold water on anyone hoping for a near term cut in interest rates. The FOMC held rates steady as expected Wednesday, but also highlighted the struggles with stubbornly high inflation. The CME’s Fedwatch tool gave 58% odds of at least one rate cut by September before the announcement, and those odds have slipped modestly to 54% this morning.