Path Of Least Resistance For Product Prices

Market TalkThursday, May 21 2020
End To A Choppy Week For Energy Prices

The U.S. Department of Energy was unable to find almost seven million barrels of crude oil in the U.S. last week. It’s true; they said so in yesterday’s EIA weekly status report, in a number nobody normally pays attention to, but is now contributing to a strong rally in oil prices.

WTI prices are now just one decent day away from filling the gap in the chart left behind during the March meltdown. Typically we see a tendency for product prices – particularly for gasoline – to trend higher while heading into a driving-season holiday. Until the upward momentum breaks, it seems like the path of least resistance over the next couple of days is for prices to continue moving higher.

The DOE listed nearly one million barrels/day of oil as unaccounted for last week, the second week that figure has surpassed -900,000 barrels/day, marking the only two times in 20 years of data we’ve seen that much crude go missing. It’s not too terribly surprising that a weekly government report could have this type of error factor, and what it most likely means is that actual U.S. oil production has probably declined much more quickly than the official estimates can keep up with. It all likelihood, U.S. oil production is probably close to 10 million barrels/day instead of 11 million barrels/day, meaning a drop of nearly three million barrels/day since the COVID shut downs began in a testament to the industry’s ability to adapt based on cash flow rather than mandates.

That adjustment factor will likely show up in the monthly report data and helps explain how Cushing, OK stocks have plummeted just one month since the panic occurred surrounding them overflowing.

Diesel continues to look weak fundamentally in the DOE data, and in more industry reports like the weekly rail data report, or regional basis values that are hitting double-digit negatives in the Midwest. So far that weakness isn’t outweighing the futures rally, but it has prevented ULSD from keeping up with the rest of the complex, leaving it in a perilous technical position. Ultimately, diesel prices may end up meaning more pressure on local spot and rack prices if increasing refinery production to keep pace with the gasoline recovery means even more diesel is made without a home.

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Most Energy Contracts Are Ticking Lower For A 2nd Day After A Trickle Of Selling Picked Up Steam Tuesday

Most energy contracts are ticking lower for a 2nd day after a trickle of selling picked up steam Tuesday. ULSD futures are down a dime from Monday’s highs and RBOB futures are down 7 cents.

Diesel prices continue to look like the weak link in the energy chain, with futures coming within 1 point of their March lows overnight, setting up a test of the December lows around $2.48 if that resistance breaks down. Despite yesterday’s slide, RBOB futures still look bullish on the weekly charts, with a run towards the $3 mark still looking like a strong possibility in the next month or so.

The API reported crude stocks increased by more than 9 million barrels last week, while distillates were up 531,000 and gasoline stocks continued their seasonal decline falling by 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning.

RIN values have recovered to their highest levels in 2 months around $.59/RIN for D4 and D6 RINs, even though the recovery rally in corn and soybean prices that had helped lift prices off of the 4 year lows set in February has stalled out. Expectations for more biofuel production to be shut in due to weak economics with lower subsidy values seems to be encouraging the tick higher in recent weeks, although prices are still about $1/RIN lower than this time last year.

Reminder that Friday is one of only 3 annual holidays in which the Nymex is completely shut, so no prices will be published, but it’s not a federal holiday in the US so banks will be open.

Click here to download a PDF of today's TACenergy Market Talk.

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Refined Products Seeing Small Losses Of Around A Penny While Crude Oil Contracts Hover Just Above Break Even

Energy futures are taking a breather to start Tuesday’s trading, with refined products seeing small losses of around a penny while crude oil contracts hover just above break even.

No new news on either the Red Sea shipping or Russian Refining attacks this morning, so Cocoa prices seem to be taking over the commodity headlines while energy markets wait on their next big move.

RBOB gasoline futures set a new 6-month high Monday at $2.7711, which leaves the door open on the weekly charts for the spring rally to continue. A run at the $3 mark is certainly possible in the next few weeks before the typical seasonal price peak is set just before the start of driving season.

A container ship lost power and crashed into the Francis Scott Key bridge in Baltimore this morning, causing a devastating collapse. While cargo shipping into the area will no doubt be impacted by this event, fuel supplies are unlikely to see any notable change since the 9 fuel terminals in Baltimore are primarily supplied by Colonial pipeline. Barges from Philadelphia refineries do supplement Baltimore supplies at times, and those vessel flows will be impacted at least until rescue operations are completed and the bridge sections removed from the waterway. That said, since shipping up from the Gulf Coast via Colonial is generally cheaper than shipping an NY Harbor-priced barrel south, the amount of supply disrupted by this event will be minimal.

While we’re still waiting on the official forecasts for the Atlantic Hurricane season, early reports continue to suggest that we could be in for a very busy year due to warm water temperatures and a forming La Nina pattern.

Dallas meanwhile is preparing for a different sort of disruption, with city officials encouraging companies to let employees work from home during the solar eclipse on April 8th as metroplex traffic is expected to surge. While some isolated fuel outages are certainly possible if people start panic buying gasoline they don’t need, there’s no reason to expect any widespread impact from the demand spike.

Today’s interesting read: Why AI requires a staggering amount of electricity and may create supply competition for EVs that will end up benefitting fossil fuels.

Click here to download a PDF of today's TACenergy Market Talk.