Volatility Drops To Lowest Levels Of The Year

Energy futures are holding close to two year highs this morning, but are still below the levels we saw early in Tuesday’s session. As prices have climbed, volatility has dropped to its lowest levels of the year for both equity and energy contracts as investors seem to be optimistic that the reopening trajectory will keep prices moving higher. While the bulls still have control, they need to keep the momentum up this week, or risk forming a double top in ULSD just below $2.12, which was the high from January 2020, that could spark a large corrective selloff this summer. 

OPEC & Friends agreed to stick with their plan to boost output now that global demand is returning. If you’re a bull, you see this as good news that the Saudis feel confident enough in the demand outlook to unwind their output cuts, and that Russia didn’t get too greedy with forcing a faster pace of production. For the bears, this is seen simply as more supply coming back onto the market just as the supply/demand equation was back to where it was BC (before Covid).

A vote today in California could seal the fate of two of the last standing Bay-Area refineries.  The issue at hand is whether or not to require the Chevron Richmond and PBF Martinez to install wet gas scrubbers to reduce pollution from their FCC units. Given the state of refinery economics in general, and in particular in the state of California, a ruling requiring that investment is likely to mean that one or both of the plants would either idle, or go the way of their neighbors and convert to renewable diesel production.

Speaking of refinery margins, as the chart below shows, gross margins for Gulf Coast refiners are approaching their highest levels in two years. Unfortunately for those plants, once you back out the $9-10 /barrel cost of their renewable obligations with RIN values holding near record highs, they’re right back down close to break-even levels. 

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