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Energy Prices Were Seeing Another Healthy Selloff Overnight
9:30 am update
Gasoline prices have jumped since the weekly DOE report, and our emails seem to be back up finally, both of which are exciting.
Import/export flows are factoring heavily into the weekly stats with Gasoline exports accounting for half of the inventory draw down, while a decline in distillate and crude oil exports on the week explains why those products gained. Refinery runs increased in every PADD, with PADD 1 rates jumping 10% on the week, no doubt due to PBF restarting the crude unit at their NJ facility that had been shuttered due to weak economics last year.
From the 8am market update:
Energy prices were seeing another healthy selloff overnight, after a big Tuesday rally, but have since cut those losses following the latest reading on inflation in the US.
Gasoline and crude prices both turned positive, Diesel nearly wiped out 10 cent losses and stock markets rallied sharply this morning after the July CPI reading came in unchanged for the month, a sign that US inflation has peaked, and that the FED can take it easy on free money crowd. The drop in gasoline and other fuel prices was the main driver of cooling inflation in July, while prices for food and shelter both continued to increase.
Another large part of the yo-yo action in prices the past couple of days is being blamed on flows of Russian oil to several land-locked European nations. Tuesday, Russia’s pipeline company Transneft announced that flows on that pipeline were being cut since sanctions prevented payment for that fuel, and that coincided with the strong price rally. This morning, Hungary announced it was paying fees to allow shipments to resume temporarily, and prices are moving lower once again.
Another factor stirring up the action in Diesel prices this week: Low water levels on the Rhine river are disrupting one of Europe’s most crucial arteries for transporting energy supplies, right when the continent can least afford another supply snag.
Speaking of which, NY Harbor gasoline prices continue to trade 40 cents or more above their Gulf Coast counterparts, with a steeply backwardated curve hanging on for another week. This unusual phenomenon was highlighted in the DOE/EIA’s Short Term Energy Outlook this week, noting how refinery shutdowns along the East Coast of Canada and the US and reduced imports from Europe due to their energy crisis are both contributing to this phenomenon.
The monthly STEO also highlighted the tight global market for distillates, with the major supply centers in the US, Europe and Asia all holding 30-40% less inventory than their 5 year averages. The report does predict that rising output in the US should help inventories to heal modestly in the coming month, but highlights the threat that the looming hurricane season pose to those estimates.
Speaking of which, the area of storms moving across the Atlantic currently known as Invest 97L was downgraded overnight and now has only a 30% chance of getting a real name this week. If that system is named, long range projections peg it moving towards the East Coast, rather than into the Gulf of Mexico, which is good news for oil producers and refiners, but bad news for the beleaguered region that’s been struggling to get fuel supplies caught up ever since the start of the war in Ukraine.
The API reported builds in crude oil and distillate inventories last week of 2.1 and 1.4 million barrels respectively, while gasoline stocks drew by 600,000 barrels. The DOE/EIA’s version of the weekly status report is due out at its normal time this morning.
Week 32- US DOE Inventory Recap
Have Fuel Prices Found A Floor?
Have fuel prices found a floor?
After dropping 60 cents in a week and a half, diesel prices have bounced 17 cents in the past 24 hours, and gasoline prices are up nearly 20 cents since bottoming out last Thursday. While crude oil prices have also bounced, WTI is up $5/barrel from Thursday’s lows, they’re not keeping pace with the recovery in refined products, suggesting this move may be driven by spread buyers as we head into the fall maintenance & storm seasons with a refinery network that’s more vulnerable than it’s been in decades.
There isn’t much in the way of a headline to pin the sudden reversal in diesel prices on, and in fact European natural gas prices are pulling back as inventories have recovered in recent days, which would tend to act as a drag on diesel prices. This suggests the move may be more technical in nature, as trading programs and some humans see the latest wave of selling as a good buying opportunity after the head and shoulders and descending triangle patterns that foreshadowed lower prices have now been completed. The first big test for the bulls to decide if they’re serious about this rally is to get diesel prices back north of $3.50, and gasoline prices back above $3.
The latest round of negotiations with Iran over its nuclear ambitions ended without any sign of progress, reducing the odds that Iranian oil exports will legally re-enter the world market.
The national hurricane center still gives a 40% chance the storm moving over the Atlantic will get a name this week, and the long range forecasts suggest there will be more storms coming soon as the hurricane season reaches its peak a month from now.
HF Sinclair proved that the previous year was a great time to be buying refineries, joining its US peers reporting huge profits for the 2nd quarter. While the company’s newly acquired facilities netted nearly $30/barrel after operating costs, the renewable diesel operations showed heavy losses for the quarter, suggesting that turning soybeans into motorfuel may not be the field of dreams many have been hoping for, even with nearly $5/gallon in various government tax credits and subsidies and diesel prices at elevated levels.
Speaking of which, the spending bill passed in the Senate this weekend includes the extension of several existing biofuel credits, and the addition of several new credits to encourage more production. One detail that’s already expected to have unforeseen consequences is that Sustainable Aviation Fuels (SAF) will get $.25-$.75/gallon more credits than Renewable Diesel, which will likely mean a shift by some producers away from on-road fuels given the limited feedstocks available to make fuel out of food.
Gasoline Prices Are Trying To Find A Floor, Rising For A 2nd Straight Day After Hitting A 6 Month Low Last Week
Gasoline prices are trying to find a floor, rising for a 2nd straight day after hitting a 6 month low last week, while distillates continue to fall, hitting their lowest levels since March this morning.
ULSD futures took out the April low just under $3.19 overnight and promptly dropped another nickel, before bouncing back to that level later in the morning. That layer of support looks to be about the only thing on the charts standing in the way of a drop to $3 for ULSD, and it’s worth noting that most futures and cash contracts for 2023 are already trading below that level. If you’ve been waiting to lock in diesel prices to meet or beat your budget for the next 12-18 months, this is looking like a good time. Be assured that prices could absolutely go lower from here (in 2008 they dropped from $4.15 to $1.19) but at some point, the market is going to remember that the world is still short on distillate supplies, and the long term trend in place for the past 2 years is still pointing higher.
Some money managers are probably looking for a do-over after making large increases in long positions in RBOB and ULSD contracts last week, just in time for the big price drop. Funds did reduce their long positions in WTI, Brent and Gasoil contracts however, so they weren’t all wrong. The combination of extreme volatility and concerns over the looming economic slowdown seem to be keeping the big money bettors on the sidelines. The net length held by large speculators in WTI is at its lowest since April of 2020 (also known as the time when WTI went negative) while open interest in RBOB dropped to its lowest level since 2015, and open interest in Brent dropped to its lowest since 2016 last week.
Baker Hughes reported a net decrease of 7 oil rigs active in the US last week, while natural gas rigs increased by 4. New Mexico led the drop in oil drilling activity, with 6 fewer rigs active. It’s hard to say if last week’s count will become a pattern as natural gas has become the commodity of choice globally, or just a small dip on the chart as rig counts approach pre-pandemic levels.
After a 2 month lull, the tropics are starting to heat up as we approach the interesting part of Hurricane season. The NHC is giving 40% odds of development for a system moving across the open Atlantic. It’s too soon to say where this storm (which will be named Danielle if it develops) is headed, but a path into the Gulf of Mexico is possible at this point so we’ll need to keep an eye on it for a while.
Crude Oil And Gasoline Prices Are Lower This Morning Than They Were On The First Day Of The Russian Invasion Of Ukraine
Crude oil and gasoline prices are lower this morning than they were on the first day of the Russian invasion of Ukraine, as a breakdown in technical support and sentiment for consumption both seem to be pushing prices lower. RBOB and WTI were attempting to make small gains this morning after trading in negative territory overnight, but if the attempt to bounce doesn’t accelerate soon, the charts suggest we’re in for another wave of selling.
Gulf Coast and Midwestern gasoline spot prices dipped below $2.50 on implied values overnight, which could mean retail prices below the $3 mark in some markets if values hold around this level for another week or more. Unless the market reverses course, more markets may join the sub $3 retail club in another 6 weeks as the transition to winter-spec gasoline ensues, and producers can once again start blending more butane, which is $1.25/gallon or more cheaper than gasoline.
Diesel prices resisted gasoline’s pull lower for the start of the week, but are catching up now that the bottom end of the descending triangle gave way, and quickly dropped another 12 cents after taking out that chart support before finding a temporary floor just above $3.20 overnight. Fundamentally, it’s difficult to make a case for diesel prices continuing to fall, especially with demand destined to ramp up in the fall. Read here for another argument on why now may be a good time to buy ULSD.
One headline that may explain why diesel prices are down more than a dime this morning even as gasoline prices were able to move into positive territory: Germany said it could keep its nuclear power plants operating this winter, which will help ease the shortage of natural gas and distillates needed to power the region.
The July payrolls report knocked stock prices, along with gasoline and WTI, back into negative territory as another strong reading on the US job market seems to have spooked the machines that base their bets on easy money from the FED, which is sure to be encouraged by the fact that their first 4 interest rate increases haven’t hurt the labor market. Adding more than 550,000 jobs to the government estimate since the last report will also help the argument of those that say the US is not in a recession, despite 2 straight quarters of negative GDP growth.
The tropics remain eerily quiet as we approach the busy part of the Atlantic hurricane season. Officially, the NHC says no new tropical cyclones are expected in the next 5 days, but longer range models are already tracking 2 potential systems moving over Africa, that could develop as they move out to sea next week. Colorado State’s latest forecast for the season was reduced by 2 named storms, but still suggests we’re in for a busy year with 16 more storms yet to come. The weather channel forecasters seem to agree noting yesterday that 90% of the storm activity is yet to come.