Futures Seek Direction Amid Lukewarm Technicals, Mixed Monetary Policies
The search for direction continues in energy markets, with refined products starting the day with modest gains again Thursday, after a back-and-forth Wednesday session saw early gains turn into losses later in the day. The neutral technical outlook remains in place after ULSD prices failed to make much of an effort to challenge the top end of their 7-week-old trading range, which sets the stage for more back and forth action in the days ahead.
The FED held interest rates steady Wednesday, after 10 straight increases, but made it clear that more rate increases were coming with 12 of 18 voters all seeing the need for more increases this year. The ECB meanwhile raised rates to a 22 year high with a 25 point increase this morning to try and combat inflation, while China’s central bank took the opposite approach and reduced a key lending level to try and get their economic recovery back on track.
The EIA’s refining capacity figure finally caught up to the Exxon Beaumont expansion only 3 months after the fact, showing an increase of 240mb/day in PADD 3 capacity last week, and bringing the utilization percentage back to reality. Total US refinery runs dipped for the first time in 6 weeks but remain above average and year-ago levels thanks in large part to that new capacity coming online.
Gasoline consumption estimates aren’t great, but they are holding above the 5-year average and year-ago levels and export activity remains strong, which is keeping inventories well below average levels despite the strong refinery runs. Gasoline days of forward cover remain at the bottom of the seasonal range, shifting the supply concerns for most of the country from diesel a year ago, to gasoline today. We have seen a large increase in PADD 1 gasoline imports the past two weeks however, which has pulled East Coast inventories off the low end of their seasonal range and helped relieve some of the steep backwardation that had been building in the NYH.
Besides the weekly inventory report, the DOE also highlighted the plight of West Coast diesel demand in its This Week in Petroleum article. The report details how the lack of details on the surge in renewable diesel production is skewing the official figures, which show total diesel inventories much lower than reality, and demand at a 20 year low since most of the RD is not factored into the official estimates yet.
The IEA’s monthly oil report predicted that global oil demand will reach a new record high this year at 102.3 million barrels/day, with China’s rebound the driving force in those figures, while developed nations remain in a “slump”. The report also suggested that new refining capacity in Oman and Kuwait, and the shift of discounted Russian supply to Asian markets will continue to skew activity away from the Atlantic basin. Meanwhile, a new medium term report from the IEA made longer term estimates for fuel consumption, highlighting once again that while transportation demand for fuels is set to slow in the coming years, the need for plastics will keep petroleum demand growing for decades to come.
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View AllEnergy 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.
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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.