News & Views
News & Views
News & Views
Sign up to receive market talk updates in your inbox each day.
The Energy Complex Continues To Bounce Back And Forth This Week And Have A Mixed Outlook Going Forward
The energy complex continues to bounce back and forth this week and have a mixed outlook going forward, with Crude Oil falling well below its weekly trend-line, while refined products have managed to stay above theirs.
The technical breakdown in crude, while refined products have managed to hold above their trend lines has sent crack spreads to fresh record highs in some areas, with even the low end estimates putting margins for plants north of $1/gallon. If you think that kind of margin isn’t enough incentive for a refiner to pull out all the stops to run full out, you’ve probably never met anyone in the refining business.
Speaking of which, we didn’t get a DOE status report this week due to a systems issue, but we did get the agency’s annual refinery capacity report. That report highlighted the decline in operable capacity over the past two years that marks the most severe decline since the early 80s and has led to all sorts of straw grasping to try and solve the problem of high fuel prices in an election year.
The EIA this morning published a note on Global Crude Oil production capacity, showing both the relatively large excess in place today, and predicting a drop in that amount as producers race to bring output back online, something that’s proven difficult this year. That excess crude production capacity goes a long way to explaining why we saw oil prices top out well below their 2008 highs (so far) while the lack of refinery capacity goes a long way to explain why refined products have smashed their previous records.
The National Hurricane Center increased the odds of development for a system churning across the Atlantic to 60% yesterday, but that system still may not pose a threat to the US unless it’s able to shift north before approaching South America. The 2022 season is still expected to be a busy one for hurricanes, even though it’s off to a slow start vs the last two years.
RIN Prices continue to slide this week, and have now given back all of the gains made earlier in June when the EPA revised their blending requirements for refiners. Plummeting grain and palm oil prices are getting credit for the slide in RIN and ethanol prices.
Refined Fuel Prices Seem To Be In A State Of Quiet Confusion This Morning
Refined fuel prices seem to be in a state of quiet confusion this morning after Tuesday saw 15 cent morning gains wiped out in the afternoon, and Wednesday saw 15 cent morning losses turn into gains. Adding the uncertainty, the DOE announced it would not be releasing its weekly status report due to system issues this week, and the White House is trying to change the rules of the game to lower prices.
Equity markets are also finding a bit of calm after a bout of volatility, but it seems unlikely that these quiet hours of trading will last for long given the daily moves in the Western World’s chess match with Russia. Germany warned that Russia’s move to cut off natural gas to European nations could spark a “Lehman effect” on the energy system, which obviously isn’t helping to calm any nerves.
The API reported a large build of 5.6 million barrels of US crude oil last week, while gasoline stocks increased by 1.2 million and diesel declined by 1.6 million. That will have to suffice for weekly inventory given the DOE’s system issues, but you might still keep an eye on prices during the originally scheduled release time of 10am central today so see if anyone forgot to train their trading robot to not try and trade around the release of the report.
Major US refiners are meeting with the White House today to discuss the supply crunch, with little expectation of progress on either side, simply because there’s not a whole lot that can be done short term to deal with a long term problem.
The National Hurricane center is tracking a potential system moving over the Atlantic this week, but gives that storm low odds of development. As is often the case early in the Atlantic Hurricane season, dust from the Sahara has been limiting development of storm systems, but forecasters note those dust plumes are dissipating which will open the door for more development in the coming weeks.
Energy And Equity Markets Are Pointing Sharply Lower This Morning
So much for that rally. Energy and equity markets are pointing sharply lower this morning, after Tuesday’s big rally ran out of steam in the afternoon. For refined products, 15 cent morning gains were largely wiped out heading into Tuesday’s close, an ominous technical signal that encouraged more follow through selling overnight. For stocks, those that suggested Tuesday’s rally was a dead cat bounce are looking like they know what they’re talking about (for now) as the world continues to try and figure out what happens when we stop giving money away for free.
The US President is expected to call on congress to suspend federal gasoline & diesel taxes for 3 months today, and ask states to provide similar relief on their own taxes. If congress agrees on this plan (which seems almost comical) and the states follow suit, the average retail fuel price could drop by around 50 cents/gallon, which is a meaningful amount for consumers. That (theoretical) price drop could help spur demand, which given the tight supply situation may actually lead to higher prices later in the year than if they allowed high prices to heal themselves as they tend to do.
The IEA’s head warned that Russia could cut off natural gas supplies to Europe completely this winter, when that supply is most needed, in an effort to continue using the energy weapon to win the war in Ukraine. Those remarks coincided with the agency’s World Energy Investment report, which highlighted a record amount of spending on renewable fuels in 2022, while stating that the amount is still not nearly enough to reach the climate pledge goals around the world. The report also noted the near record refinery capacity retirement over the past 2 years and the impact it’s having on global supply/demand balances.
A drone attack on a Russian refinery overnight was another reminder that it’s a lot easier to destroy a refinery than it is to build one, which is a big reason why there are no short term supply solutions to the current situation.
The Dallas FED released a study on high fuel prices Monday and highlighted the expected drop in demand they will bring later this year.
Pent-up demand for travel (particularly foreign travel) amid easing COVID-19 restrictions could be a reason U.S. fuel consumption remains sticky. This may provide only a temporary uplift through August, when the summer travel season winds down. At the same time, a proliferation of work-from-home options gives many workers the ability to reduce their commuting fuel use—which is roughly 30 percent of gasoline consumption—relative to pre-COVID-19 levels. All told, fuel prices may be closer to consumers’ pain threshold than inflation-adjusted prices might suggest. And if prices climb higher, expect consumers to respond by cutting back on fuel consumption and overall spending sooner than later.
Energy And Equity Markets In The US Are Taking Back Most Of Friday’s Heavy Losses
Energy and Equity markets in the US are taking back most of Friday’s heavy losses as buyers search for a floor after a week of heavy selling. The rally puts the risk of a technical breakdown in energy futures on hold for the time being, although many are warning that this rally in equities is nothing more than a dead cat bounce.
Gasoline prices were up 15 cents this morning, rendering the President’s potential plan to push a Federal Gasoline Tax holiday (which would save 18.4 cents a gallon) pretty much meaningless.
Other political possibilities to deal with the impossible supply puzzle include a ban on some refined product exports, and waiving some summertime anti-smog rules to allow more fuel to be produced. The export ban seems particularly challenging given the previous promises to support European countries in their attempt to wean themselves from Russian energy supplies.
Speaking of which, a note this morning is a good reminder that we haven’t seen the worst of the Russian oil supply decrease as the bans by European countries are just about to start, and the latest Russian warnings to Lithuania suggest the fallout from this war still may get worse before it gets better.
While much has been made of the lack of refining capacity in the US, South America and Europe lately, a Bloomberg article today highlights the large amount of idle capacity in China as the country tightly controls the industry, and even perhaps may use the energy sword like Russia has to strengthen its position in any number of standoffs with the US.
The Dallas FED’s Texas Employment Forecast highlighted another strong month of job growth in the state in May, but also flashes signals of a slowdown ahead with its leading indicators dropping for a 2nd straight month. (Charts Below)
Reminder that since there were no settlements for RBOB and ULSD futures Monday (and spot markets weren’t assessed) today’s price movements are from Friday’s settlement levels.
Energy Futures Are Trying To Find A Bottom, While U.S. Stock Market Is Closed For The Day Along With Spot Markets For Refined Fuels
Energy futures are trying to find a bottom this morning in an abbreviated holiday session while US stock markets are closed for the day along with spot markets for refined fuels. Last week’s big selloff pushed gasoline prices down nearly 70 cents from their June 10th highs, but so far the weekly trend lines are still holding up, making it too early to call an end to the huge 7 month rally. WTI is also in a precarious position on the weekly charts, threatening a drop below $100 if support fails to hold around $109, while ULSD looks the strongest both technically and fundamentally, keeping the door open to another rally despite the concerns of a widespread economic slowdown.
Reports that Ukraine has struck Russian natural gas drilling platforms in the Black Sea this morning are adding to the numerous concerns over natural gas supplies across Europe, and seems to help diesel continue to find a bid as a key replacement option, particularly in the winter months ahead.
Money managers continue to show signs of hesitation in making wagers on energy prices with net length and open interest remaining low across the board for petroleum contracts. ULSD did see a healthy uptick in its open interest last week as the producer/merchant category added to its short position which could be some refiners looking to hedge their output at lofty levels.
Baker Hughes reported an increase of 4 oil rigs and 3 natural gas rigs drilling in the US last week. In an unusual twist, the report showed all 7 of those rigs were put to work in New Mexico but none were reported in the Permian basin, which accounts for more than half of the total US activity.
The Energy Complex Is Drifting Lower This Morning
The energy complex is drifting lower this morning, with the prompt month gasoline futures contract leading the way, trading 7.5 cents under yesterday’s settlement. Diesel futures are down around 3.5 cents and the American crude oil benchmark is trading 60 cents per barrel lower so far this morning.
Oil prices were firmly in the red for most of yesterday’s formal trading session until news broke detailing a new wave of US sanctions targeting Iranian petrochemical companies and their brokers. The latest round of crackdowns on the theocracy will likely further curtail their oil exports, and put more pressure on an already strained global supply shortage.
French, German, and Italian leaders visited the capital city of Ukraine yesterday as the war-torn nation is in talks to join the European Union. Putin responded by cutting natural gas exports to European countries, causing regional prices to surge. It will be interesting to see, when/if this war ends, if Gazprom will restore natural gas supplies to their former trade partners, or keep a tight lid on exports and continue to enjoy disproportionately higher profits.
Equity markets were sent reeling yesterday as traders wrestle with the largest interest rate increase in nearly 30 years and recession fears take center stage. It seems that another hike is on the way in July, in an effort to tame the rampant inflation we’ve enjoyed for the past few months. Analyst forecast the interest rate to be about 3.4% by the end of the year and 3.8% by the end of 2023. The S&P 500 is poised to close with the largest weekly loss since 2020.