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 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