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Refined Products Are Trading Down A Couple Of Cents In The Early Going While Crude Oil Contracts Are Seeing Modest Gains As July Trading Comes To A Close
Refined products are trading down a couple of cents in the early going while crude oil contracts are seeing modest gains as July trading comes to a close, in what should end up being the strongest month in almost a year for energy contracts.
RBOB gasoline futures came within 65 points of reaching the $3/gallon mark Friday, before stalling out and pulling back to around $2.93 this morning. The July contract expires today, and August is trading more than 6 cents lower, reducing the chances of another run at $3 gasoline futures near term, while physical prices across the 3 West Coast spot markets are all well above that level. Most cash markets are already trading vs August futures, so watch that contract for price direction today if you’re not already.
ULSD futures topped out at $2.9748 Friday before sliding to around $2.93 this morning but aren’t seeing anywhere near the backwardation of gasoline (another sign of the dramatic changes from a year ago) and the charts suggest a decent chance diesel futures can still make a run at $3 over the next several days. Just like gasoline, west coast ULSD spot markets are all trading north of $3, while markets east of the Rockies range from $2.86-$2.95 this morning.
Money managers continue to jump on the energy bandwagon, adding length across the board last week in crude and refined products. The net length (bets on higher prices) for RBOB and ULSD is at the highest level of the year, with the late-comers still willing to buy after the strong July rally. From a historical perspective, the outstanding length held by the big speculators is relatively mild, so it’s not yet a contrary indicator that the trend may soon run out of steam.
Open interest continues to recover in RBOB ULSD and Brent contracts as easing volatility and margin requirements encourage funds to return to the market after many were forced out during last year’s chaos. The exception to the OI recovery rule is WTI, which is still running roughly ½ million contracts lower than anything we saw from 2016-2021.
The reason for the slump in the classic NYMEX crude oil contract appears to be the rapid expansion in trading activity for new WTI contracts FOB Houston and Midland as the export market for domestic crude grades increases. Both the CME Group (NYMEX parent) and ICE (Home of the Brent contract) are racing to take advantage of the changing patterns, and both exchanges have reported record trading activity in their new WTI contracts over the past week.
Baker Hughes reported a drop of 1 oil rig and 3 natural gas rigs drilling in the US last week, continuing the trend of slow but steady attrition in the rig count that’s been happening for most of the year. Unlike the past 3 weeks however, the Permian basin didn’t lead the slide, and actually increased by 1 rig on the week. Don’t expect a rapid recovery in rig counts with oil prices north of the $80 mark given the long lead times needed to acquire equipment and crews, but we may see the declines come to an end if prices can hold near current levels.
California Carbon Allowance (CCA) prices spiked to a record high last week after the Air Resources Board (CARB) announced plans to make the Cap & Trade program more stringent. California’s Low Carbon Fuel Standard (LCFS) credit values meanwhile continue to languish as new production of renewables, most notably renewable diesel, creates a surplus off credits and the state’s plans to also make that program more stringent are less clear.
The National Hurricane center is tracking two potential storm systems in the Atlantic this week, one of which is given 80% odds of being named, while the other has just 20%. Both systems look like they’ll stay far enough out to sea to not be a threat to land, while the map suggests they could end up merging off the coast of New England. Two storm systems converging off of the New England coast…seems oddly familiar.
Refined Products Set Fresh Multi-Month Highs In Another Strong Session For The Bulls Thursday
Refined products set fresh multi-month highs in another strong session for the bulls Thursday and have resumed that push higher this morning after a brief pullback overnight.
August RBOB futures reached $2.9679 this morning, the highest level since October of last year. It seems like we’ll see at least an attempt to try and push those values to $3 ahead of the contract expiration on Monday, before the roll to the September contract knocks about 7 cents off of the prompt values. The strength in futures and time spreads this week has come in spite of weakness in NYH basis differentials and Colonial linespace values as PADD 1 refinery runs quickly recovered after the extended downtime at the Bayway refinery.
ULSD futures are trading at their highest level since Valentine’s Day touching $2.9338 in the early going, which opens up a similar window for a push towards $3 just like RBOB. Unlike RBOB however, physical buyers seem to be jumping on the diesel bandwagon with stronger basis values seen across most of the country, and less backwardation in the forward curve means prompts values will drop just a penny or two after Monday’s expiration.
While refined products are celebrating a summer renaissance, ethanol values are heading the opposite direction, dropping by 25 cents this week on the back of weaker corn prices. The diverging price patterns has pushed the premium for gasoline vs ethanol (net of RIN values) north of $2/gallon.
We are still about 6 weeks away from the peak of hurricane season, but the NHC is tracking 3 different potential storm systems this morning, 2 of which could be threats for the east coast. The good news is 2 of the 3 systems are given low odds of development and are already close to shore giving them little chance to develop into something meaningful. The third system is given 60% odds of being named next week and is far enough north and east that it may stay offshore, but there is a possibility of some disruption along the Eastern Seaboard as it moves north.
There’s a common theme among the refiner Q2 earnings releases this week: The 2nd quarter of 2023 was nowhere near as strong as the record smashing margin environment they enjoyed a year ago, but margins are still pretty good given low inventory levels and recovering demand. The reports are also confirming what many on the West Coast already knew, that renewable diesel production has surged in the past 6 months and created a rapidly changing environment for the diesel marketplace as both the new renewable barrels and the old traditional diesel barrels all look for new homes.
Total US Crude Oil Stocks Drew Down Slightly Due To Lower Imports
The smaller-than-expected product draws, reported by the Department of Energy yesterday, seems to be what the headlines are pointing towards to explain yesterday’s rally in energy futures. However, the bump in refinery runs, particularly in the PADD 1 region (the delivery point of the NYMEX refined product contracts), suggest yesterday’s rally was primarily driven by the speculative traders, riding the momentum of a rally that started earlier this month. It wouldn’t be a surprise to see a net addition of long position put on by money managers on Monday’s Commitment of Traders report.
Total US crude oil stocks drew down slightly due to lower imports and increased exports and refinery runs. Diesel stocks stayed pat with rising imports offset by rising demand. Gasoline demand continues to recover from last month’s drop off but is still well below the 5-year average.
While there is no smoking gun on why US ethanol stocks have broken through the top end of its 5-year seasonal range, other than “we made more of it”, it will be interesting to see if the new rice export rules India imposed this week will have a more resounding impact on the global ethanol market. In semi-related news, Indonesia’s state-run energy company Pertamina has begun supplying gasoline with a 5% mixture of ethanol, made from sugar molasses.
How many ways can we express that it’s hot outside, and that isn’t good? The EIA published a report this morning illustrating how much more power is required to cool commercial buildings in hot vs cold weather. While 98% of the energy consumed in keeping our offices chilly is supplied by electricity with only a fraction of a fraction coming from petroleum products, further stressing some states’ energy grids may cause some plants to subsidize output deficits by burning natural gas or ULSD.
The three storm systems that addled the NOAA’s 7-day forecast just two days ago have all but dissipated, save for one area of intrigue that has a 40% chance of development in the next week. As of now, the potential storm looks like it will curve northward, potentially staying out to sea as we’ve seen prior storms do earlier this season. So far there has been no activity threatening the nation’s refining center in the Gulf Coast, but we are still about a month away from peak hurricane season.
Week 30 - US DOE Inventory Recap
August Futures Up More Than 40 Cents/Gallon From Their 4th Of July Lows
After a 1-day pullback, the rally has resumed for refined products as we await the latest FOMC announcement and the DOE weekly stats.
Gasoline prices have now increased in 12 of the past 15 trading sessions, bringing August futures up more than 40 cents/gallon from their 4th of July lows.
ULSD prices managed to recover all of the early losses and finish with slight gains on the day, marking a 6th consecutive session of increases, with today making 7 if prices hold in the green. In addition to the bounce in futures we’ve seen some heavy buying in physical markets as well this week, with LA spot diesel hitting the highest basis values of the year, while Chicago ULSD has rallied to single digit discounts to ULSD futures after trading 30+ cents below earlier in the month.
The rally in refined products has pushed crack spreads to their highest levels since March, which is welcome news for refiners who have suddenly felt a bit of a reality check with supplies and margins returning to more normal levels in recent weeks. Then again, you have to be operating a refinery to enjoy the recent rally, and numerous unplanned outages – like this one in Memphis - have contributed to the move higher, so not everyone is celebrating.
While refined products march higher, oil bulls aren’t quite ready to push prices north of $80, rallying to within a dime of that mark Tuesday before pulling back by more than $1/barrel. If the bulls can sustain a push above $80, there’s not much on the charts to stop a run at $90 in the back half of the year, with April’s high of $83.53 the only meaningful layer of prior resistance on the weekly chart. If we see oil prices fail to sustain this rally however, they will soon act as a major headwind to the rally in products given the extra refining capacity brought online around the world in the past year.
Speaking of which, it looks like the zombie refinery FKA Hovensa and Limetree bay may be given another chance to come back to life after a court ruled the EPA overstepped its authority (shocking) in requiring new permits before letting the new owners attempt to restart the facility.
You can’t make this up: protesters in Scotland concreted themselves to a road to block the country’s only refinery to protest its GHG emissions. Perhaps for their next trick the group will dump oil on the ground to protest the extreme amounts of CO2 released by concrete.
The API reported builds in crude oil and diesel inventories of 1.3 and 1.6 million barrels respectively, while gasoline stocks dropped by 1 million barrels last week. The DOE’s weekly report is due out at its normal time this morning.
Gasoline Futures Hit 9-Month Highs, WTI Eyes $80
Refinery upsets and optimistic equity markets sent gasoline prices soaring Monday, while ULSD and WTI had a much more tempered outlook. RBOB gasoline futures surged by more than 12 cents to touch a new 9 month high before giving back more than half of those gains since topping out early yesterday afternoon. While WTI was left in gasoline’s wake yesterday, it did manage to settle above its 200 day moving average which leaves the door open to a push north of $80 in the near term.
A reported FCC shutdown at Exxon Baton Rouge set to last weeks, which could erase more than a million barrels of gasoline output, took much of the credit for gasoline prices far outpacing the rest of the complex Monday. In addition, Marathon’s Texas City (aka Galveston Bay) facility had yet another upset over the weekend, marking at least a half dozen events since a fatal fire 2 months ago.
Despite the big moves in futures, physical traders seemed unimpressed with USGC basis values little changed on the day. West Coast basis values on the other hand rallied after the roll to August pipeline cycles, pushing cash gasoline prices up by more than 16 cents on the day following yet another reported upset at an LA-area refinery.
The EIA published its annual refinery capacity report Friday, noting the first increase in US refining capability since 2019, even though the report still does not include Exxon’s 250mb/day expansion in Beaumont or smaller additions from Valero Pt Arthur or Marathon Galveston Bay that occurred this year. The increase in the past year was all due to PBF Paulsboro bringing shuttered units back online in 2022 as East Coast refiners went from worst to first due to the fallout from the Russian invasion of Ukraine. Good news for those who don’t enjoy reading, the EIA is now publishing these notes on YouTube, despite the ongoing writers’ strike.
After the Atlantic’s first hurricane of the season came and went over open water this past week, the NHC is tracking 2 more potential storm systems. One is targeting the east coast of Florida, Georgia and South Carolina while the other makes its way into Caribbean, but both are given just 20% odds of developing over the next 7 days.
An EIA note last week took a closer look at the impact on tropical systems on Gulf Coast oil production and refining, forecasting a peak impact of a storm shutting in 80% of GOM oil output, and taking 8% of the country’s refining output offline for a month. This Reuters note details how refinery issues not caused by hurricanes have kept diesel inventories across the US low (outside of the West Coast where Renewable Diesel inventories don’t show up in official numbers yet) and making the system more susceptible to a price shock should a storm hit.
Pretty much everyone Is betting the FED will raise their target interest rate by 25 points tomorrow, with the CME’s Fedwatch tool showing a 99% probability of that outcome, while 1% thinks the FED may raise by 50 points. It’s worth noting that a month ago 28% of bets were placed on the FED holding rates steady at this meeting, and yet equities have rallied in the face of tighter monetary policy, in another sign of shifting expectations from economists that tend to predict 5 out of every 2 recessions.