HO And WTI Reach Fresh 3-Month Highs As Inflation Outlook Improves

Market TalkWednesday, Jul 12 2023
Pivotal Week For Price Action

ULSD and WTI prices are both trading at fresh 3-month highs this morning as energy and equity markets seems to be embracing an improving outlook on inflation, and shrugging off inventory builds in the early going. 

The push higher this week opens a big of a technical window for WTI to make a run at the 200 day Moving Average, which is currently around $77.55, and managed to harshly repel 2 other rallies over the past year. 

ULSD has clawed its way back into the $2.60 range that held prices for most of March and April and there’s an argument that this opens the door to another 15-30 cents of more gains in the coming few weeks. Given that diesel inventories haven’t been able to recover much despite the freight recession this year, there’s also a fundamental argument being made that ULSD prices are poised to rally as we approach the busier demand seasons for distillates. It’s also worth noting that the correlation between ULSD daily price moves and the S&P 500 has reached a 2 year high this week, so for now, it looks like diesel prices may simply be following the stock market, which is adding to the bullish outlook today. 

The S&P 500 is trading at a 15 month high this morning after the June CPI report calculated inflation at 3% for the past 12 months, which was slightly below the “official” estimates. If it weren’t for the big drop in energy prices over the past year however, the inflation rate would be north of 5% which may eventually cause a pullback in the early rally if traders realize this better-than-predicted figure simply isn’t as good as it seems.

The API reported inventory builds across the board last week as the holiday hangover for fuel demand took hold. The industry group estimated inventory increases of 3 million barrels for crude oil, 2.9 million for distillates, and 1 million barrels for gasoline. The EIA’s weekly estimates are due out at their normal time this morning, and there’s a good chance we’ll see a big pullback in demand figures after gasoline consumption reached an 18-month high to end June, but evidence at the rack levels suggests its dropped sharply in the first third of July.

The DOE increased its outlook for US GDP growth for 2023 and 2024 in its latest Short Term Energy Outlook which helped increase the outlook for fuel prices. The agency also highlighted a change in operable refining capacity over the coming year now that Lyondell has pushed back plans to shutter its Houston refinery, but also failed to note the upcoming conversion of the P66 Rodeo CA facility to renewable production which will result in a net decrease of roughly 100mb/day. The report lowered the forecast for renewable diesel production next year due to the EPAs final ruling on the RFS through 2025 that increased targets for advanced biofuels, but not by enough to satiate the appetites of the government credit harvesters.   

Today’s interesting read: If you weren’t already convinced that ESG was a farce, read this note on how investors who don’t read the fine print ended up financing Saudi Aramco.

Click here to download a PDF of today's TACenergy Market Talk.

Market Talk Update 07.12.2023

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, May 17 2024

The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, May 16 2024

Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
Market TalkWednesday, May 15 2024

Week 19 - US DOE Inventory Recap