Late Rally Pushes Prices Into The Green
After a late rally that pushed prices into the green after trading lower most of the session, energy futures are coming under pressure once again after more inventory builds check the optimism for economic recovery. The price action in the back half of the week looks to be pivotal from a technical perspective, as the recent selling has contracts testing their upward sloping trend lines,. Whether or not that support holds up may mean the difference in another large rally or a substantial correction lower.
The API was said to report another large build in U.S. oil stocks of more than eight million barrels last week, while distillates had another build of 4.3 million barrels, and gasoline stocks declined by 2.3 million barrels. The increase in crude oil was almost all in PADD 3 – likely driven by the spike in Saudi imports offloading along the gulf coast – while Cushing, OK inventories had another large decline of more than two million barrels. If the API estimates carry over to today’s DOE report, we will see U.S.diesel inventories reach an all-time high.
The EIA’s Short Term Energy Outlook painted a more optimistic outlook for the industry, which seemed to encourage Tuesday’s late bounce, suggesting the glut of global fuel inventories would start being reduced this month as demand recovery has been better than previous forecasts. The report also highlighted the stark difference in gasoline and diesel cracks during this recovery – consistent with what the weekly inventory reports have been showing - which could limit refiner’s ability to recover from this crisis.
The FOMC will make a policy statement this afternoon, and will release its economic forecast and host a virtual press conference. While most predictions suggest there will be no new policy announcements today, watch for language about Yield Curve Control, to become more commonplace in coming weeks.
Speaking of forward curves…the charts below show how quickly the energy forward curves have moved away from the super contango witnessed in the past couple of months, which should help encourage some barrels to be pulled from storage as long as the slow and steady demand recovery continues. Distillates still seem the most susceptible to pressure on the curve as the demand recovery hasn’t kept pace with the rapid increase in inventories and tankage is becoming scarce.
Notes from the STEO:
EIA now expects global oil inventories will begin declining in June, a month earlier than previously forecast, with draws continuing through the end of 2021. The sooner-than-expected draws are the result of sharper declines in global oil production during June and higher global oil demand than previously expected.
Declines in U.S. liquid fuels consumption vary across products. EIA expects jet fuel consumption to fall by 64 percent year-over-year in the second quarter of 2020, while gasoline consumption falls by 26 percent and distillate consumption falls by 17 percent. EIA forecasts the consumption of all three fuels to rise in the third quarter and into 2021 but to remain lower than 2019 levels.
After decreasing by 2.8 percent in 2019, EIA forecasts that U.S. energy-related carbon dioxide (CO2) emissions will decrease by 14 percent (714 million metric tons) in 2020.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
Click here to download a PDF of today's TACenergy Market Talk
Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.