With The DOE And FOMC Both On Tap, More Big Swings Appear Likely To Come
It’s already been a volatile day for energy prices, and with the DOE and FOMC both on tap, more big swings appear likely to come.
The big news overnight was Russia announcing it would draft 300,000 reservists to aid its [failing] war in Ukraine. That move seemed to add to bullish sentiment in oil and refined product prices with ULSD up 12 cents not long after that news broke, only to see prices pull back and trade down 4 cents as of 7:30 central. Crude oil and gasoline prices have seen less dramatic versions of those price swings, and are still holding on to modest gains in the early going.
The API reported inventory builds across the board last week, with crude stocks up 1 million barrels (thanks again to large releases from the SPR) while gasoline stocks increased by 3.2 million barrels and distillates increased by 1.5 million. The DOE’s weekly report is due out at its normal time of 9:30 am central.
The FOMC announcement is due out at 1pm central, just 30 minutes ahead of the settlement for NYMEX contracts, which often makes for some wild trading to end the session. Just about everyone expects the FED will raise interest rates by at least 75 points today, with a large focus on what the chairman will say in the news conference following that announcement, which is likely to add to the volatility late in the day.
Gasoline prices on the East and West coast continue heading in opposite directions. NYH gasoline prices have dropped to just even with RBOB futures, and hold just a 3 cent premium vs their USGC counterparts, which marks the lowest spread since the RVP transition in April. Colonial line 1 space was reported to trade at a negative 2 cent value yesterday, which marks the lowest value in 2 years, just a few short weeks after reaching an 8 year high.
While the East Coast is seeing gasoline values crumble, West Coast markets continue to hold premiums of $1/gallon or more as refinery issues and the end of the summer gasoline spec keep inventories at extremely low levels.
Another refinery fire in the Midwest injured 2 employees, and has completely shut operations at the Toledo facility and will keep surrounding markets which have been unusually tight further on edge. That fire is yet another black eye for Husky which is still rebuilding the refinery it blew up in Superior WI a few years ago.
There are 5 potential storm systems being tracked in the Atlantic basin today, which will probably mark the unofficial peak of activity for the 2022 season. Tropical storm Gaston
The most troubling at this point for energy supplies is the system known as 98L that is given 90% odds of being named (Hermine) in the next 5 days. Odds are good that this system will make it through the Caribbean and it could blow up to a major Hurricane once it reaches the extremely warm water East of the Yucatan, but are unclear where it will head once it reaches the Gulf of Mexico. The early favorite looks to be a Florida landfall, which would keep it east of the oil production and refining centers, but will not help the state’s fuel supplies that have been running low for the past 6 months.
Click here to download a PDF of today's TACenergy Market Talk.
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“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.