A New Read On Inflation, That Continues To Hold Near 40 Year Highs Sparked A Wave Of Heavy Selling Pressure
Energy markets were trading higher for a 2nd day, moving the complex further away the technical support that threatened an end to the 2 month rally on Monday.
Some bullish fundamental data from the weekly DOE report and OPEC’s monthly report seemed to be encouraging buyers to continue to step in after the big selloff earlier in the week
A new read on inflation, that continues to hold near 40 year highs looks like it sparked a wave of heavy selling pressure into the complex shortly after 8am central, knocking refined products 3-4 cents below their overnight highs, which should make for some volatile action to end the week.
OPEC increased its global demand estimates for the year, and lowered its supply estimates as the end of Omicron and a tick up in industrial activity are expected to drive consumption while supply networks will need longer to sort through their logistical bottlenecks. The cartel’s oil production continued to increase, but at a slower pace than had been forecast as declines in Venezuela, Libya and Iraq offset the increases from Saudi Arabia, Nigeria and the UAE.
Cause & Effect: While the weekly moves in the DOE report weren’t particularly notable, the historical perspective makes a strong argument for the strong prices we’re seeing in several markets.
US Crude oil inventories reached a 3.5 year low last week, and production continues to be slow to return, both of which seem to be aiding the move back above $90 for WTI this morning.
Gasoline inventories made their first decline in 6 weeks as demand surged ahead of the winter storm. If in fact gasoline stocks are making the turn from winter build to spring drawdown, they’re doing so from a much lower level than the past few years, and with refining capacity much lower than it was pre COVID shutdowns, the early draw puts the supply network at risk of more challenges as we approach the driving season.
Want to see why Midwestern diesel prices have been trading 20 cents or more below their coastal counterparts? Take a look at the diesel inventory charts below where PADD 2 is the only region in the country with stocks that aren’t below their 5-year seasonal range. Midwest refiners are contributing to the excess, with run rates well above their seasonal norms, and 10% above last year’s rates.
This coming week marks the 1 year anniversary since the biggest disruption in refinery runs on record, and while we did see a handful of refinery shutdowns from last week’s storm, the impact will pale in comparison to the dramatic drops you can see on the refinery run charts below.
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Gasoline Futures Are Leading The Way Lower This Morning
It was a volatile night for markets around the world as Israel reportedly launched a direct strike against Iran. Many global markets, from equities to currencies to commodities saw big swings as traders initially braced for the worst, then reversed course rapidly once Iran indicated that it was not planning to retaliate. Refined products spiked following the initial reports, with ULSD futures up 11 cents and RBOB up 7 at their highest, only to reverse to losses this morning. Equities saw similar moves in reverse overnight as a flight to safety trade soon gave way to a sigh of relief recovery.
Gasoline futures are leading the way lower this morning, adding to the argument that we may have seen the spring peak in prices a week ago, unless some actual disruption pops up in the coming weeks. The longer term up-trend is still intact and sets a near-term target to the downside roughly 9 cents below current values. ULSD meanwhile is just a nickel away from setting new lows for the year, which would open up a technical trap door for prices to slide another 30 cents as we move towards summer.
A Reuters report this morning suggests that the EPA is ready to announce another temporary waiver of smog-prevention rules that will allow E15 sales this summer as political winds continue to prove stronger than any legitimate environmental agenda. RIN prices had stabilized around 45 cents/RIN for D4 and D6 credits this week and are already trading a penny lower following this report.
Delek’s Big Spring refinery reported maintenance on an FCC unit that would require 3 days of work. That facility, along with several others across TX, have had numerous issues ever since the deep freeze events in 2021 and 2024 did widespread damage. Meanwhile, overnight storms across the Midwest caused at least one terminal to be knocked offline in the St. Louis area, but so far no refinery upsets have been reported.
Meanwhile, in Russia: Refiners are apparently installing anti-drone nets to protect their facilities since apparently their sling shots stopped working.
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The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.