Energy Markets Rally As Saudi-Russia Production Cuts Extend

Market TalkFriday, Aug 4 2023
Pivotal Week For Price Action

Oil and diesel futures are poised for a 6th straight week of gains after some whipsaw price action over the past couple of days.

ULSD futures saw a 12-cent intraday reversal lower Wednesday - that ruined a run at 12 consecutive increases – followed by a 13 cent bounce off of their lows Thursday to set a new 6 month high. The double reversal puts the bulls back in the driver seat with weekly charts suggesting a run towards $3.50 could be coming soon. 

Saudi Arabia and Russia both announced they would extend their voluntary production cuts yesterday, which helped give WTI and Brent a boost, even though the Russians reduced the amount they are keeping off the market. Ukraine seems to want to help the Russians involuntarily reduce their export volume taking aim at a major Black Sea port overnight

After being the weak link in the energy chain for much of the week, RBOB futures have decided to join in on the bull run fun and are leading the complex higher this morning with nickel gains for the prompt September contract.

Back to school squeeze? Gasoline spreads are getting interesting once again as we wind down the last weeks of summer the Sep/Oct (U/V) RBOB futures contracts (AKA the “sunburn spread”) have widened out to an almost 25 cent premium for the remaining summer-grade RVP grade, which is roughly double what we’ve come to expect with that annual transition. West Coast spot are seeing even more dramatic moves with San Francisco CARBOB trading up close to a 50-cent premium to summer-grade futures and LA approaching a 40-cent premium, despite the new laws from the governor of California that now require refiners to report their trading activity on a daily basis that were put into place following last year’s RVP transition-related price spike.

Time for reform? A pair of reformer-unit upsets at Gulf Coast refineries seems to be a contributor to the relative strength in gasoline prices so far today. Exxon’s Baytown facility reported a hydro-former unit had a leak yesterday, but noted it had a “minimal impact to production” in its regulatory filing. Total was forced to shut a unit at its Port Arthur refinery after a pump leak that lasted 11 hours, which will most certainly have more than a minimal impact to production.

PBF joined the growing list of new Renewable Diesel producers, reporting during an earnings release Thursday that output at its St. Bernard (parish, not the dog) JV production facility co-located at its Chalmette LA refinery came online in July. The company’s operations followed the theme of most refiners in Q2, with margins notably lower from the record-setting quarter a year ago, but still above average despite lackluster demand as inventories remain relatively tight across the country.

Slowing down? The July payroll report estimated 187,000 jobs added last month, while the May and June estimates were revised lower by a combined 49,000 jobs. The headline unemployment rate ticked down a tenth to 3.5%, while the less-manipulated U-6 unemployment rate ticked down 2 tenths to 6.7%. The market reaction was muted to the report as it probably isn’t good or bad enough to change the FED’s plan of action on interest rates.

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

Market Talk Update 08.04.2023

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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