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ULSD Prices Drop Despite Looming Russian Supply Ban
ULSD continues to lead the energy complex lower as January winds to a close, dropping from a high of $3.58 one week ago to a low of $3.0570 this morning. Crude oil and gasoline prices have also come under heavy pressure, but have lagged far behind the moves in ULSD, which has pushed prompt diesel crack spreads by down by $12/barrel in just a week.
Why exactly diesel prices got so weak so fast is a bit of a mystery given that inventories remain well below their seasonal ranges, refineries across the country are running below normal levels due to a rash of unplanned issues, and the embargo on Russian diesel shipments starts this weekend.
The warmer than expected winter has certainly eased concerns of more severe shortages of natural gas and heating oil across Europe and the US North East, but European natural gas prices have been rebounding as temperatures are expected to drop again next week, and French workers are attempting to block more fuel deliveries today as part of the ongoing strikes against state pension reform.
Recession expectations could be a factor in this pullback, as they were during the last 2022 selloff as earnings season is showing that US consumers are slowing down purchases, while the FED is poised for another rate hike tomorrow.
Liquidations by the hedge funds that added new bets on higher prices last week, just in time for this pullback could also be at play, although we won’t get to see that data again until Friday.
The drop could be a sign of the classic “buy the rumor, sell the news” trading phenomenon with the upcoming Russian embargo, particularly given that exports have surged in recent weeks as buyers race to beat the deadline.
There’s also a real possibility that there simply is not a fundamental reason at all for this price pullback, and it has more to do with the big speculative funds that can be the fair weather fans of commodity markets, or the trading algorithms that account for most daily volume being programmed to sell after an 82 cent rally from a low of $2.76 in early December to $3.58 last week.
Whatever the cause, ULSD is now breaking its weekly trendline that propelled prices higher for 7 weeks, and sets up a test of the January lows at $2.92 if they can’t manage a bounce in the next day or two. Then again, if they do bounce, this 50 cent pullback in 5 trading days may be seen as nothing more than the latest big swing in an extraordinarily volatile market and a good buying opportunity for anyone that has a fuel budget.
Pretty much everyone expects the FED to raise rates by 25 basis points tomorrow, with the CME’s fedwatch tool showing a 99% probability of that outcome, and 85% that they’ll raise another 25 points in March. The big question is whether or not the FED will be done raising rates after that, with traders fairly evenly split in their bets on the rates beyond the next two months.
Exxon, Marathon and P66 all reported earnings for Q4 today, and surprised no-one with their strong results, even though refining margins pulled back from the record levels set earlier in the year.
Energy Futures Tumbling Again to Speculator's Chagrin
Diesel futures are leading the energy complex lower for a 2nd straight day and have dropped 24 cents from Friday’s highs. In total, ULSD futures are down 39 cents from the highs set last Tuesday, and the bulls are now in rally-or-else territory as the 6-week-old trend line is suddenly under pressure. The moves for RBOB have been less dramatic, with gasoline prices “only” dropping 11 cents since Friday morning’s highs, which leaves more room to fall before gasoline threatens its weekly trend-lines.
The big selloff looks like it will have several hedge funds wishing for a do-over after adding to their bets on higher fuel prices last week. The big 5 NYMEX and ICE contracts all saw healthy increases in long positions held by money managers in the latest report from the CFTC, while Brent, WTI and ULSD contracts also saw heavy short covering, just before those bets on lower prices would have paid off.
Open interest in crude and refined product contracts saw another week of healthy increases, making it appear that the recent reduction in volatility has more traders getting comfortable returning to the petroleum space after many bailed out during the chaotic trading in 2022.
The timing of this latest pullback in diesel prices is particularly curious given that we’re now less than a week away from the highly anticipated embargos on Russian distillates taking effect. European imports of Russian diesel have surged in recent weeks to get supplies in before the restrictions take place, which may be causing some short-term excess supply, although longer term there are still major concerns about distillate supplies globally.
There’s another winter storm warning issued to oil and gas pipeline operators in Texas this week, but the freezing temperatures aren’t expected to extend south into the refinery zone along the Gulf Coast, so we should not see a widespread impact from this system like we did in December.
A study published by the Environmental Integrity Project is getting a fair amount of press as it highlights the water pollution caused by US oil refineries and the failure of the EPA to enforce the Clean Water Act. The study could end up being a catalyst that forces the EPA to update its 40-year-old standards for wastewater disposal or may be ignored if higher fuel prices become a bigger news story again this year.
Baker Hughes reported a drop of 4 oil rigs drilling in the US last week, offset for a 2nd straight week by an increase in natural gas drilling rigs. Notable this week was that the decline in oil drilling was almost all in waters off the Louisiana coast, while the Permian basin saw a net increase of 3 rigs.
Energy Markets Seeing Modest Gains To Start Friday's Session
Energy markets are seeing modest gains to start Friday’s session, chipping away at the heavy losses we saw earlier in the week.
If prices end near current levels, gasoline prices will be down about a penny for the week while distillates will be down by a nickel, and the weekly charts still have a higher high and higher low than last week, keeping the upward trend intact.
While the pullback Tuesday and Wednesday eased immediate concerns of another runaway rally for fuel prices, warning signs are already flashing that retail fuel prices are back up to $3.50 per gallon during some of the weakest demand of the year, while refiners are still able to blend large amounts of butane into fuel to stretch supplies. With inventories already low and numerous refineries struggling, the stage is set fundamentally for a big rally in the weeks ahead, and technical indicators suggest there’s plenty of room for more upside as the upward trend started in December is still intact despite this week’s selling.
Are we striking or not? That seems to be the question for French unions that tried again Thursday to disrupt operations at refineries and nuclear power plants Thursday, but saw participation wane as cold temperatures increased heating demand and increased the risk of backlash for interfering with fuel deliveries. There’s another strike planned for next week, so the risk to supplies remains if that lasts more than a day or two.
Chevron reported record profits in 2022, even though Q4 earnings pulled back substantially from the prior 2 quarters as fuel prices retreated. The company’s refinery earnings were more than triple 2021 levels, in what is certainly going to be a theme for the rest of the earnings releases upcoming. Of course these companies remain easy targets for politicians wanting to place blame for high fuel prices. The “drill more or else” mantra is probably overlooking that while the on shore rig counts have stagnated, the offshore business is booming once again.
While refined products are recovering, natural gas prices have continued to slide, dropping below $3 for the first time since May of 2021 as inventories swell and weather reports suggest that much warmer winter than previously forecast is still in the cards. Those cheap prices may not last long however as the Freeport LNG Export facility received FERC approval to begin the long process of restarting its operations. That facility accounted for 15% of US exports before a fire last June and has kept domestic prices suppressed as those supplies were stranded inland.
Refined Products Bounce Keeping Prices Well Above Their 6-Week-Old Trend Lines
Refined products are bouncing back this morning after 2 days of selling as a bit of economic optimism appears to be creeping back into the market. The bounce keeps prices well above their 6-week-old trend lines and keeps the bulls in position to push prices substantially higher in the coming weeks and makes the past two days of selling look like nothing more than profit taking to cure an overbought market.
Stocks and energy prices reacted positively to the 4th quarter US GDP estimates this morning that showed the economy continued to expand, albeit at a slower pace than in Q3, and that the consumer continues to be resilient with purchases and savings despite so much consternation about a looming recession. International travel was noted as a highlight in this report, and could be a major theme this year as China has reopened its doors while many other countries get closer to business as usual and release the pent up demand of 3 years of COVID travel restrictions.
Despite surging exports, light imports, and no more SPR releases, crude oil inventories continue to build in the US as refinery runs continue to be far below planned levels. The recovery from the Christmas blizzard and a handful of other events in the past few weeks continues, but we’re still seeing utilization that’s several percentage points below where it would be otherwise. These lower run rates on top of already low inventory levels would be much more painful if demand wasn’t still very sluggish, and adding another anecdote for the half that think the US economy is already in a recession.
Then again, it’s also January which is typically the worst demand month of the year, and we’re in the midst of a parade of winter storms sweeping the entire country and keeping many vehicles off the road, so if we do see a normal demand rebound heading into the spring months, supply may get very tight again in short order.
Valero reported another banner quarter in Q4 this morning, and ended the year with net income of $11.8 billion, compared to $1.3 billion in 2021. The company’s refineries operated at 97% during the quarter, which was the highest since 2018 as they, along with all the others that were able, maximized output to try and help alleviate chronic inventory shortages and take advantage of the record margins those shortages bring. The report also noted that the expansion of their newest Diamond Green renewable diesel facility was completed during the quarter, and the coker project at the Port Arthur refinery which will expand capacity is due to be completed in Q2.
Total reported Wednesday that its refinery outside Houston was knocked offline during Tuesday’s severe weather event. The report suggests the plants boilers were restarted early Wednesday morning, suggesting that the facility avoided any major damage. That facility is just a couple of miles from the Deer Park refinery that was also knocked offline during the storm and restarted a few hours later. Those are the only two facilities reporting so far, while several others in the region have said their operations remain stable, so it seems we’ve avoided a major disruption from that system.
Week 4 - US DOE Inventory Recap
Refinery Upsets Whipsaw Energy Markets
It’s been a rollercoaster ride for energy prices this week with strong gains Monday turning into heavy losses Tuesday, only to see prices rally again overnight and then give up those gains this morning. The theme seems to be that prices have rallied when refinery disruptions appear, then give back the gains when it looks like those issues may not be as bad as originally feared. The first up and down cycle seemed to have a lot to do with the impact, or lack thereof from French protests, while the second ride came courtesy of the severe weather sweeping the US.
The tornado outbreak near Houston Tuesday came dangerously close to many refineries, including a handful of the largest facilities in the country. There were a few reports of power outages and other operational upsets, but so far there are no reports of damage to any facilities or units being completely knocked offline, so we may have just dodged a big bullet in terms of supply security. While we did see a strong price rally overnight as it appeared there would be some disruption to supply in this critical region, the 7-8 cent gains for refined products have been erased this morning as it appears the damage may not have a meaningful impact on output.
In addition to the latest string of weather-related disruptions along the Gulf Coast, there were reports of a fire that injured an employee at the PBF Delaware City refinery Tuesday, although here too it’s unclear if operations were impacted by that event. That’s the second fire in less than a week at a PBF facility, after its plant outside of New Orleans shut a unit over the weekend. Meanwhile, one of the six workers injured in a fire at the Borger TX refining complex last week died of his injuries over the weekend.
In total, we’re seeing unplanned issues stretching coast to coast, with facilities accounting for more than 10% of US production impacted, although the actual extent of the output losses remains unclear, except at the Suncor facility in Colorado which remains completely offline.
We’ll get another look at the impact of this variety of events in today’s DOE report. Yesterday the API reported another build in crude inventories of 3.4 million barrels – suggesting that refinery rates are still restricted, while gasoline inventories saw a small build of 620,00 barrels, and distillates dropped by 1.9 million.