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Energy Futures Are Trying To Find a Floor After Another Heavy Week Of Selling
Energy futures are trying to find a floor after another heavy week of selling in what will mark a 6th consecutive monthly loss for oil and diesel futures. Gasoline continues to show relative strength, as it typically does this time of year and is barely holding on near the weekly trend line that may well be the pivotal level that helps determine if we see prices rally back to $3 or drop below $2 in the next couple of months.
So far markets seem to be shrugging off news that Iran has seized another oil tanker in the Gulf of Oman, which occurred just as US senators urged the President to allow Homeland security to seize Iranian tankers that have been bypassing sanctions.
Today is the last trading day for May HO and RBOB futures, with June taking the prompt spot Monday. Most cash markets have already rolled to trade vs the June contract, but the New York Harbor and Group 3 markets will transition today. Many terminals will be shutting down for a few hours today to complete their transition to summer-grade RVP grades rather than waiting until the deadline on Sunday due to labor challenges over the weekend.
The EPA is reportedly planning on issuing a summer-time E15 waiver later today, even though that higher blend is noted to increase pollution in warmer weather. As we saw last year, even with the temporary waiver, sales of E15 won’t dramatically increase given the logistical hurdles that are a challenge to overcome on a short-term basis across most of the country.
April Energy Futures Struggle To Finish Strong, Diesel Demand Remains Soft
Energy futures are stumbling to the finish line with just 2 days left in April trading and most contracts hovering around their lowest levels of the month.
US Oil inventories fell for a 4th week out of 5, despite more barrels being taken out of the SPR, and the EIA finding another 8 million barrels of oil in their adjustment figure last week. Refinery runs and oil exports remain strong, and the oil production estimate dipped last week, which all contributed to that draw in stocks.
RBOB futures did see a healthy rebound off of their lows Wednesday after the EIA reported a strong demand estimate that helped pull inventories lower last week. That recovery bounce was short lived however and RBOB prices find themselves teetering on the edge of their weekly trend line once again this morning, and poised to drop below it once the June contract takes the prompt position next week, unless we get a nickel or more bounce in the last two days of trading for the month.
Diesel demand estimates continue to be very soft, consistent with the steady drumbeat of “freight recession” warnings that have been issued in recent weeks. While refiners are likely to report record earnings for a first quarter this week, that soft outlook for diesel, and the recent collapse in crack spreads that’s come with it, have created a much different outlook for the balance of the year.
ULSD prices have dropped to their lowest level since the first day of trading in 2022, with several spot markets reaching their lowest levels since December of 2021, despite the fact that diesel inventories remain at the bottom end of their seasonal range across all 5 PADDs included in the report. The PADD 5 figure is the most misleading however as the EIA figures are not yet capturing the rapid influx of renewable diesel into these figures, so actual commercial diesel inventories will be higher than the official figures.
The EIA’s latest report on Biodiesel and Renewable diesel inventories showed a record high of 7.8 million barrels of combined inventory in the US as of January, but it does not break out biodiesel and RD stocks. It seems inevitable that the EIA will eventually include RD inventories in their weekly figures as they do with ethanol, particularly now that RD is moving along major pipeline systems in California, but that could still be years away given the glacial speed in which government agencies tend to move.
Speaking of which, you may note that PADD 3 refinery utilization rates look abnormally high. You’d be correct in that assessment since the EIA’s data continues to report the actual output generated by Exxon’s new 250mb/day expansion in Beaumont but won’t report that as actual refining capacity which is artificially inflating the percentage utilization.
Side note, did you know there are actually 7 PADDs but the EIA doesn’t include 6 and 7 in its weekly reports? Also, did you know that a US congressperson once worried that one of PADD 7s islands might tip over and capsize? Can’t make that stuff up.
Week 17 - US DOE Inventory Recap
Diesel Prices Hit Lowest Level Since January 2022 Amid Technical Support Failure, Shortages Persist in Southwest US
Diesel prices are trading at their lowest levels since the first week of January 2022 this morning after technical support around the $2.50 level failed to hold in Tuesday’s session, dragging the entire energy complex sharply lower. Tuesday’s US Consumer confidence report showed the lowest reading in 9 months, adding to the bearish sentiment for energy and equity markets.
Contango is back: The drop in prompt prices for distillates coincides with a collapse in the forward curve with prices for November and December ULSD currently trading 2 cents higher than May and June contracts. This time last year, prompt ULSD was trading at a premium of more than $2/gallon above 1 year forward values and today that premium has dropped to less than a penny/gallon as the world has finally figured out a work-around to the Russian supply conundrum.
Just don’t tell people in Arizona or New Mexico that diesel prices are cheap. Rack prices in those states continue to be offered north of $3.50/gallon as shortages across the Southwestern US persist. West Texas and Nevada are seeing similar price spikes as pipeline resupply options simply aren’t able to make up for the refinery downtime in the region, which has seen a few other smaller facilities convert to renewables production or shut down completely in recent years. Arizona’s low RVP CBG grade gasoline is going for $4.50/gallon in Phoenix, while spot prices for that boutique grade in LA are trading at $2.90.
While not nearly as extreme as what we’re seeing in the Southwest, values for diesel in the Group 3 market have been on a rollercoaster ride the past two weeks, with differentials fluctuating by 10-20 cents daily with premiums north of 40 cents and below 20 being talked on any given day. Here too, refiners trying to supplement supplies during maintenance, with fewer options now than in years past continues to be the underlying theme.
The Superior Wisconsin refinery is back operating under new ownership 5-years to the day after it blew up and forced a partial evacuation of that town. The refinery rebuild took 2 years longer and cost 3 times the original expected amount. Given the relatively small size and isolated location of that facility, don’t expect it to have any noticeable impact on spot prices in the region.
An explosion Tuesday at an asphalt facility in Lemont IL killed 1 worker and sent another to the hospital. That facility is adjacent to Citgo’s Lemont refinery, but refinery operations were not expected to be impacted. The terminal rack was temporarily taken offline following the explosion, but was brought back online by the afternoon.
The API reported an inventory decline of 6 million barrels for crude oil last week, even though more sales from the SPR continue, while gasoline stocks dropped by 1.9 million barrels and distillates increased by 1.7 million barrels. That report probably helps explain the relative strength for RBOB and WTI futures vs ULSD this morning. The EIA’s weekly report is due out at its normal time.
Energy Prices Lack Direction in Tuesday's Session, Southwest Markets Remain Tight, Refineries Report Q1 Earnings
Energy prices are seeing another round of lackluster selling to start Tuesday’s trading session as the search for direction continues after a modest Monday bounce. RBOB gasoline prices continue to hold above their weekly trend-line, which could eventually spark another run at $3, while ULSD is still hovering around the $2.50 mark, and is looking bearish on the charts.
Corpus Christi experienced widespread power outages over the weekend that knocked at least 3 refineries off-line according to numerous reports to the TCEQ Monday. Damage assessments and restart efforts are underway, but there was an immediate tightening of supply in the San Antonio, Austin, and DFW corridor that is largely supplied by the Corpus refineries. While a long-term disruption is unlikely given that facilities were already bringing units back online Monday, it certainly doesn’t help alleviate the supply concerns in other parts of the state.
Markets across the US southwest continue to show extremely tight supplies with $1/gallon premiums compared to spots still the norm in a handful of markets. The market for pipeline space is indicating that supply will start to ease at some point in May, assuming the two local refineries return from maintenance in that window, with June premiums offered 40 cents/gallon lower than May bids.
Refiners will start reporting their Q1 earnings later this week. Crack spreads were healthy for that time of year but have since slumped to their lowest levels since the war broke out, which will cloud the future outlook for many. A Reuters article highlights how Russia’s supply loopholes are creating big opportunities for Indian and Chinese refiners, and those in the Middle East who can buy cheap Russian barrels for domestic use, and export their own products at higher prices, all of which is contributing to lower margins globally.
The debate over who will buy TA continues with SEC filings detailing the arguments on both sides.
The Dallas Fed’s Texas manufacturing survey was flat in April after increasing modestly in May. The report noted that “Perceptions of broader business conditions worsened notably in April” while new orders slumped for an 11th straight month.
Energy Futures Steady After Last Week's Sell-Off
It’s a mixed start for energy markets to start the week with Crude oil and gasoline prices moving modestly lower while diesel prices hold small gains. Prices seem to be stabilizing after last week’s big sell-off, with little news to push values one way or another.
RBOB prices continue to hold above their weekly trend line, leaving the door open for a push higher as we approach driving season, while ULSD prices remain on the cusp of a technical breakdown that could push prices towards the $2 mark.
Money managers were adding to their net length in most energy contracts last week, pushing the speculative bets on higher gasoline and WTI prices to their highest levels of the year. That report was compiled on Tuesday just as the selling was picking up steam, so no doubt some of that new money would like a do-over.
Baker Hughes reported an increase of 3 oil rigs and 2 natural gas rigs drilling in the US last week. The Permian basin led the increase with 3 more rigs active on the week.