It’s Reversal Thursday As Oil And Refined Product Prices Trade Lower After A Big Rally In The Front Half Of The Week

Market TalkThursday, Oct 6 2022
Pivotal Week For Price Action

It’s reversal Thursday as oil and refined product prices trade lower after a big rally in the front half of the week. So far, the pullback looks like nothing more than a little profit taking after a 3-day rally that added 50 cents to diesel futures and 30 cents to gasoline. As long as ULSD can hold above the $3.50 range, the door is open for another run at $4 in the near term, with a move to $4.50 still looking possible this winter. Gasoline isn’t as bullish from a technical or seasonal perspective, although yesterday’s DOE report gave fundamentalists reason to think those prices should continue moving higher as well. 

OPEC & Friends announced an output cut of 2 million barrels from their previous output target Wednesday, which sent shockwaves through the markets even though the newly reduced target is still 1 million barrels/day more than the cartel’s actual production. See the comparison of target vs actuals below.

In reality, only Saudi Arabia, UAE and Kuwait have agreed to cut production levels by 100mb/day or more from their actual levels, with the total cut from those 3 countries roughly 700mb/day, or roughly 1/3 of the headline announcement. That is still a significant output cut to be sure, and a clear sign that Saudi Arabia is sticking by Russia, but not nearly as big a deal as the networks would have you believe. 

It’s also worth noting that Libya, Iran, Nigeria and Venezuela continue to be exempt from the output cut agreements given their various states of societal disarray, making their erratic production levels a continued wild card. A WSJ article this morning suggests that the US is attempting to relax sanctions on Venezuela to bring more of its oil back to the market.

Gasoline inventory in the US reached an 8 year low last week, even though refineries are produced more than 10 million barrels/day, which is well above domestic consumption. A 2nd straight week of demand growth, and weak import levels – particularly for the West Coast – both contributed to the decline. Somewhat ironically, the news of extremely tight gasoline markets coincided with California gasoline markets tumbling by more than $1.30/gallon, as the basis bubble popped after the state relaxed its RVP requirements this week.

While gasoline values were crumbling in California, diesel values continued their strong rally as inventories in PADD 5 dropped to a 2 year low. 

RIN prices were continuing to rally Wednesday morning, until a report that the EPA would be recommending “e-RINs” be included in the RFS next year, which sent values lower in the afternoon. There are still many questions as to how the electric-based RINs would qualify for RIN generation, whether they’d create yet another category of RIN, and if refiners would still be on the hook for the entire obligated amounts, or if this move would bring power plants into the pool of obligated parties.

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

Market Talk Update 10.06.2021

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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