Energy Prices Slide Amid Sanctions, Positive Economic Outlook
Diesel prices are once again leading the petroleum complex lower, dropping more than 10 cents overnight as natural gas prices tumble to an 18-month low, and adding to the sentiment that another energy crisis will not only be avoided this year, but perhaps next year as well.
This latest move looks particularly bearish for crude oil prices, with a good chance we could see a slide to $72 for WTI if prices can’t manage to rally later today. So far refined products look less bearish on the charts, but if they take out the February lows about 5 cents below current values for ULSD and 10 cents lower for RBOB, the door is open for another 20-30 cent slide.
Last Friday, an announcement that Russia would cut oil production by 500,000 barrels per day helped spark a sharp but brief rally in energy prices, a move the IEA says is proof that sanctions are having their intended effect. This week reports suggest the country would not need to cut exports to reduce oil production, it could simply supply less to its domestic refineries, which seems to be contributing to the selloff, and will no doubt be seen as a sure sign that the diesel embargo that started Feb 5 is having at least some of its intended impact.
China continues to be the main beneficiary of Russia’s energy follies, and a Reuters report highlights how the country is set to reach record oil import levels thanks to the reopening economy, and new refineries reach to pump both domestically and abroad.
A surging US dollar is also getting some credit for the latest sell-off, as positive economic data and stubborn inflation levels reported this week suggest the FED will be forced to continue its rate increases, and another 50-point increase could be back on the table. The correlation between daily moves in energy and currency prices remains fairly weak however, so this probably isn’t as big of a factor as it was in past years.
Speaking of which, the relationship between stock markets and energy prices has been very weak for the past 6 months or so, so while it’s still possible that this week’s selling in equities could be carrying over into the move lower in energy prices, it’s probably not the main factor.
We have not seen any commitments of traders data from the CFTC for going on 3 weeks, following a cyber-attack on ION markets, which is a 3rd party service provider for certain derivative contracts. So far there are no new updates on the situation since February 10th, but we should hear one way or another later today as the report is typically scheduled to be released late on Friday afternoon.
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News & Views
View AllEnergy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
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WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.