Sign up to receive market talk updates in your inbox each day.
Energy Markets Are Seeing A Strong Rally For A 2nd Day
Energy markets are seeing a strong rally for a 2nd day as uncertainty about the upcoming OPEC meeting and about the looming Russian oil embargo seem to have markets focusing on supply fears again, after weeks of demand-fears driving prices lower. Diesel prices are up more than 22 cents from yesterday’s low trade, while gasoline prices are up 12. The bounce puts the complex back in neutral technical territory after surviving a trip to the edge of a breakdown that could have sent prices sharply lower.
Concerns about a pending recession continue to plague equity markets as the US Treasury yield curve is inverted to a degree we’ve only seen a couple of times in the past 25 years. As the chart below shows, these inversions have been a good indicator of a pending economic slowdown. Energy markets seem to already have gotten that selling out of their system in the short term, but this could once again become a factor if this latest rally runs out of steam.
The European Union still can’t unite on a price cap agreement for Russian oil, less than a week before an embargo on Russian oil is set to begin. Both WTI and Brent crude have slipped into a Contango price curve near term as current supplies are proving ample as traders have had months to prepare for this change, and demand has softened globally.
Meanwhile, Italian officials continue to race to find a way to keep their Sicilian refinery in operation after the embargo begins, asking the US to provide banks assurance that they won’t face fines for breaching sanctions given the Russian-owned status of that plant. Since the US is a consistent buyer of products from that facility, and the East Coast continues to struggle to find enough supply, perhaps it’s an offer they can’t refuse.
OPEC and friends have decided to hold their upcoming meeting virtually, which some are taking as a sign that they will roll over their output cut agreement from October.
The tornado outbreak in the southern US looks like it stayed far enough away from the Gulf Coast to spare the refineries in the area. The Alon refinery in Big Spring TX reported an operational issue that lasted more than 16 hours Monday, that ENT is reporting could end up causing extended downtime at that facility. While that plant is far from the Gulf Coast trading hub, downtime could add to the supply challenges to West Texas and surrounding markets.
Week 48 - US DOE Inventory Recap
Energy Prices Bouncing To Start Tuesday After Monday Saw 11-Month Lows For Gasoline And Oil Prices
Energy prices are bouncing to start Tuesday’s session after gasoline and oil prices dropped to 11-month lows on Monday, while distillates reached their lowest levels since the start of the war.
Less than 6 months ago, the cheapest wholesale regular unleaded gasoline in the country was going for $4.18/gallon, and today the most expensive is going for $2.36 and several spot markets have prices below $2. The bounce in futures puts the chance of a technical collapse on hold for now, but if support around the mid $2.20s breaks, there’s a good chance we’ll see gasoline futures fall below $2 this winter as well.
The drops have been even more dramatic for distillates, with NYH spots dropping $1.75/gallon in just 3 weeks and most other regional cash prices touching their lowest levels since late February. Distillate basis values are also trading at historically weak levels across most of the country, with 5 out of the 6 major cash markets seeing a discount of 24 cents or more to December futures, while the NYH is the only market left trading at a premium. That weakness in basis differentials suggests there is excess physical supply at several of the major origin points around the country, while elevated rack prices in numerous markets suggest there are still shortages at the destinations, as transportation bottlenecks continue to confound the supply network.
RINs have continued their steady march higher, touching fresh 18-month highs, and coming within striking distance of new all-time records, a day before the EPA is obligated by court order to release its mandates for the Renewable Fuel Standard for 2023 and beyond.
Meanwhile, the EPA has approved a fuel pathway for Chevron to co-produce biofuels from soy oils at its refinery in LA after a 2-year review. While the EPA’s approval limits the firm to generating D6 RINs for now, this type of co-processing could eventually be a game changer in that refiners may no longer have to fully convert their petroleum operations in order to produce biofuels, and may add to the lingering regret from those companies that already have.
The risk of a US rail strike seems to have decreased after the President and congressional leaders agreed to support legislation to block a walk-out, forcing the holdout unions to accept the deal negotiated in September.
While the Atlantic hurricane season is down to its last couple of days, with no tropical threats in site, refinery row along the US Gulf Coast is included in a severe weather watch that is expected to see numerous tornadoes form over the next 24 hours. While the most severe areas are forecast to be well north of most Gulf Coast refineries, power outages and other damage could still cause some disruptions to facilities in the region.
We Saw Another Black Friday Sell-Off For Energy Contracts That Has Carried Through The Weekend
We saw another Black Friday sell-off for energy contracts that has carried through the weekend. The big slide has pushed wholesale gasoline prices in the Midwest and US Gulf Coast below the $2 mark this morning, while diesel values in most US cash markets have dropped below $3. WTI traded below $74 overnight, for the first time in 2022, while Brent dipped below the $81 mark for the first time since early January.
We won’t see the full Commitments of Traders report until later today due to the holiday, but we can see the ICE positions since the UK apparently still doesn’t celebrate American Thanksgiving. Money managers were bailing out of Brent and Gasoil long positions and adding new shorts, which suggests we’ll see a similar reduction in net length for NYMEX contracts, which no doubt contributed to the big price drops over the past week.
Baker Hughes reported an increase of 4 oil rigs, and a decrease of 2 natural gas rigs drilling in the US last week, with the Permian basin accounting for an increase of 3 rigs. The total US rig count is at a fresh 2.5 year high, but is still 56 rigs below pre-COVID levels.
Last week’s DOE report showed that domestic consumption for gasoline and diesel fuel are relatively soft, even though total US Petroleum demand remains above average. Total supplies remain very tight, even though the gulf and west coasts are seeing inventories for both gasoline and distillates above average levels. Refiners continue to run hard, holding near the top end of their 5 year seasonal range, despite the big reductions in capacity over the past few years.
We’re less than 2 weeks away from a potential rail strike that will disrupt all sorts of supply chains across the US, including fuels. Negotiators are back at the table in Washington DC this week, trying to hammer out a(nother) deal to avoid the first such strike in over 30 years.
There are just 2.5 days left in the official Atlantic Hurricane season, and the NHC does not project any new tropical cyclones, so the industry can now breathe a sigh of relief that we avoided a major disruption to the supply network that simply wasn’t able to handle it this year.
Energy Futures Are Seeing A Big Pullback To Start Thanksgiving Eve Trading
Energy futures are seeing a big pullback to start Thanksgiving eve trading, wiping out most of Tuesday’s gains. As traders continue to deal with a daily deluge of dreadful demand headlines from China, offset by uncertainty surrounding supply thanks to OPEC rumors and a plan to cap Russian oil prices that leaves more questions than answers.
More refinery problems seem to have contributed to runup in RBOB futures in the early part of the week, although this morning’s pullback suggests the market really isn’t too worried about gasoline supply. Reports that the Irving refinery on the East Coast of Canada was facing challenges restarting after a major fall turnaround and that BP’s plant in Rotterdam was unable to restart due to a strike are both making waves in futures and physical markets, and could be key factors driving trading as we approach the end of November. Meanwhile, Bulgaria announced that it will exempt its refinery owned by Russia’s Lukoil to continue exporting fuels after the EU embargo starts next month, adding yet another loophole to the attempted sanctions on Russian supplies.
Cash markets around most of the US weren’t buying the futures rally Tuesday, with basis values tumbling for both gasoline and diesel. On the West Coast, gasoline basis values have dropped to their lowest levels in 2 years with discounts ranging from 25-30 cents/gallon, just two weeks after trading at a $1/gallon premium to December RBOB futures. New York harbor diesel has completed its return to earth, trading at just a penny premium to December ULSD futures, just two weeks after reaching an all-time high of $1.25/gallon. Gulf Coast distillates continue to get hammered, trading at a 36 cent discount to Dec ULSD, as refiners continue to struggle to find enough transportation to move their product.
An often-overlooked detail in the breathless reporting of diesel shortages is that the US actually produces more than a million barrels/day more diesel than it consumes, with producers relying heavily on the export market to keep their facilities moving at maximum capacity. What seems to be happening lately is that the refinery hubs have plenty of supply as run rates have been maxed out, but pipeline and vessel availability is lacking, forcing huge discounts for generic origin barrels, and big premiums for anyone who has space along the pipelines heading East and West, or a ship that’s not already booked up. A prime example: With New York ULSD now trading close to par with futures, you might think that the price for space along Colonial would collapse, but it’s holding north of 15 cents as Gulf Coast refiners are paying up to find a home for the diesel they want so badly to continue overproducing given current margins.
The API reported that diesel stocks increased by 1.1 million barrels last week, while gasoline stocks declined by 400,000 barrels. Crude oil stocks declined by more than 4 million barrels, even though the SPR released more than a million barrels on the week, which has helped make that brief contango in WTI prices disappear. The DOE’s weekly report is due out at its normal time today, with the import/export flows key numbers to watch.
Futures will trade in abbreviated sessions Thursday and Friday but spot markets will not be assessed. Even though many would prefer if nothing happened for the next 4 days, rack prices can and will change over the long holiday weekend, especially if we see a big market move like we did last year.
RIN values continue to slowly but steadily climb to an 18 month high as the market awaits the EPA’s big announcement on its new plans for the RFS next week.