Energy Futures Are Bouncing Back This Morning After Their Biggest Daily Drop Since Black Friday
Energy futures are bouncing back this morning after their biggest daily drop since Black Friday as a debate over troop counts, inventory declines and a presidential warning all seem to be encouraging buyers this morning. Equity markets continue to struggle with another troubling inflation report and a flattening yield curve both signaling to many that there may be more economic pain ahead.
As the forward curve charts show, despite the big selloff Tuesday, not much has changed from a week ago. From a chart perspective, the weekly bullish trends are still holding, but there’s no longer much room to spare to the downside if the bulls are going to regain control this week.
While NATO and Russia continue to disagree on just about everything, including whether there are more or less troops surrounding Ukraine, the US President warned that the sanctions planned if Russia does invade will target energy exports, which will likely push prices higher. Given that petroleum prices have already risen 40% or more in the past 2 months (see the PPI inflation note above) the question then becomes whether or not that’s already priced in, and anything less will become a reason to sell in the near future.
The API reported small inventory draws across the board last week. If the DOE confirms that estimate, it will provide more validation for the backwardation we’re seeing in the forward curves as most US markets outside of the Midwest are tighter on days of supply than they typically are this time of year, setting the stage for more product allocations and outages as demand ramps up this spring.
Speaking of outages: Another winter storm is sweeping the country, and is expected to bring severe thunderstorms with it. Unlike the last 3 storms however, it’s not expected to bring the cold snap, snow and ice to parts of the south that disrupted both refinery operations and travel. While overnight temperatures will dip below freezing for most of Southeast, day time tempts will still be pushing mid 50s which should help limit the surge in electricity demand that might hamper a diesel supply network that’s been caught flat footed this winter. That sigh of relief seems to help explain why the March HO contract went negative in the past few minutes after being up 4 cents overnight, while the rest of the complex is holding onto gains.
The relatively tight gasoline markets should make the spring RVP transition a bit easier for inventory holders, and may limit the amount of price dumping that often happens as the deadlines loom. The refiners that survived the COVID crisis look to be in a great position now as crack spreads have rebounded nicely and the forward curve shows them staying in positive territory for the next few years.
The EIA continues to predict that US oil production will hit record highs this year and next, even though the weekly stats have yet to show much increase in output so far this year. The Permian basin is expected to account for 6 out of every 7 new barrels of oil produced in the country this year according to the report, while other basins will take on more of the burden next year.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
Click here to download a PDF of today's TACenergy Market Talk
Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.