Energy Prices Are Pulling Back Slightly After A Furious 2 Day Rally
Energy prices are pulling back slightly after a furious 2 day rally that added almost 60 cents to diesel prices thanks to a combination of bullish fundamental and technical factors. RBOB prices meanwhile have “only” rallied 30 cents this week before this morning’s pullback, while WTI added more than $10/barrel since Monday’s lows. Yesterday’s DOE report gave plenty more examples of the tight supply for refined products across much of the US, even though crude oil stocks are seeing large increases.
A little less than half of the big build in crude oil inventories reported yesterday can be attributed to the ongoing drawdown of the Strategic Petroleum Reserve (SPR) which pumped out another 4 million barrels last week, and if the announced plan comes to fruition, that should increase to 7 million barrels every week through the summer.
Unfortunately, the crude coming out of the SPR can’t go directly into your fuel tank, and didn’t prevent diesel stocks from dropping to their lowest levels in more than 8 years. Gasoline stocks also had a sizeable draw during the week, dropping well below average levels for this time of year.
A big question mark left by the DOE report: Are we already seeing the early stages of demand destruction with diesel implied demand dropping for a 3rd straight week, helping diesel days of supply to build, even though inventories and diesel production both saw big declines on the week? One thing seems clear looking at the refinery output charts below, US refiners have been doing whatever possible to maximize Jet Fuel production over the past couple of weeks, which seems to be a big contributor to the drop in ULSD production.
Gasoline demand meanwhile is holding steady with year-ago levels, ramping up as we approach the driving season, but holding well below the figures we saw prior to COVID. In general gasoline supplies are on the low end of their seasonal range, and relatively healthy compared to diesel, but the East Coast (PADD 1) is the exception to that rule, with inventories well below the seasonal range, and helping to explain the ongoing terminal outages scattered across the region.
Refinery runs dipped for the first time in 5 weeks as a handful of weather disruptions and maintenance events (some planned, some not) continued to hamper facilities seeking to capitalize on the best potential margins in a decade.
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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.
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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.