Energy Futures Pull Back While Trading Slows Pending Weekly Inventory Report

Energy futures are cooling their heels after a strong start to the week as traders move into temporary wait and see mode ahead of the weekly inventory report and the latest Fed announcement later today. News that Russia was hinting at having to curtail oil production due to Ukraine’s continuous assault on its refining and port infrastructure seemed to be a big factor in Tuesday’s buying spree, while other reports suggesting China’s inventory stockpiling may be ending is giving reason to reconsider those bullish bets.

Not buying it? While futures had a strong start to the week, cash markets around the country seem less enthusiastic about a fall price rally. The biggest mover in basis values has come in the PNW where gasoline values plummeted more than 65 cents after the Olympic pipeline restarted late last week. Diesel values are also showing signs of lackluster interest in chasing the futures rally, with Mid-western differentials still holding at discounts despite the start of the harvest season which typically drives some of the strongest prices of the year.

The API estimated inventory draws for crude oil and gasoline last week of 3.4 million and 691,000 barrels respectively, while distillates were estimated to increase by 1.9 million barrels. The DOE’s weekly report is due out at its normal time this morning.

After the morning DOE report, the FOMC announcement at 1pm could also make for interesting trading. Everyone expects the FED to announce at least a 25 point rate cut today with the CME’s Fed-watch tool showing 100% probability bet on that outcome. The big question mark is whether or not the central bank signals more cuts to come, with 73% of the money this morning betting that we’ll see at least 3 cuts (or at least 75 basis points cut) prior to year end. With that much money already expecting a string of interest rate reductions, any signal to the contrary has the potential to create a bit of a temper tantrum in equity markets that have rallied to record highs in part due to expectations for lower rates.

Did the EPA just make up a new term? The agency is making 2 different proposals (“co-proposing”) to reallocate volumes exempted from the Renewable Fuel Standard when they recently exempted numerous small refineries from their obligations. One proposal is to reallocate 100% of the 2023-2025 exemptions (roughly 2.2 billion RINs) while the other reallocates 50% of the volume. Going forward, the EPA intends to automatically include the reallocated volumes in its annual calculation of obligations refiners use to comply with the standards. The agency will now have an open comment period through the month of October on its co-proposal, with a public hearing scheduled for Oct 1.

RINs had bounced almost a dime off of the 3 month low they reached last week prior to the announcement, and have gone quiet since as traders seem to be digesting the dual proposal, although it seems clear that the EPA under this administration has a much different take on the RFS than they did 7 years ago when their blanket approvals of small refinery exemptions helped push RIN values below $.20/RIN for the better part of 2 years.