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ULSD Futures Contract Continued To Smash Records And Reset Charts Thursday
The runaway train known as the May ULSD futures contract continued to smash records and reset charts Thursday, reaching a new all-time high of $5.22, which is more than $1/gallon above the high set in 2008, and 55 cents above the high set earlier in March.
It’s the last trading day for May RBOB and ULSD futures, so for those in the NY Harbor and Group 3 based markets that haven’t already switched over to referencing June futures, you’ll want to be sure to watch the HOM and RBM contracts for direction today.
Usually an expiring contract in a volatile month can bring some fireworks on the last few trading sessions, and we certainly saw that in Thursday’s action with the May contract smashing all-time records and trading $1/gallon above June. Overnight we saw the opposite however as it took more than 12 hours for the first trade in the May HO contract to happen.
With open interest at decade lows as extreme volatility and backwardation (which led the CME group to increase margins this week) appear to be keeping many traders on the sideline, volume should be extremely low today so we could see hardly any trading, but there may be huge price swings if anyone needs to get something done.
The US dollar has surged to a 20 year high this week, as rising interest rates and a flight to safety have international dollars pouring into the us. (So much for those plans to replace the dollar with Yuan…) While obviously that’s not slowing down diesel prices any, the dollar strength could end up slowing the energy rally if it breaks the back of international buyers now facing a double whammy of record high fuel prices and their own currencies devaluing vs the dollar.
Bottom line, prices are simply becoming unaffordable, if supply is available in the first place, which is going to hit demand in a big way. Anecdotal evidence of this: employees of a major oil company were complaining yesterday about how much it cost them to fill up. That actually happened.
RIN prices (and your grocery bill) continue to surge as the various edible oils used to make “advanced” biofuels are being hoarded by countries scared about feeding their people.
No surprise that quarterly earnings reports this week are showing huge profits for oil producers and most refiners less than 2 years after the industry was left for dead. Considering that prices didn’t really rally until the 3rd month of the quarter, things are looking even better for Q2, although the inflationary impact of the war is giving plenty of reason for concern further out into the future.
Diesel Prices Have Hit A Record High This Morning
Diesel prices have hit a record high this morning as global markets are experiencing a Lord of the Flies moment as they come to terms with the shortage of oil products, both edible and fossil.
RINs are rallying to their highest levels in almost a year as Indonesia’s palm oil export ban was expanded to include unrefined oils, which is setting off another frantic scramble for replacements to process all sorts of foods, fuels and other products.
While ULSD futures have reached all-time highs, only the NY Harbor spot market is trading above where it peaked out in March, while other cash markets around the US are still well below their peaks. The extreme backwardation that has been well documented over the past month is a primary driver of this spread between markets, and also makes resupply a challenge when there’s a 70 cent price drop looming in the next 30 days.
Prompt diesel prices in the Chicago market are trading more than $1/gallon below those in the NY Harbor, so if you live in PA you might notice a few more tankers heading east this week as those with both the supply and the freight capacity could net $5,000 or more per load. While it’s not unusual to see Chicago trade at steep discounts to neighboring markets at times, it is unusual to see San Francisco spot diesel trading nearly $1 below NYH values, especially given the reduction in operable refining capacity in the bay area in recent years.
The big question for the months ahead is whether the other US markets will rally to meet New York, or if New York will collapse to get in line with its neighbors. It seems likely that 80 cent backwardation won’t last long (just as 15 cent backwardation which shocked the world in 2008 didn’t) and the divergence between regional markets can often be the precursor to a trend reversal. That said, total US diesel inventories remain well below their normal range, and international buyers are frantic, so it’s much too soon to say this rally is coming to an end.
Week 17 - US DOE Inventory Recap
The Energy Complex Seems To Be Taking A Breather This Morning
The energy complex seems to be taking a breather this morning after Russia cutting natural gas supply to its neighbors overwhelmed the potential demand destruction from new COVID lockdowns and pushed prices higher yesterday. As of now, gasoline futures are trading on the green side of flat while diesel and American crude oil contracts are posting ~1% losses to start the day.
The spread between the expiring May and June ULSD futures contracts continued to set records yesterday with the former trading as high as 71 cents above the latter. A combination of a dismal short-term supply outlook and end-of-the-month trading volatility is taking credit for yesterday’s sharp increase. Physical markets scrambled to offset the change in futures prices with 5-20 cent gains or losses, depending on which futures month each market is referencing.
The API’s national inventory estimate published yesterday afternoon didn’t seem to move the needle in overnight trading. The Institute estimated a moderate build of 4.7 million barrels of crude oil last week while gasoline stockpiles drew down by almost 4 million barrels. The total diesel inventory for the country grew by just under 500,000 barrels, however the more interesting number traders will be looking is the inventory levels in the New York market. If the Department of Energy publishes new all-time lows this morning, we will likely see another surge in prompt month diesel futures.
Crude and heating aren’t the only oil markets the war in Ukraine is distressing: many different cooking oil supplies are tight around the world, causing some countries to ban exports. While this might not affect refined product prices outright, it is pushing some blendstock and renewable credit prices higher. Corn futures, the underlying product influencing ethanol and D6 RIN prices, is trading at highs only seen once in the history of the contract. Soybean oil, the main price driver for biodiesel and D4 RINs, is setting new all-time highs this morning. It will be interesting to see, now that food scarcity is contributing to higher energy prices, if more start asking the question “should we be growing crops for fuel?”
Energy Prices Continue Their Recovery Rally After A Big Selloff Monday Morning Was Largely Erased In The Afternoon
Energy prices continue their recovery rally after a big selloff Monday morning was largely erased in the afternoon. Diesel prices once again continue to steal the show as the market seems to be dealing with the realization that a demand slowdown is tomorrow’s problem, and today there’s still not enough supply to go around.
The May diesel contract is smashing records for the steepest backwardation on record as it trades 51 cents above the June contract with less than 4 days until expiration. Those huge swings in time spreads continue to wreak havoc on US cash markets, with markets trading vs June seeing big premiums while some of those still trading vs May are starting to see hefty discount. The exception to that is the NYH which has cash prices still trading nearly 20 cents above May futures as the region slogs through the lowest inventory levels in history.
The Chicago market meanwhile is facing the opposite situation, trading nearly 60 cents below NYH prices as inventories swell thanks to big refining margins and weak spring demand. Theoretically at least long haul trucks could move from the eastern fringe of Chicago-based markets to take advantage of that arbitrage window, but as we’ve seen over the past 18 months, the shortage of drivers makes that move less likely.
While there was a modest pullback in biodiesel prices and their associated RINs after Indonesia said it was “only” banning processed palm oil exports, not all of them, a Bloomberg article highlights why the shortage of oils is going to lead to another spike in grocery prices. The EPA meanwhile has been compelled by the courts to finalize its 2020-2022 RFS obligations, just 6-30 months behind the schedule set out in the law.
A Heavy Wave Of Selling Hit Energy Markets To Start The Week
A heavy wave of selling hit energy markets to start the week, as more demand fears seem to be driving a risk-off stance in markets around the world.
Beijing started mass COVID testing, which sparked fears that another one of the world’s largest cities would be locked down. Already the lockdowns in Shanghai have pushed Chinese oil consumption down an estimated 20% in April.
Slowing consumption is not just an international story anymore. A slowdown in US trucking demand is a concerning leading indicator for some, and a welcome change for others after more than a year of severe shortages in trucking capacity.
While demand fears are grabbing the headlines, supply shortages have not gone away yet, and we’re seeing more evidence of that today in diesel markets, both traditional and renewable. While most of the NYMEX futures contracts are seeing double digit losses this morning, May ULSD is down less than 3 cents, and trading nearly 36 cents above its June counterpart. Think about that for a second, diesel prices are worth more than 1 cent less every day in the near future given this extreme backwardation.
Biodiesel prices are surging to new record highs, and their RINs have rallied to their highest levels in more than 8 months last week, while ethanol & its RINs follow close behind. Indonesia announced a ban on palm oil exports to protect its domestic food supply, which sent shockwaves through the food and fuel oil industries which were already reeling from the war and weather-related supply restrictions. There was some relief this morning as the government clarified that the export ban only applied to processed oils, leaving crude palm oil available for export, for now.
Money managers continue to take a cautious approach to energy contracts, with short covering by speculators pushing net length in Brent higher, while new shorts in WTI decreased the net bet on higher prices. Refined products also saw minimal changes on the week, and continue to see extremely low levels of open interest as risk managers apparently still telling traders “don’t touch that” after the record shattering volatility in March.
Baker Hughes reported a net increase of 1 oil rig and 1 natural gas rig drilling in the US last week. North Dakota took credit for the increase this week, giving Texas a week off as it prepares for a new boom cycle after record setting permitting in the region last month.
There were a pair of noteworthy refinery fires over the weekend. One outside of New Orleans sent 8 workers to the hospital but is not expected to have a major impact on fuel supplies as the facility was in the midst of shutting down for planned maintenance. The other at an “illegal” refinery in Nigeria is reported to have killed more than 100 people in a shocking reminder of how desperate some countries are for fuel.