It’s Been A Volatile Week For Energy And Prices As The Fear Trade Continues

Market TalkThursday, Oct 13 2022
Pivotal Week For Price Action

It’s been a volatile week for energy and prices as the fear trade continues to manifest itself in various ways as the trio of monthly energy market reports had some mean things to say about demand, and worse to say about supply. 

The November ULSD contract is at it again this morning, rallying more than a dime overnight only to fall 18 cents from those highs and trade sharply lower even before the September CPI report that showed inflation remains stubborn, sending equity markets sharply lower. There was a similar wave of selling in the contract late in Wednesday’s session that knocked the Nov/Dec spread back from a $.3975/gallon high to settle at $.31…only to see the spread rally right back to $.35 this morning. 

While those values are extreme, the premise is simple:  If you have the ability to ship diesel, will it be worth more to you to sell it in Europe – which is desperate for more supply – or the US East Coast, which is becoming so. NYH basis markets continue to try and entice those barrels, reaching a 53 cent/gallon premium to November futures for prompt barrels, creating a spread of nearly 90 cents between now and December.  With those types of price moves in the front half of the month, all bets are off for what prices could do as the November contract approaches expiration, and price swings like we saw back in the spring cannot be ruled out.

The EIA’s monthly report (STEO) had all sorts of bad news, lowering both supply estimates due to OPEC’s announcement and lackluster production in the US, and demand due to large declines in GDP expectations globally next year.  Perhaps worst of all however is that the report called for a colder than average winter and noted how that will translate for much larger heating bills for consumers due to tight natural gas and diesel supplies. 

On the bright side, the report did do a nice job answering the political theatre questions posed by California’s elected appointed chair of the state’s energy commission on why gasoline prices were so high.  See the note below.

The IEA sounded even more distraught in their monthly oil market report, citing “The relentless deterioration of the economy…” for a large reduction in their global demand estimates while calling what we’re experiencing “the worst global energy crisis in history” . The report also had a harsh reminder that Europe’s actual embargoes on Russian supplies haven’t taken full effect yet and the continent still hasn’t found a replacement option for roughly half of that fuel. 

Right on cue: Europe’s largest refinery had a major malfunction overnight, which will only compound the issues stemming the ongoing refinery strikes in France and the race to stock up supplies for winter with options ranging between bad and worse. 

The API reported a large draw in US diesel inventories of more than 4.5 million barrels last week while gasoline stocks increased by 2 million barrels, and crude inventories added 7 million barrels, thanks to another 8 million barrels being released from the SPR.  The DOE/EIA’s weekly report is due out at 10am central. Why the report is delayed 24.5 hours after a federal holiday is as much of a mystery as the latest federal holiday itself.

Tropical Storm Karl is making its course reversal in the Gulf of Mexico and heading away from US oil production and refining assets. While US supply is dodging another bullet, the storm is targeting the recently commissioned, though still not operational, Olmeca refinery near the port of Dos Bocas. While this storm probably won’t get strong enough to do significant damage, it could continue to delay efforts to finish the refinery that is already far behind schedule and billions over budget. 

Federal investigators reported that a corroded pipe was to blame for the explosion and fire that destroyed the PES refinery, way back in 2019 before shutting down refineries went mainstream. 

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

Market Talk Update 10.13.22

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Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

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, Nov 30 2022

Energy Markets Are Seeing A Strong Rally For A 2nd Day

Energy markets are seeing a strong rally for a 2nd day as uncertainty about the upcoming OPEC meeting and about the looming Russian oil embargo seem to have markets focusing on supply fears again, after weeks of demand-fears driving prices lower. Diesel prices are up more than 22 cents from yesterday’s low trade, while gasoline prices are up 12. The bounce puts the complex back in neutral technical territory after surviving a trip to the edge of a breakdown that could have sent prices sharply lower. 

Concerns about a pending recession continue to plague equity markets as the US Treasury yield curve is inverted to a degree we’ve only seen a couple of times in the past 25 years. As the chart below shows, these inversions have been a good indicator of a pending economic slowdown. Energy markets seem to already have gotten that selling out of their system in the short term, but this could once again become a factor if this latest rally runs out of steam. 

The European Union still can’t unite on a price cap agreement for Russian oil, less than a week before an embargo on Russian oil is set to begin. Both WTI and Brent crude have slipped into a Contango price curve near term as current supplies are proving ample as traders have had months to prepare for this change, and demand has softened globally. 

Meanwhile, Italian officials continue to race to find a way to keep their Sicilian refinery in operation after the embargo begins, asking the US to provide banks assurance that they won’t face fines for breaching sanctions given the Russian-owned status of that plant. Since the US is a consistent buyer of products from that facility, and the East Coast continues to struggle to find enough supply, perhaps it’s an offer they can’t refuse. 

OPEC and friends have decided to hold their upcoming meeting virtually, which some are taking as a sign that they will roll over their output cut agreement from October. 

The tornado outbreak in the southern US looks like it stayed far enough away from the Gulf Coast to spare the refineries in the area. The Alon refinery in Big Spring TX reported an operational issue that lasted more than 16 hours Monday, that ENT is reporting could end up causing extended downtime at that facility. While that plant is far from the Gulf Coast trading hub, downtime could add to the supply challenges to West Texas and surrounding markets.

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

Pivotal Week For Price Action
Market TalkWednesday, Nov 30 2022

Week 48 - US DOE Inventory Recap