Reversal Thursday Pares Week's Rally

Market TalkThursday, Aug 10 2023
Pivotal Week For Price Action

That escalated quickly. The rally in ULSD futures picked up steam Wednesday, adding 12 cents on the day, and setting a new 6 month high nearly 30 cents above Tuesday’s low overnight. RBOB and WTI both joined in on the big move higher as well, with crude oil reaching a new high for the year, while gasoline prices continue to flirt with the $3 mark.   Prices are taking a breather in the early going this morning, in what looks like a classic “Reversal Thursday” pattern that probably won’t mean much when the week ends. 

Refined product prices did bounce a couple cents off their morning lows following the July CPI report which showed another month of relatively tame inflation. Perhaps most notable in this report is that energy prices were only up a 10th of a percent, which means the rally in gasoline and diesel prices hasn’t hit the official numbers yet. As the chart from the BLS below shows, energy prices have been the key governor on inflation over the past year, but with the recent rally, that’s about to change.     

The rally in ULSD futures has created a flag pattern on the daily chart that suggests a run all the way to $3.50 could be coming soon, with the weekly charts suggesting the bulls still have things well under control after Tuesday’s big bounce. 

After 4 straight weeks of below-average numbers, the DOE’s estimate for gasoline demand jumped last week to outpace both the 5-year average and year-ago figures. With just about 5 weeks left in the summer RVP season, and the big price bounce this week, this leaves the door open for a last push towards the $3 mark for RBOB futures, despite today’s pullback.   

We’re also just under 5 weeks away from the peak of hurricane season. While the factors contributing to the record setting heat wave are also keeping a lid on tropical activity at the moment, forecasters still are calling for an active season, which will keep suppliers on the edge of their seat given the lack of supply cushion and excess refining capacity.

So far, refiners are keeping pace with last year’s output levels, despite numerous heat-related hiccups, and the recent earnings reports and the rally in crack spreads the past few weeks suggest they should continue to run hard through the fall after a busy spring maintenance period, provided that storms or other events don’t knock them offline.

If you look at only the PADD 5 diesel inventory chart below, it would come as little surprise that basis values are holding at their highest level of the year. Those stats are leaving out the big story however which is the rapid influx of new Renewable Diesel output that’s being shipped to West Coast markets to save the environment take advantage of the LCFS and Cap & Trade programs. Eventually the DOE will include those figures in its weekly report, as it did with Ethanol more than a decade ago, but in the meantime, both the inventory and demand estimates will be understated, which gives fundamental fans something to pin yesterday’s big rally on despite the sluggish diesel consumption estimates.

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

Market Talk Update 08.10.2023

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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