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Tuesday, May 17 2022

It’s Been A Choppy Trading Session For Energy Futures With Overnight Gains Turning Into Morning Losses

It’s been a choppy trading session for energy futures with overnight gains turning into morning losses, and signs of a potential market top flashing even as new records are being set.   RBOB gasoline futures and several US spot markets set fresh records on Monday, meaning new record highs for retail prices are coming. While that’s bad news for consumers, and will no doubt continue to dominate headlines near term, there’s a divergence with diesel prices that could be bringing relief. 

Monday was a relatively quiet session for NYH ULSD futures, which traded down less than 1.5 cents, but a big day for NYH diesel spot markets that dropped more than 56 cents on the day.  A big drop in NYH was inevitable as those values were trading $1/gallon or more than any other US region, and typically once a bubble like that bursts it’s a one way trip lower so don’t be surprised to see more downside now that sellers have emerged.  

Just as the backwardation in ULSD, and the spread to NYH, have started their return trip to reality, gasoline spreads have decided to smash records. The Prompt month futures spread for RBOB reached its highest level since the wake of Hurricane Harvey yesterday, and is actually more impressive given that this backwardation doesn’t include the winter RVP discount like that one did. Even more impressive, June RBOB futures are trading $1.15 above January, which is roughly 60 cents higher than the record prior to this year.

The premium for barrels in NYH has sent values for shipping product along Colonial to their highest levels of the year, although as we saw with diesel prices the past couple of months, the backwardation in the market makes this a challenge. The difference between gasoline and diesel however is that the export bid for gasoline is not nearly as strong, so sending barrels north on Colonial seems to make the most sense for those with space. 

With supply options in the slim to none category globally the major question is how soon will the record high prices start hitting fuel demand? Rising fuel prices are already being cited as a headwind in Wall Street earnings reports, and we’ll have to wait and see if main street reacts with staycations this summer, or if they’ll pay up to get out after 2 years of travel disruptions.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
Monday, May 16 2022

Gasoline Futures Hit The $4 Mark For The First Time Ever This Morning

Gasoline futures hit the $4 mark for the first time ever this morning even though oil and diesel prices are selling off to start the week. 

We’re approaching one of the busiest demand weeks of the year with tight supplies in many US markets, and much tighter supplies elsewhere around the world, which helps explain the 50 cent jump in gasoline futures over the past 4 trading sessions. Then again, we’re also in the seasonal peaking window for gasoline prices, so don’t be surprised to see a big pullback before the end of May.

On the bearish side of the ledger this morning, reports of a sharp slowdown in economic activity in China (which also happens to be the world’s largest importer of energy) and a warning that the US might be next.  

Those reports may help explain why diesel prices continue to pull back and trade at a discount to gasoline despite warnings of a potential need for rationing across the East Coast this summer as US refineries are already running near capacity following a rash of closures the past two years leaving no good options to solve the shortages.

Money managers followed a pattern last week, reducing old long positions and adding new shorts with WTI, RBOB, Brent and Gasoil contracts just in time to get run over by the surge in prices to end the week.   ULSD contracts saw the opposite with a small amount of new length added and a large amount of short covering that missed out on the subsequent pullback in diesel prices.  In other words, it seems like hedge funds continue to struggle to get a grip on the petroleum market, which may explain why Brent open interest dropped to a new 5 year low last week and ULSD OI remains near its lowest in over a decade. 

Baker Hughes reported 6 more oil rigs and 3 more natural gas rigs were put to work in the US last week, with Oklahoma taking the state lead adding 4 rigs while a handful of other states added 1 each.  The Permian Basin, home to nearly 60% of all active rigs in the country, held steady at 334 rigs for a 3rd week.  Last week the Dallas FED released a report explaining why oil producers won’t be the solution to high gasoline prices this year.  

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
Friday, May 13 2022

Gasoline Futures Have Surged To A New All-Time High On Friday The 13th

Gasoline futures have surged to a new all-time high on Friday the 13th, trading north of $3.90 for the first time and making a run at $4 seem inevitable.

Most cash markets in the US are following the lead of futures and are hitting record highs this morning as well, with Midwestern gasoline a notable exception as Group 3 spots dropped to a 40 cent discount below the June RBOB contract. West Coast basis values meanwhile are seeing strong gains this week following reports of more refinery issues keeping supplies tight in the region.

While it may not (yet) be as dramatic as what we’ve witnessed the past month in ULSD futures, the backwardation in RBOB contracts is reaching extreme levels, with the January 2023 contract trading more than $1 below June values. Just as we saw with distillates, this spread creates a challenging environment of huge basis swings and a reluctance by shippers to hold inventory today and sell it for much less down the road.

Don’t worry about most of the shippers however, as the crack spread charts below show margins that have spiked north of $50/barrel for many, which is roughly $1.20/gallon. Think about what your business will do to save a penny per gallon, and imagine what’s happening at those facilities when they can make $1 just two years after most were hemorrhaging cash. Those higher crack spreads seem to be keeping a bid under RIN values as well, with D6 values reaching their highest levels since last August yesterday.

The IEA followed the lead of OPEC and the EIA in estimating a slowdown in global economic growth in the back half of the year in its monthly oil market report, thanks (or no thanks) in large part to demand destruction caused by “soaring pump prices”. The good news, if you’re looking for an end to high fuel prices, is that the agency expects oil output outside of Russia to grow by 3 million barrels/day from May to December, which should largely offset the drop in Russian output. The report does remind us however that the worst of the supply crunch is still ahead of us as most Russian exports have continued thanks to deals struck before their invasion, but those transactions are quickly coming to an end.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
Thursday, May 12 2022

It’s A Mixed Bag For Energy Markets To Start Thursday’s Session

It’s a mixed bag for energy markets to start Thursday’s session, with Gasoline prices rising after an overnight drop, WTI coming under pressure after a Wednesday rally, while Diesel drama is dominating the price action once again.  

June ULSD futures have already seen a 22 cent swing this morning as any headline from Europe has the potential to move prices a dime or more in just a few minutes.

Some of the 30 cent pullback from yesterday’s highs are credited to Germany’s utility Uniper announcing it had found a loophole to continue purchasing Russian natural gas without violating sanctions, which may provide substantial relief for the next supply crunch. Then again, Russia is cutting off some natural gas to other parts of Germany to retaliate against sanctions, which may explain why prices have bounced 10 cents from their overnight lows. 

The DOE’s weekly report showed East Coast (PADD 1) diesel inventories reached their lowest level since they started keeping records in 1990 last month, and have dropped another 13% in the past 2 weeks.  The East Coast is suffering from 2 undeniable fundamental realities these days, first, it has been a net importer of refined products for decades, and has only increased its reliance on other producing regions in recent years. Second, it’s also the closest district to Europe, and if you put diesel on a vessel from a US Port, the Jones Act and proximity makes it easier in some instances to cross the pond than send those barrels to an East Coast port. The shortage is most notable in PADD 1B which included the central Atlantic states, and the NY Harbor delivery hub. That reality helps explain both the record-smashing price spreads we’ve seen over the past month, and the terminal outages we’re witnessing today.  

Just as we saw with the insane price spike for Jet Fuel in NY last month, eventually the price spreads will draw in reinforcements and bring prices back to reality, but in the meantime, if you hold of diesel anywhere near New York today, it’s worth $1.25/gallon or more than just about anywhere else in the US.

Gasoline stocks are nowhere near as tight as distillates on a historical level, but they too are facing logistical challenges as the world struggles to deal with the supply chain going from bad to worse over the past 3 months just in time to reach our peak demand season.

OPEC’s monthly report revised its outlook for global economic growth and oil demand lower for the balance of the year citing the “geopolitical events” in Eastern Europe (AKA a war) and COVID restrictions for the slowdown.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
Wednesday, May 11 2022

Diesel Prices Are Once Again Trying To Lead The Energy Complex In A Rally After 2 Days Of Heavy Selling

Diesel prices are once again trying to lead the energy complex in a rally after 2 days of heavy selling for gasoline and oil prices as both fuel supplies and inflation continue to move somewhere between bad and worse. The big news that appears to have sparked a 25 cent bounce in distillates the past couple of days was that Ukraine was cutting off nearly 1/3 of Russian natural gas shipments, at least in part because Russia is lobbing bombs at the facilities pumping that fuel. 

While equity and Energy prices were seeing strong gains in the overnight session, they’ve pulled back sharply this morning following the April CPI reading that showed inflation is holding near a 40 year high, and will give the FED plenty of reasons to hike rates and stop printing money. If you’re looking for good news, you might say that April’s inflation reading of 8.3% for the year wasn’t as bad as the 8.5% estimate in March. Then again, if you read through the release and realized that it was a drop in retail gasoline prices that accounted for a big part of that decline, you can already guess how May’s numbers will look now that gasoline prices have surged to new all-time highs.

The EIA’s monthly report reduced estimates for global crude oil and fuel production, noting the extreme levels of uncertainty caused the war and fuel embargoes. The report did however suggest that global inventories will be able to build in the back half of the year as new supply sources return from their COVID-induced shutdowns.

A Reuters article this morning highlights the steep discounts that Russian diesel cargoes are trading for as most European nations that are desperate for distillates still refuse to take those supplies. Meanwhile, the premium for prompt barrels in NY Harbor is several times larger than the premium paid for non-Russian diesel in Europe, which suggests enough of the Russian barrels are still making it through the EU loophole while the US is struggling through the tightest supply ever on the East Coast.

Based on the pullback in prices in all US markets outside of the East Coast, it seems like just a matter before we see a collapse in values of $1/more in the NY Harbor, but so far this week we are seeing the opposite as premiums surge to $1.40 over futures even while most other US markets have shifted to discounts. 

The API reported small inventory builds across the board in its weekly report yesterday, which offers little relief to markets around the country that have seen terminal outages become commonplace. The DOE’s weekly report is due out at its normal time this morning. 

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk
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