A Trio Of Headlines Are Pushing Energy Prices Sharply Lower

Market TalkTuesday, Oct 11 2022
Pivotal Week For Price Action

Last week’s supply fears that sparked the strongest rally since April have given way to demand fears following a trio of headlines that are pushing energy prices sharply lower. Another round of lockdowns in China is certain to curb demand for fuel by the world’s largest oil importer, European markets are facing fears of financial market instability after the Bank of England was forced to intervene again to prevent fire selling of government debt, and JP Morgan’s CEO warned that the US is likely about to dip into a recession.

That trio of negativity seems to be the driving force behind the sharp pullback in futures this week, whereas physical markets continue to signal that supplies are tight and options to refill storage tanks are few and far between. See this Bloomberg article for a detail look on the changing flows of Russian oil, and why that means supply options globally may soon go from bad to worse.

ULSD futures are leading the move lower after several 10+ cent swings Monday that eventually led to a weaker finish following several rallies throughout the day. The November contract is currently trading down around 15 cents, after being down as much as 22 cents overnight, marking a 39 cent drop from the high trade set Monday morning. Considering that ULSD prices had risen 98 cents in 2 weeks, this type of pullback shouldn’t be too surprising, and was actually a common occurrence this spring, but is also a good reminder of why open interest has dropped so sharply as many traders simply aren’t allowed to take on this type of risk.

The rally, and pullback, in ULSD is eerily similar to what we saw in August, with a 97 cent run-up over two weeks followed by a big reversal. If that pattern plays out again, we should see prices stabilize for a week or two in the $3.60 range. The big question from there is if prices will give back all of their gains like we saw in September, or if they’ll make another push higher. Longer term charts, and inventory reports, continue to favor another rally towards the $4.50 mark this winter.

A storm system is given 60% odds of developing in the Gulf of Mexico this week, but forecast models suggest it will bring heavy rains to Mexico and not threaten refinery row along the gulf coast.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk Update 10.11.2022

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Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
Market TalkWednesday, Nov 30 2022

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.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkWednesday, Nov 30 2022

Week 48 - US DOE Inventory Recap