Energy Futures Drift Higher Ahead Of Fed Announcement

Market TalkWednesday, Jun 14 2023
Pivotal Week For Price Action

After two days of large back and forth swings to start the week, energy futures are quietly ticking higher this morning as markets around the world await the FED’s latest announcement later today. Refined products had been bouncing back and forth across the break -even line in the early going but are holding gains of 2-3 cents around 8am central, adding to Tuesday’s recovery rally.   

Gasoline prices remain near the middle of their recent trading range, with a neutral technical outlook after the annual spring “driving season” rally seems to have run its course. ULSD prices meanwhile are creeping towards the top end of the trading range that’s held prices for the past 2 months. If we see prices move above $2.45 that would open door for a run at $2.60 short term, even though longer-term charts suggest this sideways pattern may just be a temporary consolidation of the bear market that’s already seen prices drop by more than $2.50/gallon in the past 9 months.

Just about everyone expects the FOMC to hold rates steady in its announcement due out at 1pm central today. The CME’s FedWatch tool shows a 94% probability that the target rate will be left alone today, a big increase from the 74% odds given prior to yesterday’s CPI report that showed inflation holding in most categories besides fuel prices.  More people are betting on at least 1 more rate increase to combat that less “transitory” inflation, with odds of at least a 25 point increase now set at 40% up from 24% prior to the CPI report.

The API reported inventory builds across the board last week with gasoline stocks up 2 million barrels on the week, diesel up 1.4 million and crude oil up 1 million thanks to another release from the SPR of 1.9 million barrels on the week. The DOE’s weekly report is due out at its normal time, and may be largely shrugged off due to the other news of the day, not to mention that several of the more meaningful data points are admittedly inaccurate.

OPEC’s monthly report showed the cartel making good on earlier promises to cut production, with output for the month down 464,000 barrels/day, despite healthy output increases from Nigeria and Iran, who are exempt from the output cuts. The report highlighted stronger than expected economic activity in the first quarter of 2023, and suggested China’s reopening will continue to keep fuel demand on an upward trajectory, despite signs of slowing in developed nations. The OPEC report also highlighted an increase in refinery runs and decrease in margins as facilities ramp up operations to full run rates after a busy spring maintenance season and Chinese export quotas are expected to continue bringing more supply to the global market. Margins for US operators remain above those in Europe and Asia, although this report does not normalize spreads for the costs of various environmental programs. 

Speaking of which, the EPA announced it was delaying its RFS volume targets – again – on Tuesday. The timing and method of delay are even more suspect than normal (keep in mind we’re already 19 months past the law’s deadline) as the EPA had to convince biofuel trade association Growth Energy to go along with the plan, which seems to imply a favorable outcome for renewable fuel proponents. The RIN market disagreed with that theory however, with a flurry of afternoon trades done after the announcement that pushed 2023 levels down 4 cents from levels done in the morning.

While OPEC thinks China’s economic recovery is continuing, China doesn’t seem to think so as the country prepares to provide new economic stimulus and perhaps cut its interest rates tomorrow, in an effort to prop up stalling growth. 

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

Market Talk Update 06.14.2023

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Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday

Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.  

The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news. 

There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.

The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.   

Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.

Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours.  It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much. 

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

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week

The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today. 

The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.

IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year

US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule.  Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.

Chicken or the egg?  Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands.  Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.

Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check.  The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior.   The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.

As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.

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, Sep 20 2023

Week 38- US DOE Inventory Recap