Energy Prices Starting Week Soft With Indications Of Slowing Reopening Recovery From World's Largest Oil Buyer

Market TalkMonday, Jul 17 2023
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Energy prices are starting the week on a soft note with losses of around 3 cents for refined products and $1 for crude, following disappointing GDP growth from China that suggests the reopening recovery in the world’s largest oil buyer has slowed, and oil production has resumed at Libya’s 2 largest oil fields which bring nearly 400,000 barrels/day back online.

The pullback that started Friday does help alleviate the overbought condition brought about by a 3-week-long rally that pushed prices close to a 3-month high, and it’s still too soon to say that run has come to an end. The $2.60 range should be a pivotal area for both gasoline and diesel futures this week to determine if we’re just witnessing a short-term correction or the end-of-the-summer rally.

Money managers were jumping on the energy bandwagon again last week with large increases in speculative net length added across the board. Short covering was also heavy on the week as those funds that had been betting on lower prices seemed to be throwing in the towel as prices broke out to the upside. From a historical perspective, the net length held by funds is still small, so there’s plenty of fast money that could still come into the energy arena if the recent uptrend continues.  These funds are notoriously fickle, however, so there’s certainly no guarantee they may continue to push prices higher.

Baker Hughes reported a decline of 3 oil rigs and 2 natural gas rigs last week, which drops the oil rig count to its lowest level since March 2022. The reduction in drilling activity was focused in the Permian basin, which saw a drop of 5 total rigs last week, and Texas saw a net decline of 8 rigs while New Mexico, North Dakota and Louisiana all increased.

The EPA denied all 26 small refinery exemption requests under the Renewable Fuel Standard Friday, consistent with the policies of the current administration over the past couple of years. The decision notes the reason, small refiners don’t face economic hardship due to the RFS….because the market price for these fuels increases to reflect the cost of the RIN, much as it would increase in response to higher crude prices.” Remember that when your state’s clean fuels program claims it won’t cause prices to go up. RIN markets didn’t seem to flinch at this news as the denials were widely expected.

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Market Talk Update 07-17-23

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Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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Pivotal Week For Price Action
Market TalkWednesday, Apr 10 2024

Week 14 - US DOE Inventory Recap