ULSD Futures Have Had The Most Dramatic Reversal

The recovery rally in energy prices ran out of steam Wednesday with a confluence of fundamental and technical factors knocking the complex back to reality. ULSD futures have had the most dramatic reversal, dropping more than a dime since running into their 200-day moving average yesterday morning. RBOB gasoline meanwhile has dropped almost 7-cents since topping out ahead of yesterday’s inventory report.

It wasn’t just energy contracts that saw a big intra-day reversal, the DJIA dropped nearly 600 points after touching a new record high in the morning and the S&P 500 dropped nearly 87.   There was little news to drive the pullback in equities, but this type of volatility is not unusual as we approach the holidays and liquidity dries up, and after a 9-day winning streak, prices were due for a correction anyway. 

The pullback in prices puts energy contracts back in neutral territory technically, and with fewer and fewer traders around as we approach the holidays, some more choppy back and forth action to end the year looks likely. The Red Sea remains the key wild card near term, with a lack of new attacks since the US announced its naval coalition to protect ships helping to calm markets the past couple of days. 

Refiners cranked up runs in most parts of the US last week, leading to healthy inventory builds for gasoline and diesel. Mid-continent refinery runs stand out as being particularly high for this time of year, which is likely to keep basis values depressed as those land-locked facilities will have to stretch to find homes for their output over the winter. 

The DOE’s estimate for US Crude production reached an all-time high of 13.3 million barrels/day last week, and the US has now also broken the record for annual crude oil production – for any country in the world – as well. The weekly data is still a bit unclear due to the DOE’s adjustment wildcard, so it’s hard to say how much of the recent gains in the weekly output figure are due to improving efficiency by producers, and how much is caused by the change in accounting methods the agency recently announced to correct the chronic under-reporting of crude production and overestimates of domestic consumption that had gone on for years. 

The SPR did see a small 600,000-barrel increase in inventory last week that barely registers on the charts.  At the current pace of purchases, it will take the DOE more than 7-years to replace the 240 million barrels used last year in an effort to stabilize global markets. 

Demand for refined products remains soft, with gasoline consumption estimated just below the 5-year average, while diesel is estimated to be below the 5-year seasonal range. Here too, there seems to be some known unknowns as the EIA’s weekly survey still doesn’t account for renewable diesel inventory or demand, so it’s assumed that the official estimates are notably understated due to the rapid increase in RD across the West Coast this year.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.