Markets Guess What Will Come Next
Stocks are trading lower and oil prices are trading higher as the markets try to guess what will come next in the U.S./Iran conflict. The most remarkable news so far is that energy prices are up less than five percent from where they were prior to last week’s attacks, compared to a few years ago when this type of tension could have easily pushed prices up 20 percent or more.
Perhaps the most significant development of the past decade for oil markets is we changed from fears of “Peak Oil,” where lack of supply led to routine spikes over $100/barrel to fears of “Peak Oil Demand,” as OPEC and other producers are now having to voluntarily reduce their production to keep prices from collapsing and even after extreme violence in the Middle East, prices are still in the $60s as that excess supply has cushioned the impact of these events.
Prices did briefly spike overnight, with products trading up more than four cents and Brent trading north of $70 for a few hours. Most of those gains have been erased in the morning hours however, with ULSD actually trading negative on the day.
ULSD’s relative weakness appears to be at least partially a sympathetic trade with Natural Gas as warmer-than-average temperatures across the eastern half of the country limit demand for home heat. In addition, the annual holiday demand slump for diesel is in full force, with consumption down 27 percent across the U.S. last week according to the DOE’s weekly estimate. Based on prior years, we expect that slump to last another week, and then we should (hopefully) see a return to normal levels in the second week of the year.
The gasoline demand slump so far is not as bad as it has been this time over the past two years, but history suggests the worst is still ahead of us, and we probably won’t see consumption bottom out for another two weeks. This annual tradition of demand falling to its lowest levels of the year also coincides with refiners reaching their winter peak for output, which tends to create some sloppiness in spot and rack markets for the next several weeks. 2020 looks to be set to follow that trend, although the loss of PES is holding total refinery runs below the all-time highs set a year ago.
The Commitment of Traders report from the CFTC was delayed again due to the holiday, but Brent crude (reported by ICE) saw speculative length reach its highest levels in more than a year last week. No doubt money managers holding those bets on higher prices are enjoying the price spike of the past few days, and it seems likely we may see an influx of additional speculative length in the coming weeks as long as the potential for more violence in the region remains elevated.
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Gasoline Futures Are Leading The Way Lower This Morning
It was a volatile night for markets around the world as Israel reportedly launched a direct strike against Iran. Many global markets, from equities to currencies to commodities saw big swings as traders initially braced for the worst, then reversed course rapidly once Iran indicated that it was not planning to retaliate. Refined products spiked following the initial reports, with ULSD futures up 11 cents and RBOB up 7 at their highest, only to reverse to losses this morning. Equities saw similar moves in reverse overnight as a flight to safety trade soon gave way to a sigh of relief recovery.
Gasoline futures are leading the way lower this morning, adding to the argument that we may have seen the spring peak in prices a week ago, unless some actual disruption pops up in the coming weeks. The longer term up-trend is still intact and sets a near-term target to the downside roughly 9 cents below current values. ULSD meanwhile is just a nickel away from setting new lows for the year, which would open up a technical trap door for prices to slide another 30 cents as we move towards summer.
A Reuters report this morning suggests that the EPA is ready to announce another temporary waiver of smog-prevention rules that will allow E15 sales this summer as political winds continue to prove stronger than any legitimate environmental agenda. RIN prices had stabilized around 45 cents/RIN for D4 and D6 credits this week and are already trading a penny lower following this report.
Delek’s Big Spring refinery reported maintenance on an FCC unit that would require 3 days of work. That facility, along with several others across TX, have had numerous issues ever since the deep freeze events in 2021 and 2024 did widespread damage. Meanwhile, overnight storms across the Midwest caused at least one terminal to be knocked offline in the St. Louis area, but so far no refinery upsets have been reported.
Meanwhile, in Russia: Refiners are apparently installing anti-drone nets to protect their facilities since apparently their sling shots stopped working.
Click here to download a PDF of today's TACenergy Market Talk.
The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.