Beware The Ides Of March - Biggest Daily Drop Of Year For Energy Complex Yesterday
Beware the ides of March. Wednesday saw the biggest daily drop of the year for the energy complex, which joined in a major selloff in risk assets around the world as fears over the latest banking crisis spread.
Futures did not waste any time moving towards their technical targets to the downside when chart support failed to do much at all to stand in the way of the selling wave yesterday morning. WTI dropped briefly below $66, its lowest since December of 2021, while ULSD dropped to its lowest level since early January of 2022, and RBOB closing the gap in its charts left behind by the RVP roll, which now leaves the complex looking like it may consolidate for a while.
Diesel prices continue to look the most vulnerable, with a move towards $2 possible if prices can’t hold above $2.50 to end the week. RBOB meanwhile doesn’t look nearly so bad despite the big drop yesterday, and now that the gap is closed on the continuous chart, there’s still an argument to be made that we could get a traditional spring rally over the next couple of months.
While the 10+ cent drops in refined products and 20-cent trading ranges are certainly noteworthy, they pale in comparison to what we saw in March of last year, when trading ranges were routinely north of 30 cents/gallon. March 15, 2022, for example, saw gasoline prices drop 17 cents with a 28-cent range, while ULSD dropped 25 cents with a 33-cent range, and that day was actually quite tame compared to the previous week.
The DOE had another adjustment of more than 15 million barrels (aka 2.2 million barrels/day) on crude oil inventories last week, which helped inventories build despite large increases in exports and refinery runs, while production remains stagnant.
Total petroleum demand remains soft, well below last year and the 5-year average as gasoline and diesel consumption are both holding at the bottom end of their 5-year seasonal range.
Exxon announced that its 250mb/day expansion at its Beaumont refinery was officially online Wednesday, which accounted for the 249mb/day increase in PADD 3 refinery runs last week. The DOE has not yet counted those new units in its capacity figures, which will mark the largest increase in US output in over a decade, and could be the last major refinery expansion ever in the US but will likely do so next week following the official announcement.
PADD 5 also saw a substantial increase in refinery runs last week of 124mb/day, or roughly 6% of capacity, as plants returned to service after a rash of issues in the past month. That increase in production was foreshadowed by large declines in gasoline basis values over the past couple of weeks.
The US Exported more than 6.2 million barrels/day of refined products last week, but gasoline and diesel only accounted for 2 million bpd of that total as the “other” liquids like propane, propylene, and other oils continue to see growth in both international demand and US production.
The IEA’s monthly oil report still suggests that global demand will accelerate sharply in 2023, bringing total consumption to a new record high of 102 Million barrels/day by the end of the year, despite the sluggish start. Rebounding air traffic and the release of pent-up Chinese demand are said to “dominate” the recovery. The report also forecasts refinery runs will stay strong this year, despite the recent collapse in diesel margins, as cracks are still strong by historical standards.
Couche-tard announced a $3.3 billion purchase of 2,200 stores from Total this morning, nearly doubling the company’s footprint in Europe.
Time for an omelet: The US PPI index decreased slightly in February, which brought a sigh of relief for those looking for any sign that inflation is going away. The news was less encouraging if you read further and saw that “Over 80 percent of the February decline in the index for final demand goods can be attributed to a 36.1-percent drop in prices for chicken eggs.”
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March Trading Is Going Out Like A Lamb As Energy Prices Continue To Search For Direction
March trading is going out like a lamb as energy prices continue to search for direction with Bears focused on soft demand and fears of a recession, while the Bulls can see supply shortages and the risk of disruption lurking around the corner.
While March felt chaotic with a new banking crisis and plenty of other domestic and geopolitical controversy going on around us, it was actually a relatively tame month for refined product futures. The trading range for diesel in March was actually the smallest we’ve seen since before the war broke out and was just ¼ of the range we saw in March a year ago.
Protesters in France agreed to extend refinery strikes through April 4th, which is keeping close to 1 million barrels/day of refining capacity offline. A Business Wire note this morning highlighted how these strikes may be rapidly depleting the stockpiles built up ahead of February’s sanctions that banned Russian diesel imports.
The Dallas FED confirmed what we’ve been seeing in the weekly rig counts, showing that activity in the energy sector has stalled out in the first quarter of 2023. Executives surveyed lowered their Crude oil price outlook for the end of the year by $4/barrel from the previous survey but made a much larger change to expectations on Natural Gas prices, slashing those estimates by nearly 40% since Q4.
As if banks don’t have enough on their plate these days: There were reports this week that Wells Fargo is looking to expand its energy trading business. There are also reports that Wells Fargo was fined nearly $100 million for sanctions violations, is under investigation by the CFTC for illegal trading communications, and that a former executive is facing jail time for obstructing the investigation that ended up with the bank paying more than $3 billion in fines for opening fake accounts.
You may also remember that after the last round of bank bailouts in 2008, the FED moved to make the banks act like banks and not trading houses, which eventually led Morgan Stanley to try and sell their oil trading business to the Russians, only to end up selling it to a firm headed up by a former Enron trader when the Russian deal was nixed by regulators. You can’t make this stuff up.
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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
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