Energy Markets Reeling On FED and EIA News

Market TalkWednesday, Mar 8 2023
Pivotal Week For Price Action

Energy markets got hammered Tuesday following comments from the FED president that suggested interest rates may go higher than previously forecast, and a monthly report from the EIA that suggested fuel supplies are going to heal faster than previously expected.

Within a few seconds of Jerome Powell beginning his congressional testimony we saw a harsh reaction in energy futures that moved quickly and sharply lower.  It was interesting to note that equity markets took longer to build up momentum to the downside, and were actually following energy contracts, not leading them. Prior to that testimony, Fed fund futures showed the market split 50/50 on whether rates would go up more than 75 points by July, and today 86% are betting that rates will be increasing by 100 points or more in that time.

The selloff certainly took the wind out of gasoline’s sails after reaching a 4-month high earlier in the day and looking poised to make a run at the $3 mark in March. That said, the slide hasn’t yet changed the technical outlook on the weekly charts, leaving the door open for the spring gasoline rally to continue if RBOB can hold above the $2.60 range. The technical outlook for distillates remains neutral at best and may be reliant on a pull higher from gasoline to avoid another test of support at $2.66, that could lead to a bigger move lower if it fails to hold.

The EIA thinks it figured out why they’ve had more than 2 million barrels/day of crude oil inventory show up in their weekly reports the past few weeks. EIA administrator Joe DeCarolis took to Twitter Friday to awkwardly spell out the reason why their reporting has had so many issues of late in a string of 140-character notes. They said that crude oil blending and under-reported oil output were the two key reasons for the huge builds in inventories, over the past few weeks, even though the other figures suggested we should see inventories decline. 

The blending factor is certainly a real issue, as many refiners have reported that due to the high levels of condensates blended in gathering systems, aka “Hydrocarbon Soup” that “WTI” isn’t WTI anymore, which has created challenges for processing that oil which has more light ends than many plants are configured to handle and makes them more valuable in the export market than at home, particularly when many other countries have less complex facilities and less strict pollution controls.

The report also notes that those condensates are not yet reportable in the EIA’s data, which is why their net effect ends up as an adjustment factor. The tweet storm ended with a note that suggests the agency will soon change their weekly reporting forms to better account for the extra liquid production and blending, with their plans to be laid out on March 22. 

Speaking of data not reported by the EIA, you may wonder why west coast diesel markets have been trading at a discount to futures even though PADD 5 diesel inventories look tight.   Part of the answer, besides the horrible weather to start the year that’s ground trucking and industrial demand to a standstill, is that the EIA does not yet count Renewable diesel inventories in their weekly report, so the rapidly increasing RD simply isn’t showing up in the figures. As RD continues to become more available, it’s likely we’ll see the EIA add this to the weekly figures, either on a standalone basis or as part of the total ULSD pool. We saw a similar phenomenon about 15 years ago as the EIA had to adjust their reporting to account for the steady increase in ethanol blending after congress declared grain alcohol had to be blended into fuel.

Perhaps next week the EIA can tweet why their latest short term energy outlook reduced the forecast for vehicle miles traveled over the next 2 years but increased its estimate for gasoline consumption. The monthly report also forecast that US gasoline inventories will have a counter-seasonal build this spring after refineries return from a heavy maintenance schedule in March. The forecast also says that the demand for US product exports, particularly diesel, will diminish this year as new refinery capacity comes online elsewhere in the world.

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

Market Talk Update 03.08.2023

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Pivotal Week For Price Action
Market TalkFriday, May 17 2024

The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

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

Pivotal Week For Price Action
Market TalkThursday, May 16 2024

Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

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, May 15 2024

Week 19 - US DOE Inventory Recap