News & Views
News & Views
News & Views
Energy Prices Are Surging And Equity Markets Are Sliding Once Again
Energy prices are surging and equity markets are sliding once again as Ukraine has become a modern day version of the Alamo , and has generated an unprecedented international response. While 3-4% moves are a big deal, the market reaction is still relatively calm given the circumstances, and uncertainty.
Russian energy exports continue to be given a loophole, the new sanctions and bank restrictions announced over the weekend will make the transactions needed to move those supplies more challenging, and also likely to draw retaliation in various forms.
The potential scenarios of how this will play out are extremely complex, and will continue driving price volatility as both rumor and reality make their way through the market. So far, about all we can say with certainty is that despite the latest price spike, petroleum futures did not reach the highs set last Thursday after the start of the invasion. That leaves at least one piece of technical resistance on the charts that may prove pivotal this week to determine if $100 oil and $3 refined products are here to stay.
This morning there have been a few reports that a coordinated release of strategic petroleum reserves was in the works, which briefly had futures pulling back, until the headline reading algorithms realized that the last coordinated SPR release still hasn’t happened as announced back in November.
Reminder that today is the last trading day for March ULSD and RBOB contracts, so any cash markets that haven’t already transitioned to the April contract will do so today. Also a reminder that since April RBOB futures are summer-grade spec, prompt futures values will increase by around 15 cents tomorrow, but basis values adjust lower to offset that spread on the board until the terminals make their transition.
Money managers were reducing their net length in ULSD, Gasoil and WTI contracts ahead of the Russian invasion, and are likely to want a do over and reversed that pattern in the days since the latest CFTC data was collected. Brent crude contracts did see both healthy short covering and new long positions added, increasing the large speculator net length by 6% in the latest report, which makes sense as the market digested the threat to European supplies and pushed the Brent/WTI spread to its widest in 2 years.
Baker Hughes reported a net increase of 2 oil rigs active in the US last week, with the Permian basin again accounting for the entire increase, offsetting a net decline of 1 rig in other basins. Natural gas rigs increased by 3 last week, and are surely to get more attention now as the world scrambles to find alternatives to Russian output.
Markets Around The World Are Transitioning From Full Panic To Major Discomfort As The Russian War On Ukraine Continues
Markets around the world are transitioning from full panic to major discomfort as the Russian war on Ukraine continues, but the fallout has been isolated so far. This time yesterday brought with it breathless comparisons to other notorious market shocks, as Europe was not only facing its most severe military conflict since WW2, but it came with an only-slightly-veiled threat of nuclear war should other countries try to intervene.
Equity markets staged a huge recovery Thursday afternoon, and energy prices pulled back sharply, as traders digested the new reality that most have only read about in history books online, with several factors seeming to play into the calming down we witnessed throughout the day.The US President had promised sanctions would be “swift and severe” if Russia invaded Ukraine. Thursday he announced a variety of moves that may be seen as severe, but avoided cutting Russia off from the SWIFT payment system, which is seen as a way to keep a penalty in reserve if needed, allow European banks to continue receiving loan payments from Russian firms, and probably most importantly, allow for Russian energy exports to continue.
Expectations that the FED would take it easier on interest rate hikes to try and offset some of the economic impact of the war & sanctions also seemed to encourage stock markets. The CME’s FedWatch tool shows that 2 days ago, there was a 33% probability of a 50 point rate hike at the March FOMC meeting, but that likelihood dropped to 21% yesterday.
While the panic has subsided, we’re a long way away from a calm market. After refined product prices pulled back 15-18 cents from the overnight highs Thursday afternoon, energy buyers did step back in pushing prices 5-6 cents higher last night, only to see a drop to 2-3 cent losses earlier this morning. That type of volatility is to be expected as long as the fighting and constantly changing stance on sanctions continues.
Physical product trading in the US had a fairly muted reaction, with most regional cash markets seeing only small basis moves on low liquidity, which is common when the futures market goes wild. RIN values did move higher on the day as the risk of trickle down effects from Black Sea supply disruptions to grain markets took hold, but like the rest of the energy contracts those prices pulled back sharply from the initial round of panic buying.
The lack of reaction in USGC products was particularly noteworthy given the ongoing shutdown of the products pipeline FKA Plantation as the company investigates a leak in Georgia. Values for shipping space on Colonial had already jumped last week as the annual RVP transition opened up the Gulf-East Coast arbitrage window, and those values held steady Thursday, suggesting the big physical traders aren’t yet too concerned that the pipeline will be down for long. There are already reports that some retail stations in the US are seeing long lines as consumers fill their various forms of fuel tanks due to the Russian invasion, and if the Plantation line stays down for another couple of days, that phenomenon could get much worse.
Some notes from the DOE report Thursday (that no one seemed to pay attention to for more than a minute or two):
US diesel inventories declined for a 6th consecutive week, and are holding 30 million barrels (nearly 1.3 billion gallons) below their average for this time of year. Demand both domestically and abroad remains strong, which helps explain why the coasts (PADDs 1, 3 and 5) are all tight, while the landlocked locations (PADDs 2 & 4) are relatively well supplied. There’s a similar but less severe phenomenon with US Gasoline inventories which are slightly below average in total, with coastal markets seeing tighter supplies than normal. Another theme is that while supplies are well below year-ago levels this week, that’s about to change for many markets as refiners continue to operate relatively well through a parade of winter storms, and while there have been a handful of upsets, there is nothing even remotely resembling the disruption we were facing a year ago.
Week 8 - US DOE Inventory Recap
Stock Markets Around The World Are Tumbling
Oil prices surged north of $100, and several RBOB and ULSD contracts traded north of $3/gallon overnight, up nearly 20 cents/gallon so far this morning, after a full-on Russian assault of Ukraine. Stock markets around the world are tumbling, as solutions to this conflict seem to all come with a high level of economic and/or human damage.
More sanctions have already been promised by the US and allied countries, and Ukraine has requested that Turkey close off the Black Sea straits, which would block Russian warships, and roughly 2 million barrels/day of oil shipments.
So, how high can prices go now? The charts show a pretty strong band of resistance for crude oil around the $110 range, which repelled rallies in 2011, 2012 and 2013, prior to prices collapsing late in 2014. For refined products there’s a wider range between $3.20-$3.40 that acted as a price ceiling during those years, that should at least act as a stopping point if this rally continues. If for some reason prices break through those chart layers, then we’d target the 2008 highs. That said, the best cure for high prices is high prices, and this latest spike may end up forcing prices lower later this year by forcing drivers off the road and travelers to reconsider their European vacations.
As the charts below show, the US does import oil and refined products from Russia, but the relatively small fraction of the country’s declining import demand should be replaceable and most likely swapped with barrels that would otherwise go to a sanctions-resistant buyer like China.
While the war in Ukraine will no doubt dominate headlines, the pipeline formerly known as Plantation was closed Wednesday to investigate a possible leak in a suburb of Atlanta. While there are no reported connections between the situations, the timing is certainly a harsh reminder that Russian hackers took the nearby Colonial pipeline offline for almost a week last year, and that new cyber-attacks should be expected if the new cold war continues to escalate. The winter storm sweeping the eastern half of the country may delay the repairs on the plantation line, but it’s also keeping many drivers off the road so it may not have as much of an impact on regional supplies if it can come back online in a day or two.
While the 7-8% increases in oil and refined product futures are obviously a big deal, they pale in comparison to natural gas prices in European markets that are up roughly 30% on the day so far. As has been widely reported over the past few months in the runup to this conflict, Europe gets roughly 40% of its natural gas supplies from Russia. The EIA this week highlighted how the US, Qatar and Russia account for 70% of all European LNG imports, but the unfortunate reality is there simply is not capacity currently to replace the Russian supplies.
An Uncomfortable Calm Is Gripping Global Energy Markets After Some Wild Back And Forth Action
An uncomfortable calm is gripping global energy markets after some wild back and forth action the past two days. Crude oil prices have eased by $4/barrel and Refined products have pulled back 10 cents from their Monday night highs in the wake of the Russian invasion of Ukraine, and are starting Wednesday’s session on a quiet note. Even the notoriously volatile natural gas prices are acting relatively docile despite the huge potential fallout from the economic cold war.
There’s a noteworthy divergence emerging between near bullish fundamentals and technical that are looking suddenly bearish. On the fundamental side, demand estimates continue to increase as COVID restrictions rapidly ease, while supply increases continue to lag behind the estimates for 2022, even before factoring in the potential disruptions from Russia. Technical studies meanwhile are starting to look top heavy after the sharp reversal Tuesday as traders appear to have once again played the buy the rumor and sell the news game with energy contracts. Diehard chartists love to say that the headlines follow the prices, not vice versa, and the price action in the next few days will provide an interesting case study into that argument.
It’s not just crude oil that’s tight. Prices for soybeans and its oil have been moving sharply higher again in recent weeks as demand for both food and fuel from the beans increase, and supplies from South America are struggling pushing up the price for everything from tofu to D4 RINs. China announced it would release soybeans and edible oils from its strategic reserves to help minimize the increase in prices.
4th quarter earnings releases from refiners are showing some consistent themes this week. Big improvements in demand, good but not great margins, and challenges with both severe weather and labor impacting operations.
Speaking of refinery operations: Traders didn’t seem too concerned about the explosion and fire that injured 5 workers at one of the Country’s largest refineries Monday, with US Gulf Coast basis values barely flinching after the long weekend. That plant was undergoing maintenance already so output may not be impacted, and local terminal operations are not showing signs of any product tightness following the fire.
The IEA released its global Methane tracker this week, once again shouting from the rooftops about the need to reduce these emissions and some of the “cost effective” ways to accomplish that goal. One interesting note from the report: Turkmenistan accounted for nearly 1/3 of the major emissions events recorded globally last year. Perhaps Russia will invade them next to help the world combat climate change.
Now What? That Seems To Be The Question Of The Morning After Energy Prices Spiked
Now what? That seems to be the question of the morning after energy prices spiked and equity futures sold off sharply after the news broke of troops being ordered into the breakaway regions of Ukraine Monday afternoon. While WTI and RBOB did touch new 7 year highs overnight, they’ve since pulled back by 5 cents or more and stocks have recovered most of their losses, as an eerie sense of calm has taken over while the world tries to figure out what comes next.
The markets now have to guess if this is just another step closer to Russian taking the rest of Ukraine, or a way for Putin to back down while still being able to claim victory on both political and economic fronts.
Interestingly enough, stocks seemed to get a small boost, and energy futures pulled back from their highs, after reports that China is not backing Russia’s move, saying that the Ukraine is not an exception to sovereign rights for all nations, which could help limit the economic fallout of this event. Those reports did not mention China’s stance on Taiwan or Hong Kong’s sovereignty.
March RBOB futures did trade north of $2.80 overnight, while the April (summer-spec) contract touched a high of $2.9375 putting it within easy striking distance of the $3 mark when it takes over the prompt position this time next week. ULSD futures did not join the rest of the complex in setting fresh 7 year highs overnight as the extreme backwardation we saw earlier in the month has evaporated and knocked 10 cents off of prompt prices. ULSD did break back north of $2.90 for a while overnight however, so it’s too soon to rule out a push towards the $3 mark for diesel, especially if the Natural Gas markets get rolling.
Speaking of which, so far natural gas markets in the US and UK seem to be taking news that Germany will halt certification of the Nordstream 2 pipeline from Russia in stride, which may help explain the relatively muted response in the rest of the energy arena.
While cash traders largely took the day off Monday without the reporting agencies assessing spot markets, so far there’s not much happening in physical or credit markets, which is likely a sign of the wait and see trade.
It’s A Fairly Quiet Morning For Energy Prices, With Trading Limited By The President’s Day Holiday
It’s a fairly quiet morning for energy prices, with trading limited by the President’s day holiday and the fact that an all-out war didn’t break out this weekend. Futures are trading in an abbreviated session today, and are showing modest gains of around a penny for refined products, after another casually volatile overnight in which 6-7 cents swings were seen for both RBOB and ULSD contracts.
We just finished the first weekly decline of the year for most energy contracts, which also managed to break the impossibly steep bullish trend lines that have added more than 40% to prices in just over 2 months. While a sharper pullback now looks more likely, it’s hard to see a major sell-off happening until there’s some more definitive outlook for the Ukrainian showdown.
Money managers were fairly quiet last week, making modest reductions in both their long and short positions for WTI, HO, Brent and Gasoil contracts (which may be a sign they’re growing tired of the pricing rollercoaster) which ended up with minimal changes to the net length held by the large speculators.
Perhaps most notable in the weekly Commitments of Traders report is that the Producer & Merchant trade category now holds the most net length in WTI that we’ve seen in more than a decade. That suggests that drillers aren’t too worried about prices going back down and limiting their output anytime soon.
Speaking of producers, Baker Hughes reported a net increase of 4 oil rigs active in the US last week, with the Permian basin adding 5 rigs while all other basins netted a decrease of 1. A WSJ article Friday noted how large public producers are showing restraint in their drilling, prioritizing cash flow over oil flow, while smaller privately held companies are being much more aggressive to take advantage of higher prices.
The Winter Rally In Energy Prices May Have Ended This Week With Most Petroleum Contracts Down 7%
The winter rally in energy prices may have ended this week, with most petroleum contracts down 7% or more from Monday’s highs. March diesel futures are leading the move lower dropping 25 cents after coming just a few cents from hitting the $3 mark earlier in the week.
Trading headlines this week have followed a simple pattern, if prices rally, blame Russia and if they fall, credit Iran. So today the market is lower and we’ll credit negotiators seeking to salvage a nuclear agreement with Iran, even though reports suggest that even IF a deal is made, it will still be months until more oil comes to the market. Meanwhile, a broken ceasefire in eastern Ukraine that some fear is the precursor to an invasion, hasn’t been enough to stop the selling this morning, but will make a good excuse if prices bounce this afternoon.
Now that the bullish weekly trend lines have broken, there’s a good chance we’ll see even more selling for technical reasons, even though fundamentally there’s still plenty of reason for buyers to step in. Peg the February lows around $2.66 for ULSD and $2.51 for RBOB as the next pivot points to see if the bulls are ready to step back in.
While petroleum products have been selling off this week, renewable oil feedstocks have strengthened, which has helped push RIN prices higher. D4 biodiesel RINs in particular have seen strength alongside soybean oil prices, and are trading at their highest levels of the new year.
The Rumor Mill Is In Full Swing And Creating More Big Swings In Energy Prices This Week
The rumor mill is in full swing and creating more big swings in energy prices this week. While the Russian troop count debate rages on, new rumors that the US and Iran were “closer than ever” to reaching an agreement that would allow ½ million barrels of oil to quickly come back online seemed to spark another wave of selling Wednesday, only to see prices recover half of those losses after reports of shots being fired on the Ukrainian border.
RBOB gasoline futures have already had 4 different 5 cent swings since yesterday’s settlement, dipping below the $2.60 mark twice during those swings only to recover back around the $2.65 mark this morning. If the $2.60 range fails to hold support, the charts suggest we may be in for a quick move back into the $2.40s before the transition to summer-spec adds 15 cents to prompt values.
ULSD futures haven’t been quite as volatile overnight, which is surprising given the collapse in the calendar spreads from just under 14 cents to less than 6 cents over the past week. The winter storm sweeping the country seems to be contributing to the relaxation of those time spreads as the temperatures aren’t expected to get close to what we saw over the past month for most of the southern half of the country, and pale in comparison to what many were dealing with a year ago today, and should allow diesel supplies a chance to catch up. ULSD did drop briefly below the $2.80 mark overnight, but have since bounced back, which may have saved the contract from a much larger drop, for now at least.
While the pullback in prices and lower time spreads may feel like a market breathing a sigh of relief, yesterday’s DOE report provides a cautionary note that there may be more supply challenges ahead. Inventories for Crude oil, gasoline and diesel in the US are all below the low end of their 5 year seasonal range – meaning stocks have never been this low in the past 5 years at this time – while total petroleum demand is approaching all-time highs, and we haven’t even approached the driving season yet. While outages are rare at this point, the drop in refining capacity from plants shuttering or converting over the past two years leaves the system more vulnerable than it’s been since the price spikes of 2008.
Week 7 - US DOE Inventory Recap
Energy Futures Are Bouncing Back This Morning After Their Biggest Daily Drop Since Black Friday
Energy futures are bouncing back this morning after their biggest daily drop since Black Friday as a debate over troop counts, inventory declines and a presidential warning all seem to be encouraging buyers this morning. Equity markets continue to struggle with another troubling inflation report and a flattening yield curve both signaling to many that there may be more economic pain ahead.
As the forward curve charts show, despite the big selloff Tuesday, not much has changed from a week ago. From a chart perspective, the weekly bullish trends are still holding, but there’s no longer much room to spare to the downside if the bulls are going to regain control this week.
While NATO and Russia continue to disagree on just about everything, including whether there are more or less troops surrounding Ukraine, the US President warned that the sanctions planned if Russia does invade will target energy exports, which will likely push prices higher. Given that petroleum prices have already risen 40% or more in the past 2 months (see the PPI inflation note above) the question then becomes whether or not that’s already priced in, and anything less will become a reason to sell in the near future.
The API reported small inventory draws across the board last week. If the DOE confirms that estimate, it will provide more validation for the backwardation we’re seeing in the forward curves as most US markets outside of the Midwest are tighter on days of supply than they typically are this time of year, setting the stage for more product allocations and outages as demand ramps up this spring.
Speaking of outages: Another winter storm is sweeping the country, and is expected to bring severe thunderstorms with it. Unlike the last 3 storms however, it’s not expected to bring the cold snap, snow and ice to parts of the south that disrupted both refinery operations and travel. While overnight temperatures will dip below freezing for most of Southeast, day time tempts will still be pushing mid 50s which should help limit the surge in electricity demand that might hamper a diesel supply network that’s been caught flat footed this winter. That sigh of relief seems to help explain why the March HO contract went negative in the past few minutes after being up 4 cents overnight, while the rest of the complex is holding onto gains.
The relatively tight gasoline markets should make the spring RVP transition a bit easier for inventory holders, and may limit the amount of price dumping that often happens as the deadlines loom. The refiners that survived the COVID crisis look to be in a great position now as crack spreads have rebounded nicely and the forward curve shows them staying in positive territory for the next few years.
The EIA continues to predict that US oil production will hit record highs this year and next, even though the weekly stats have yet to show much increase in output so far this year. The Permian basin is expected to account for 6 out of every 7 new barrels of oil produced in the country this year according to the report, while other basins will take on more of the burden next year.
Refined Products Bounced 8-10 Cents Off Of Their Monday Lows To Reach Fresh 7 Year Highs
The Russian rollercoaster continues this week as refined products bounced 8-10 cents off of their Monday lows to reach fresh 7 year highs, only to drop 8-10 cents this morning as the market tries to guess whether or not there will be an invasion of Ukraine. Reports overnight that Russia had moved some troops back from the border are getting credit for the big selloff in petroleum (and the big rally in stocks) while other reports suggest that an invasion is still likely and NATO’s leadership suggests it has not yet seen real signs of de-escalation.
On the weekly charts today’s drop barely registers, with both RBOB and ULSD futures down just a couple of cents for the week so far thanks to yesterday’s late rally, keeping the bullish trend line intact. We’ll need to see another 7-8 cents of losses before that trend breaks – which it will at some point – and opens the door for a quick 20 cent drop. In the meantime, if prices hold again like we saw early last week, this selloff just helps to cure the overbought technical condition and paves the way for a continued rally that will have refined products north of $3 and crude north of $100.
More bad news for ethanol? While the EPA is reviewing the RFS, a new study released Monday suggests that ethanol may be notably worse for the environment than gasoline. The study argues that previous reports from the USDA fail to recognize the negative impact of land use changes to create more ethanol. Not surprisingly, that study was quickly refuted by biofuel groups. Ethanol and RIN prices didn’t seem to react much to the report, as it’s unlikely any congressional changes will be made in the near future.
Energy Futures Are Slipping Back Into The Red To Start The Week After A Furious Friday
Energy futures are slipping back into the red to start the week after a furious Friday rally sent prices to a fresh round of 7 year highs. Reports that an invasion of Ukraine was imminent Friday afternoon sparked another big rally, while weekend diplomacy is getting credit for the pullback this morning.
The backwardation in diesel prices is holding near its highest level in 19 years and more terminal outages and tight allocations are being reported as physical supplies remain well below average for this time of year.
Baker Hughes reported a net increase of 17 oil rigs last week, the largest single week increase in 4 years. 13 of those rigs were added in Texas, with the Permian adding 7 and the Eagle Ford adding 5. It’s worth noting that the last time we saw an increase this large was the 2nd week of February 2018, which suggests perhaps the company does a reconciliation that may account for the large increase more than drilling companies suddenly breaking the labor log jam. If that theory is incorrect, then maybe this week’s data is the start of an accelerated pace of drilling with producers racing to take advantage of higher prices.
Money managers reduced their net length in the latest CFTC report releases Friday. That report was made from Tuesday’s trading data, suggesting that the big funds we selling modestly during the big move lower early last week, and that the huge rally later in the week may cause us to see a large increase in speculative positions in the next report.
Perhaps the most notable change in the CFTC reports over the past few weeks has been a spike in WTI open interest, which overtook Brent for open contracts for the first time in almost 2 years. WTI had been losing interest over the past several years as its delivery point in Cushing OK became less relevant as the US became a net exporter, and new competing contracts in the Houston area took market share. A rush of options activity seems to be bringing interest back to WTI, and now that football season is over, perhaps we’ll see even more big oil bets as the gamblers look for a new outlet.
Energy Futures Are Back On The March Higher To Start Friday’s Trading
Energy futures are back on the march higher to start Friday’s trading, and have now wiped out the heavy losses from earlier in the week. Gasoline futures are back on track for an 8th straight week of gains if the current levels hold today, while ULSD needs to add another penny to continue its winning streak.
Plummeting COVID counts are providing plenty of demand optimism, while tensions around Ukraine keep supply shortages at the top of mind, and reality is starting to sink it that a nuclear deal with Iran, which would allow 1 million barrels/day or more of oil back onto the world market, is a long shot.
The January CPI release Thursday sent shockwaves through markets around the world as US inflation reached a 40 year high and may keep volatility elevated near term.
Before the CPI reading, the CME’s FedWatch was showing a 33% probability of a 50 point rate hike at the March FOMC meeting, and that spiked to 93% after the report as traders are now convinced that the FED must make its largest single increase since 2000 to try and get on top of runaway inflation.
The report created some rollercoaster trading for energy futures, with refined products giving up their overnight gains in just a few minutes after the report, only to rally a nickel or more later in the morning, and then fall back again in the afternoon as the sell-off in equity markets started picking up steam. Over the past month, energy and equity markets have moved in opposite directions more often than not (see the correlation chart below) in large part due to concerns over Ukraine that could be bearish for stocks and bullish for energy, but there’s a good chance we could see the two move more in tandem as we did Thursday, whenever FED expectations take the lead.
If you’re not sure what’s a more confusing concept, crypto currency or carbon credits, you’ll find the cadre creating contracts that combines the two concerning. Carbon backed crypto contracts seem to be increasing faster than fuel prices, giving cons and criminals a whole new field (or rainforest) to express their creativity.
A New Read On Inflation, That Continues To Hold Near 40 Year Highs Sparked A Wave Of Heavy Selling Pressure
Energy markets were trading higher for a 2nd day, moving the complex further away the technical support that threatened an end to the 2 month rally on Monday.
Some bullish fundamental data from the weekly DOE report and OPEC’s monthly report seemed to be encouraging buyers to continue to step in after the big selloff earlier in the week
A new read on inflation, that continues to hold near 40 year highs looks like it sparked a wave of heavy selling pressure into the complex shortly after 8am central, knocking refined products 3-4 cents below their overnight highs, which should make for some volatile action to end the week.
OPEC increased its global demand estimates for the year, and lowered its supply estimates as the end of Omicron and a tick up in industrial activity are expected to drive consumption while supply networks will need longer to sort through their logistical bottlenecks. The cartel’s oil production continued to increase, but at a slower pace than had been forecast as declines in Venezuela, Libya and Iraq offset the increases from Saudi Arabia, Nigeria and the UAE.
Cause & Effect: While the weekly moves in the DOE report weren’t particularly notable, the historical perspective makes a strong argument for the strong prices we’re seeing in several markets.
US Crude oil inventories reached a 3.5 year low last week, and production continues to be slow to return, both of which seem to be aiding the move back above $90 for WTI this morning.
Gasoline inventories made their first decline in 6 weeks as demand surged ahead of the winter storm. If in fact gasoline stocks are making the turn from winter build to spring drawdown, they’re doing so from a much lower level than the past few years, and with refining capacity much lower than it was pre COVID shutdowns, the early draw puts the supply network at risk of more challenges as we approach the driving season.
Want to see why Midwestern diesel prices have been trading 20 cents or more below their coastal counterparts? Take a look at the diesel inventory charts below where PADD 2 is the only region in the country with stocks that aren’t below their 5-year seasonal range. Midwest refiners are contributing to the excess, with run rates well above their seasonal norms, and 10% above last year’s rates.
This coming week marks the 1 year anniversary since the biggest disruption in refinery runs on record, and while we did see a handful of refinery shutdowns from last week’s storm, the impact will pale in comparison to the dramatic drops you can see on the refinery run charts below.
Week 6 - US DOE Inventory Recap
The Rally In Energy Prices Is Facing Its Biggest Test Of The Past 2 Months
The rally in energy prices is facing its biggest test of the past 2 months, with the price action over the next few days looking to be pivotal for the weeks ahead. NYMEX futures survived their biggest daily selloff since the Black Friday Omicron meltdown Tuesday, and managed to hold above their bullish trend-lines on the weekly charts, which keeps the door open for another rally in the next few weeks if prices can sustain near current levels. Then again, there are still signs that the selling may not be over, as we saw a heavy wave of selling around 7am central that pushed ULSD down 2.5 cents and RBOB more than a penny on the day, but those losses only lasted around 10 minutes before recovering to the overnight range.
The API reported inventory draws across the board last week in its Tuesday afternoon report, which seemed to temporarily help the market find a bid, but that proved short-lived as the selling picked up again overnight. The EIA’s weekly report is due out at its normal time this morning. We are near the point where gasoline inventories usually peak out before drawing down ahead of the spring RVP transition, and with reports of heavy buying ahead of last week’s winter storm, we could see stocks make the turn this week.
Diesel stocks are also likely to see further declines, even though ULSD calendar spreads continue to pull back, but calendar spreads remain in the steepest backwardation since 2008, when futures rallied north of $4/gallon in July before crashing to $1/gallon in December. John Kemp of Reuters is arguing this morning that diesel has become a key signal of inflation in the US, and tight supplies could continue to drive prices higher. Meanwhile, a Bloomberg article earlier this week highlighted that several commodities are seeing similar curves as supply chains struggle to match current demand.
The reports that progress in the Iran nuclear negotiations are driving the pullback in prices this week continue, even as Iran decided now was a good time to publicly display a new long range missile system which all but ensures that any agreement, if any is reached, will not be taken seriously.
A Heavy Round Of Selling Is Sweeping Across The Energy Markets To Start Tuesday’s Trading
A heavy round of selling is sweeping across the energy markets to start Tuesday’s trading, after a big reversal lower from multi-year highs in Monday’s session.
Nuclear negotiations with Iran are once again getting credit for the sell-off, even though if you get past the headlines it appears that the odds of an actual agreement that would allow more Iranian crude to reach the market is still a long way off.
It’s more likely that the pullback has more to do with traders (ie the trading programs that account for the bulk of trading activity daily) are taking another round of profits after several short term technical indicators moved deep into overbought territory following last week’s big rally. Both RBOB and ULSD contracts are still about 5-6 cents above their bullish trend-lines on the weekly charts, so it’s too soon to call this selloff anything more than a short term correction. Although a much bigger drop seems likely once supply concerns ease later in the year, it’s hard to see how sellers will be able to keep the upper hand near term as long as the threat of Russia using its oil weapon remains.
The pullback is also following reports that 3 large refineries, 1 on the East Coast and 2 on the Gulf coast, are restarting operations after having units knocked off-line last week during the winter storm.
The 14 cent drop from the Sunday night highs for the March ULSD contract has taken some of the sting out of the extreme backwardation in diesel markets, that’s been wreaking havoc on cash markets around the country as traders struggle to adjust to the big swings in the futures spreads. This has opened up some unusually large spreads between markets with 20+ cents separating diesel values in the Midwest where the seasonal demand doldrums are at their worst, compared to the Gulf & East coasts that are seeing heavy demand from winter weather and a strong export market.
The Furious 2 Month Rally That’s Added More Than 40% To Most Energy Contracts Is Taking A Breather This Morning
The furious 2 month rally that’s added more than 40% to most energy contracts is taking a breather this morning, with refined product prices showing modest gains, but pulling back 3-4 cents after hitting fresh 7 year highs overnight, while crude oil contracts slip into the red after reaching their own multi-year highs on Friday.
Signs of progress in nuclear negotiations with Iran are getting credit for the pullback this morning, even though both the US and Iran suggest they’re still a long way off from a deal that would allow most of Iran’s potential oil exports to resume.
The squeeze on prompt ULSD continues with March futures up more than 1.5 cents on the day, even as the rest of the curve trades lower. The spread between March & April HO futures is now almost 13 cents/gallon, and nearly 25 cents separates the March and June contracts. Tight diesel supplies and strong demand leave the market vulnerable to a price spike near term that could easily surpass the $3 mark, but the severe backwardation also suggests that when the diesel bubble bursts, the drop will be spectacular.
Speaking of a squeeze, a cyberattack in Europe’s largest oil hub is causing vessel delays, and adding yet another reminder that Russia is Europe’s largest supplier of both energy and hackers.
Money managers continue to steadily add to their net length in refined products, with RBOB and Gasoil contracts both standing at their highest levels for large speculators in more than a year. Brent was the only contract of the big 5 petroleum futures to see a reduction in managed money net length last week.
Baker Hughes reported a net increase of 2 rigs drilling for oil in the US last week, with Texas and North Dakota both adding 3 rigs, while several other states had small declines. While the EIA and IEA both still project that US oil production will reach an all-time high later this year, a WSJ article suggests that the end of the shale boom is in sight and will keep production growth limited despite high prices.
Up, Up, and Away Crude Oil Futures Lead The Pack This Morning
Up, up, and away. Crude oil futures lead the pack this morning, posting 1.75% gains putting the prompt month contract just below the $92 level. Gasoline and diesel futures “lag” behind, boosting their prices by 2.75 and 4.75 cents, respectively.
The cold snap in refining country seems to be the cited reason why the buyers showed up this morning. The fact that the only news surrounding refinery operations was a small unit shutdown in Memphis and a planned return of run rates in Baytown makes it seem like this morning’s market move might have more to do with momentum than fundamentals.
The difference between the prompt and second month NYMEX diesel contracts reached levels not seen since 2015, and only seen five times in the contract’s 24-year history. Weather-induced demand surge along the eastern seaboard and shrinking supplies is the one-two combo driving a staggering 12.5 cent backwardation into March.
Gasoline prices seem to be along for the ride these past couple weeks, lagging behind both crude oil and diesel futures gains. There are scant reasons to be found explaining any sort of independent market action for the RBOB futures contract, but one would think the immediate outlook for the benchmark should be bearish given the wintry conditions hitting the Northeast again this week.
Energy Prices Are Moving Lower To Start This Morning With Generic Terms Like “Profit-Taking”
Energy prices are moving lower to start this morning with generic terms like “profit-taking” being used as the reason why. Prompt month WTI futures are leading the way, currently down 1.34%, while the gasoline and diesel contracts lag behind at <1% losses.
Seems like everyone is feeling pretty optimistic about the latest wave of COVID cases finally subsiding. From Texas to Scandinavia, hospitals are seeing a drop in positive cases and hospitalizations and likewise a drop in lockdown policies. Maybe if Texas didn’t look like Scandinavia this morning we’d see some of the relaxed restrictions translate to increased consumer demand.
While natural gas futures are down nearly 10% this morning in pre-market trading, Northeast regional prices hit levels not seen since 2014. Supply bottlenecks and increased demand (AKA the usual suspects) seem to be the culprits in the price spike, reminding us the lesson many markets learned since the pandemic began two years ago: supply is only as good as its proximity to demand.
National gasoline stockpiles, as seen on yesterday’s report published by the DOE, only grew ~2 million barrels last week vs the 8 million barrels the API estimated on Tuesday. The market reaction to the difference between the two figures was muted with RBOB futures settling up just over 3 cents yesterday.
Crude oil stocks set new seasonal lows last week, which likely helped push the American crude oil benchmark to fresh 7-year highs, just shy of the $90 mark.
Week 5 - US DOE Inventory Recap
The Energy Complex Is Climbing Again This Morning After Yesterday’s Reversal
The energy complex is climbing again this morning after yesterday’s reversal started this week off with across-the-board gains. The ‘big three’ American benchmarks (gasoline, diesel, and crude oil) are all posting ~1.2% gains so far today, with gasoline and crude trading at fresh 7-year highs.
Optimism surrounding signs of the novelty coronavirus relenting in Europe is partial credit for today’s buying strength. An easing of restrictions in France (despite record positive cases in Germany) and the sustained decline of cases in the US have traders bidding up petroleum futures this morning.
Rumor is OPEC+ is going to stick to its planned production increases despite oil trading at levels not seen since the 2015 collapse. While the idea is for the cartel to increase production by four hundred thousand barrels per day in March, actually hitting that target might seems more difficult than it sounds considering the struggles member nations had meeting quotas last month.
The EIA published an interesting (if not seemingly counter-intuitive) note this morning highlighting a drop in propane prices due to a “mild” start to the winter. We might see that rebound in short order, however, as a new winter storm has an entire swath of the country in it’s sights, including many states that use propane as a primary or supplementary heating source.
The American Petroleum Institute estimated an increase of nearly 6 million barrels of national gasoline inventory last week. The market seemed to expect the large build given one of the big centers for gasoline consumption was snowed in last weekend. Crude oil and diesel stockpiles were estimated to fall a tamer 1.5-2.5 million barrels last week. The Department of Energy will publish their weekly report at the normal time this morning (9:30 CST).
Refined Product And Crude Oil Futures Are Taking A Breather From Their 2-Month Long Rally This Morning
Refined product and crude oil futures are taking a breather from their 2-month long rally this morning. The distillate contract is leading the way, showing losses of around 2 cents in the prompt month. The New York gasoline benchmark is trailing its counterpart dropping only a penny this morning while American and European crude oil contracts are down around 50 cents per barrel.
The ‘bomb cyclone’ came and went in the Northeast over the weekend, dumping record amounts of snow in the region. Weather-related disruptions to energy infrastructure were few and far between however Phillips 66 was forced to shut its fluid catalytic cracker at its Bayway refinery in Linden, NJ, citing cold weather as the cause. A restart of the unit is expected in the next 24 hours.
While many technical indicators are calling for a healthy pullback from the strong rally in energy futures we’ve seen since the new year, it will likely take more than squiggly lines and bar charts to pull this train off the track. Oil bulls have a slew of reasons back up their calls for higher prices: Houthi rebels threatening the UAE, Russia and Ukraine starting WWIII, and iffy OPEC+ supply estimates. The latter, however, is taking the majority of the credit for today’s selloff as bears are hopeful the cartel’s production increase estimates are legit.