Technical Traders Push Late-Week Rally Into Monday Morning

Market TalkMonday, May 8 2023
Pivotal Week For Price Action

The recovery rally continues for energy futures with ULSD up 22 cents from last Thursday’s low trade, while RBOB is up more than 17 cents, and WTI has earned back nearly $10/barrel. 

Besides the double-edged sword of a healthy April jobs report, there hasn’t been much in the way of news to pin this rally on, so it feels more technical in nature than anything fundamental. Bulls will say that the market overshot to the downside in a fear-driven sell-off setting the stage for a much bigger rally, while bears may argue this is a dead cat bounce, and we’re still set up for more selling ahead. 

Weekly charts suggest that the bear market for distillates is still intact, and we’ll need to see a move back closer to $1.50 to break the downward trend that took futures from $4.68 in October to $2.15 last week. A big part of that decline in futures has been a collapse in the forward curve from extreme backwardation last fall to a gentle contango in the front of the curve today.  

Betting on a collapse: The CFTC’s weekly COT report showed another big influx of speculative funds betting on lower energy prices as of last Tuesday, pushing ULSD to a net-short position for the first time since November 2020. Whether or not we see those new shorts accumulated during the past few weeks get squeezed out by this bounce in prices since that report was released may go a long way in determining whether or not the rally continues. Producers have been reducing their hedges during this sell-off, with diesel hedges dropping to a 3.5 year low in another sign that the big physical players still see upside potential for prices ahead.

Baker Hughes reported a drop of 3 oil rigs, and 4 natural gas rigs in the US last week as producers continue to shy away from spending at current values. The Permian basin accounted for the majority of the decline last week, with a decrease of 5 rigs.

A fire hit Shell’s chemical facility in Deer Park TX Friday, and reignited over the weekend forcing the company to dump excess waste water into the Houston ship channel. So far it doesn’t appear to have impacted operations at the adjacent Deer Park refinery that Shell used to own, and so should be a non-factor on refined product prices.

Nigeria announced it would be commissioning the world’s largest single-train refinery in 2 weeks, which could add another 650mb/day of refining capacity to the Atlantic basin. Then again, many view the “grand opening” as more of a political stunt on behalf of the outgoing president, with actual output not actually expected soon. If true, that would be similar to what we’ve seen at Mexico’s Dos Bocas refinery which was commissioned nearly a year ago, but still isn’t producing refined products.

Today’s interesting read from the FT. Why tax incentives are driving new clean energy commitments.

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

Market Talk Update 05.08.2023

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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