Big Swings Overnight Driven By Compromise News

Market TalkWednesday, Jul 14 2021
Pivotal Week For Price Action

It looks like a quiet morning for energy futures that are holding near break-even for the day, and still hovering close to 6 year highs. Don’t be fooled into thinking the market isn’t still volatile however, as the current values don’t show that refined products dropped 4 cents overnight (wiping out Monday’s 3-4 cent gains) only to bounce back violently to erase those losses in a span of just about 20 minutes shortly after 6 a.m. central. For now, the charts continue to favor higher prices with the 8-month-old bull trend intact, but we’ll need to see last week’s highs taken out before month end or there’s a good chance that a big correction lower will come soon.

The big swings overnight appear to be driven by news that Saudi Arabia and the UAE have reached a compromise, which should eventually bring more oil to market. The eventually piece may be what encouraged buyers to step back in so quickly as the new output – IF the deal is confirmed - isn’t likely to come online for several more months.

As has become the pattern of late, the API reported another large draw in oil inventories last week at 4 million barrels. Gasoline stocks were also estimated to be lower, by 1.5 million barrels, but distillates increased by nearly 4 million barrels, which helps explain ULSD futures seeing the most downward pressure overnight. The EIA’s weekly report is due out at its normal time this morning. Last week’s report saw an all-time record for the gasoline demand estimate, which coincided with the pre-holiday rush now that most people are back to moving about. There’s evidence on the ground of a substantial holiday hangover with retail volumes dropping last week, but it’s hard to say if that will translate to the official numbers which only measure product removed from the bulk system.  

EIA prophecy? Monday the EIA highlighted its Southern California Daily Energy report, (which is ominously published at eia.gov/special/disruptions/summer/) and then Tuesday a refinery near Los Angeles was reportedly forced to shut most of its units due to a power failure. That news sparked a modest rally in LA spot diesel basis, which had been languishing in negative territory for the past 2 months. So far the moves are relatively minor, just a penny or two, nothing like the wild swings the LA Spot market has been used to in years past, but have gone dormant over the past year. (See chart below)

Caught short: A violent spike in corn prices had RINs rallying early in Tuesday’s session, but quickly gave up those gains when the grain rally proved short lived.  It appears someone may have got caught short on the expiring July corn contract, which were up 80 cents (nearly 12%) at one point before giving up almost all of those gains later in the session, while the forward contracts did not move much at all. Not sure what that means? Think back to when crude went negative last April on the day before the May contract expired…it’s just like that, just less extreme and in reverse.  

More big news in the Carbon markets this week. The EU is set to release 13 policies today aimed at combating climate change this decade. The centerpiece is an expansion of the Emissions Trading Scheme (their word not mine). China meanwhile is launching the world’s largest Emissions-Trading program this week, which sounds impressive but also makes sense because they’re the world’s largest carbon emitter. Not sure what these various programs mean or how they work? You’re not alone, the segmentation in this rapidly expanding and evolving space is creating plenty of confusion, and like we saw in with the Renewable Fuel Standard, will likely attract plenty of fraudsters making up fake credits.

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

TACenergy MT 7.14.21

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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, Apr 10 2024

Week 14 - US DOE Inventory Recap