Refined Products Are Trading Down A Couple Of Cents In The Early Going While Crude Oil Contracts Are Seeing Modest Gains As July Trading Comes To A Close

Market TalkMonday, Jul 31 2023
Pivotal Week For Price Action

Refined products are trading down a couple of cents in the early going while crude oil contracts are seeing modest gains as July trading comes to a close, in what should end up being the strongest month in almost a year for energy contracts.  

RBOB gasoline futures came within 65 points of reaching the $3/gallon mark Friday, before stalling out and pulling back to around $2.93 this morning. The July contract expires today, and August is trading more than 6 cents lower, reducing the chances of another run at $3 gasoline futures near term, while physical prices across the 3 West Coast spot markets are all well above that level. Most cash markets are already trading vs August futures, so watch that contract for price direction today if you’re not already.  

ULSD futures topped out at $2.9748 Friday before sliding to around $2.93 this morning but aren’t seeing anywhere near the backwardation of gasoline (another sign of the dramatic changes from a year ago) and the charts suggest a decent chance diesel futures can still make a run at $3 over the next several days. Just like gasoline, west coast ULSD spot markets are all trading north of $3, while markets east of the Rockies range from $2.86-$2.95 this morning. 

Money managers continue to jump on the energy bandwagon, adding length across the board last week in crude and refined products. The net length (bets on higher prices) for RBOB and ULSD is at the highest level of the year, with the late-comers still willing to buy after the strong July rally. From a historical perspective, the outstanding length held by the big speculators is relatively mild, so it’s not yet a contrary indicator that the trend may soon run out of steam.

Open interest continues to recover in RBOB ULSD and Brent contracts as easing volatility and margin requirements encourage funds to return to the market after many were forced out during last year’s chaos. The exception to the OI recovery rule is WTI, which is still running roughly ½ million contracts lower than anything we saw from 2016-2021.

The reason for the slump in the classic NYMEX crude oil contract appears to be the rapid expansion in trading activity for new WTI contracts FOB Houston and Midland as the export market for domestic crude grades increases. Both the CME Group (NYMEX parent) and ICE (Home of the Brent contract) are racing to take advantage of the changing patterns, and both exchanges have reported record trading activity in their new WTI contracts over the past week.

Baker Hughes reported a drop of 1 oil rig and 3 natural gas rigs drilling in the US last week, continuing the trend of slow but steady attrition in the rig count that’s been happening for most of the year. Unlike the past 3 weeks however, the Permian basin didn’t lead the slide, and actually increased by 1 rig on the week. Don’t expect a rapid recovery in rig counts with oil prices north of the $80 mark given the long lead times needed to acquire equipment and crews, but we may see the declines come to an end if prices can hold near current levels.

California Carbon Allowance (CCA) prices spiked to a record high last week after the Air Resources Board (CARB) announced plans to make the Cap & Trade program more stringent.  California’s Low Carbon Fuel Standard (LCFS) credit values meanwhile continue to languish as new production of renewables, most notably renewable diesel, creates a surplus off credits and the state’s plans to also make that program more stringent are less clear.

The National Hurricane center is tracking two potential storm systems in the Atlantic this week, one of which is given 80% odds of being named, while the other has just 20%. Both systems look like they’ll stay far enough out to sea to not be a threat to land, while the map suggests they could end up merging off the coast of New England. Two storm systems converging off of the New England coast…seems oddly familiar.

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Market Talk Update 07.31.2023

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Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday

Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.  

The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news. 

There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.

The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.   

Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.

Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours.  It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much. 

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

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week

The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today. 

The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.

IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year

US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule.  Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.

Chicken or the egg?  Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands.  Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.

Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check.  The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior.   The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.

As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.

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

Pivotal Week For Price Action
Market TalkWednesday, Sep 20 2023

Week 38- US DOE Inventory Recap