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Most Petroleum Contracts Are Seeing Modest Selling For A 2nd Straight Session As October Trading Winds Down
Most petroleum contracts are seeing modest selling for a 2nd straight session as October trading winds down, with the latest round of COVID lockdowns in China getting much of the credit for the pullback in prices in an otherwise very strong month of oil and refined product prices.
On October 4th we wrote that “IF diesel prices are able to break through that resistance [200 day MA] there’s an argument to be made that a “W” pattern is forming on the charts that could end up meaning prices rally back to $4.50 this winter.” Of course, we were completely wrong in that claim as prompt values surged to a high of $4.68 on Friday, without even waiting for winter to start.
It’s the last day of October, aka expiration day for the November RBOB and ULSD contracts, which can often bring big price swings and bad jokes about spooky markets on Halloween. Calendar spreads remain incredibly strong with ULSD set to see a 90 cent decline when futures roll to December and RBOB will see a 40 cent drop from the roll tomorrow. Those price drops won’t translate to the cash markets, most of which have already begun trading off of December and seeing large basis swings to adjust to the wild moves in spreads. The silver lining is that only the NYH spot market is still trading at a premium to November futures, with most other spot markets $1 or more cheaper than prompt values in New York, so most of the country isn’t feeling the pain of this latest price spike.
Once bitten, twice shy: Money managers were bailing out of ULSD contracts last week, reducing long contracts by 10% and adding new shorts, despite that surge in prices, perhaps remembering the huge price drops that followed similar surges last spring. In fact, there have been 5 different $1/gallon or more drops in diesel prices since March, which makes it easier to understand why large speculators are renting the diesel contract rather than owning it. Money managers did make healthy increases to net length (bets on higher prices) in Brent, RBOB and WTI contracts last week, but open interest remains low as extreme volatility appears to be keeping many traders on the sidelines.
There’s about to be a hurricane in the Caribbean, but models keep that storm pointed towards Central America and far from being a threat to the US Gulf Coast refining center.
Baker Hughes reported a drop of 2 oil rigs and 1 natural gas rig actively drilling in the US last week. The Permian basin, which makes up the majority of the US rig count, did see 2 more rigs added, but reaching pre-pandemic levels before year-end looks like a long shot as the rate of growth has stalled for a few months.
Something to keep an eye on in the coming weeks: If Russia backs out of the Black Sea grain Initiative, grain and oilseed markets may be thrown into chaos once again, which in turn may up the stakes in the feedstock wars between producers of Renewable diesel, Biodiesel, SAF, and those just trying to feed their families.
Click here to download a PDF of today's TACenergy Market Talk.
November ULSD Is The Lone Energy Contract Moving Higher This Morning
November ULSD is the lone energy contract moving higher this morning as backwardation for diesel prices has now reached the 2nd most extreme level on record. With just 2 trading days left for November RBOB and ULSD, most US cash markets are already trading vs the December reference months, sparing those traders from trying to keep up with the big swings in time spreads.
The forward curve and time spread charts below tell the story of how the market is reacting to a supply squeeze on the East Coast that happens to be the delivery point for these futures contracts. While prompt ULSD values are up more than $1/gallon in the past month, diesel values 2 years and more forward have actually declined during this time.
It’s a similar but less dramatic story for RBOB contracts, with some forward months trading lower, even though the recent squeeze in supplies along the East Coast has pushed up premiums for prompt barrels.
Compare those changes in the forward curve to WTI and Brent which are both up fairly steady from prompt through 3 years forward and it seems that the market has started to price in some of the new refining capacity scheduled to come online (primarily in Asia and the Middle East) over the next 2 years. Speaking of which, while US Refiners are reporting banner earnings, China’s largest refiner struggled in Q3 as the country’s zero-covid policies crimped demand.
Exxon reported record earnings of nearly $20 billion in Q3, with record high North American refinery run rates, huge diesel margins and trading gains offsetting a drop in gasoline demand in their refining sector which has made almost $11 billion so far this year compared to a loss of $1.2 billion in the first 9 months of 2021.
The NHC continues to track 2 storm systems in the Atlantic as the 2022 Hurricane season approaches its final month. The system in the Caribbean is now given 70% odds of developing, but early models suggest it will move west towards Central America rather than north towards the US. The system moving off the US East Coast is given just 20% odds of developing, but won’t help the North East with the vessel delays that contributing to various terminal outages over the past week.
Click here to download a PDF of today's TACenergy Market Talk.
November ULSD Has Taken Back Its Place As The Leader Of The Energy Rally
Someone continues to think it’s a good idea to try and sell refined products in the overnight sessions, even though we’ve seen strong rallies wipe out those losses every day this week. November ULSD has taken back its place as the leader of the energy rally, setting a new 4 month high for futures, and pushing the spread vs the December contract north of 50 cents/gallon this morning. RBOB is seeing a similar push higher, threatening to break the $3 mark and pushing it’s prompt/2nd month spread north of 33 cents/gallon this morning. Those big moves in time spreads continue to wreak havoc on basis markets across the country as cash market traders deal with huge basis swings that are often doing nothing more than sliding down the steep backwardation curve.
Two examples of this phenomenon from Wednesday: Group 3 ULSD dropped sharply and traded 40 cents below November ULSD, but still commanded a premium to the rallying USGC contract that’s trading at a 5 cent premium to December. In LA we saw CARBOB basis values climb more than 40 cents on the day, but cash values still declined by a nickel for the day as that market rolled to a December reference month.
The best cure for high prices is high prices: Note the spike in West Coast (PADD 5) imports in the charts below from the DOE’s weekly report. That shows how the cargo market reacted to the big price premiums we saw in late September, and those barrels hitting the market then contributed to those prices crashing. Now that we’re seeing NY Harbor prices commanding the huge premiums in October, we should see imports into PADD 1 increase in the next few weeks although the Atlantic basin doesn’t seem to have the spare fuel the Pacific does owing to the chaos in Europe and refinery closures after a decade of Europe and the US East Coast having too much refining capacity.
PADD 1 refinery runs have ticked up to the 2nd highest weekly level since the PES refinery exploded and closed in 2019 as plants return from their fall maintenance and the facilities that had been limping along just trying to survive for the past few years are now finding themselves in the right place at the right time. Right on cue, PBF’s Q3 earnings showed the company made more than $1 billion during the quarter, nearly 18 times more than they made this time a year ago.
On the other hand, not everything is rosy in refinery land as the largest remaining PADD 1 refiner has reportedly gone through a restructuring and laid off numerous employees across the country. We just witnessed strikes at refineries in France that shut down 4 facilities and contributed to the tight supplies in the US East Coast this month, as workers protested the companies making record earnings while the employees weren’t sharing in that success, and it wouldn’t be surprising if we saw similar reactions at some US facilities following this type of action.
Speaking of Atlantic basin refinery capacity, one detail of the upcoming European sanctions on Russian energy exports is an Italian refinery that could be forced to close due to its links to Russian-owned Lukoil, which would cut the country’s production capacity by 20%. Germany recently took control of 3 refineries to avoid a similar problem, although it’s still unclear how those facilities will be supplied once the bans start in December.
That uncertainty of oil supply, along with the ongoing release of 1 million barrels/day from the SPR helped push US crude oil exports reached an all-time high last week with more than 5.1 million barrels (214 million gallons) of crude being sent abroad every day. If that statement makes you want to jump on the export ban bandwagon, take a look at the chart of exports over the past 15 years, and compare oil prices today to the 2008–2013-time frame when crude oil exports were mostly illegal, and prices were still regularly north of $100/barrel.
We’re Seeing Overnight Losses Turn Into Morning Gains For A Third Straight Session
We’re seeing overnight losses turn into morning gains for a third straight session as the US East Coast continues to grapple with tight supplies of gasoline and diesel that are giving traders plenty of reasons to buy any dip.
What’s different about the rallies this week is it has been RBOB more than ULSD leading the charge as the East Coast shortages are suddenly worse on gasoline than they are for diesel, with numerous short term terminal outages of RBOB and ethanol reported in the region over the past 72 hours due to various supply delays.
November RBOB futures saw a 24 cent rally from low to high Tuesday, the biggest jump in prices since the chaotic trading in May. The November/December RBOB spread surged past 35 cents during that rally, proving that the rally is more short squeeze caused by a variety of disruptions in supply, rather than an expectation of strong gasoline demand.
Premiums to ship product on Colonial pipeline for both gasoline and diesel remain in positive territory for the first time since May as refiners struggle to find ways to move product from the Gulf Coast to the East Coast.
Who needs more pipelines anyway? While Europe continues to struggle with supply shortages and extremely high prices, natural gas producers in West Texas are now having to pay buyers to get rid of their product as pipeline maintenance reduces outlets for that fuel.
The API reported a build of 4.5 million barrels of crude oil inventory last week, thanks to another 3 million barrel release from the SPR, while gasoline stocks declined by 2.3 million barrels and distillates ticked slightly higher by 635k barrels. The DOE/EIA’s weekly report is due out at its normal time this morning.
A couple of interesting notes from Valero’s earnings call Tuesday (Besides the $2.8 billion in quarterly profit) was that the company expects more SPR releases from the US (of which they’re a major buyer) and they don’t expect any of the refineries shuttered in the past couple of years to come back online.
Speaking of which, an EPA report on the shuttered refinery now known as Limetree Bay (formerly known as Hovensa) suggests that the odds of that plant ever operating again are slim to none. Don’t worry though, China is starting up one of its new refineries this week, and we know how they like to play nice with the rest of the world.
Click here to download a PDF of today's TACenergy Market Talk.
Early Morning Losses Turned Into Strong Afternoon Gains
After early morning losses turned into strong afternoon gains for refined products Monday, we saw another half-hearted selling attempt Tuesday as prices were down 4-5 cents overnight only to see prompt values turn positive by 7:30am.
Chaotic action in physical markets continues to be a major theme as supply shortages and big swings in price spreads keeps traders on edge. While East Coast diesel prices continue to slide down their backwardation curve, giving up 45 cents in prompt basis values over the past week, gasoline stocks are getting very tight again, driving up the spread between USGC and NYH spot markets, and pushing the premium to ship gasoline along Colonial north of 9 cents/gallon.
Just as we saw when diesel spreads spiked earlier in October, the refinery disruptions in Europe and subsequent challenges with cargo transportation of refined products are getting the blame for this latest squeeze. This would be yet another case where a Jones Act waiver would make sense to get products from the Gulf Coast where they’re made, to the East Coast where they’re needed.
The NHC is tracking 3 potential tropical systems as we approach the last official month of the hurricane season. None of these systems are given high odds of development, but the two off the US East Coast could further complicate the already disjointed waterborne delivery market for fuel over the next week, while the system in the Caribbean will need to be watched as there is still warm enough water to make for a late season Hurricane.
The head of the IEA spoke at an energy conference in Singapore this week, and highlighted several components of the world’s “first truly global energy crisis”. The speech highlighted the ways that the majority of Russian oil will continue to flow this winter despite sanctions and price caps, the chance of more coordinated SPR releases and why energy security not ESG will be the driver of the transition to renewables. Last week the agency noted that renewable production had surpassed expectations this year, which reduced the outlook for carbon emissions despite many having to return to coal power generation as other options became scarce.
Q3 earnings reports are starting to be released, and no surprise that refiners who were operating are looking at another banner quarter. Q4 is looking even better for many refiners, assuming their plants are running, as USGC 5/3/2 crack spreads have climbed back north of $1/gallon, which is approaching the record setting levels we saw in Q2.
Click here to download a PDF of today's TACenergy Market Talk.