The Energy Futures Recovery Rally Ran Out Of Steam Tuesday

Market TalkWednesday, Nov 15 2023
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The recovery rally in energy futures ran out of steam Tuesday, with early gains turning into afternoon losses, and that selling has carried through the overnight session. The whiplash action is putting the charts back in neutral territory short term, while longer term charts still suggest a good chance of more selling before year end. 

U.S. stock markets had their best day in nearly 7 months and the U.S. dollar had its biggest sell-off since July, both of which are often seen as bullish indicators for energy contracts. The correlations between those asset classes has been weak-at-best lately however, and yesterday was another case of energy contracts going their own way in the end, after following the lead of stocks for a couple of hours.

Here’s another theory: One often overlooked indicator of price movements for oil is the spread between 5 year treasury bonds and 5 year TIPs, which is a proxy for inflation expectations. Since some traders use oil and other energy commodities as an inflation hedge, there’s been a strong correlation between the 5 year spread (expectation for inflation) and oil prices. Now that inflation expectations are softening, the passive bid under oil prices for those “inflation hedgers” may also be going away. See Chart below.

Another reason for the whiplash action in ULSD this week was likely the unexpected shutdown of Kuwait’s huge 615mb/day Al-Zour refinery which started production last year and has become a major supplier of diesel to Europe, backfilling for barrels that used to come from Russia. That facility being knocked offline no doubt helped spur the 10 cent price surge Monday, but now that it’s scheduled to be back fully online next week, prices are easing once again.   

The API reported a build in crude oil and gasoline inventories last week of 1.3 million and 195,000 barrels respectively, while diesel stocks drew by 1 million barrels. The EIA will release two weeks’ worth of data at 9:30 eastern as it is back on its normal reporting schedule after a system upgrade. 

Although there have been a rash of unplanned refinery hiccups in the past week stretching across PADD 3, basis values continue to slump and suggest that the return of numerous refineries after the busiest fall maintenance schedule in 4 years is setting us up for a glut of some products. Colonial line space values are also reflecting this reality with both gasoline and diesel values soaring in recent weeks as Gulf Coast producers suddenly seem to be struggling to find options, while East Coast inventories remain relatively tight. 

Already there are reports that some units coming back online may not return at full capacity given the sudden weakness in crack spreads and swelling inventories, particularly for gasoline. 

The NHC is tracking 2 potential storm systems as we reach the last 2 official weeks of Hurricane season. Neither storm looks to be a threat to energy supplies, but it will bring heavy rain to the East Coast and looks like it might put a damper on the typical demand rush heading into Thanksgiving week.

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

Market Talk Update 11-15-23

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Pivotal Week For Price Action
Market TalkTuesday, Nov 28 2023

Values For Space On Colonial’s Main Gasoline Line Continue To Drop This Week

The petroleum complex continues to search for a price floor with relatively quiet price action this week suggesting some traders are going to wait and see what OPEC and Friends can decide on at their meeting Thursday. 

Values for space on Colonial’s main gasoline line continue to drop this week, with trades below 10 cents/gallon after reaching a high north of 18-cents earlier in the month. Softer gasoline prices in New York seems to be driving the slide as the 2 regional refiners who had been down for extended maintenance both return to service. Diesel linespace values continue to hold north of 17-cents/gallon as East Coast stocks are holding at the low end of their seasonal range while Gulf Coast inventories are holding at average levels.

Reversal coming?  Yesterday we saw basis values for San Francisco spot diesel plummet to the lowest levels of the year, but then overnight the Chevron refinery in Richmond was forced to shut several units due to a power outage which could cause those differentials to quickly find a bid if the supplier is forced to become a buyer to replace that output.

Money managers continued to reduce the net length held in crude oil contracts, with both Brent and WTI seeing long liquidation and new short positions added last week. Perhaps most notable from the weekly COT report data is that funds are continuing their counter-seasonal bets on higher gasoline prices. The net length held by large speculators for RBOB is now at its highest level since Labor Day, at a time of year when prices tend to drop due to seasonal demand weakness. 

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

Pivotal Week For Price Action
Market TalkMonday, Nov 27 2023

After Another Black Friday Selloff Pushed Energy Futures Sharply Lower In Last Week’s Holiday-Shortened Trading

After another Black Friday selloff pushed energy futures sharply lower in last week’s Holiday-shortened trading, we’re seeing a modest bounce this morning. Since spot markets weren’t assessed Thursday or Friday, the net change for prices since Wednesday’s settlement is still down more than 6-cents for gasoline and almost 5-cents for diesel at the moment.

OPEC members are rumored to be nearing a compromise agreement that would allow African producers a higher output quota. Disagreement over that plan was blamed on the cartel delaying its meeting by 4-days last week which contributed to the heavy selling. The bigger problem may come from Russia, who announced plans last week to increase its oil output once its voluntary cut agreement ends now that price cap mechanisms are proving to be ineffective

While an uneasy truce in Gaza held over the weekend, tensions on the Red Sea continued to escalate with the US Navy intervening to stop another hijacking and being rewarded for its efforts by having missiles fired at one of its ships.  

RIN values came under heavy selling pressure Wednesday afternoon following a court overturning the EPA’s ruling to deny small refinery hardship waivers to the RFS. Those exemptions were a big reason we saw RINs drop sharply under the previous administration, and RINs were already on due to the rapid influx of RD supply this year.

More bad news for the food to fuel lobby: the White House is reportedly stalling plans to allow E15 blending year-round after conflicting studies about ethanol’s ability to actually lower carbon emissions, and fuel prices. Spot prices for ethanol in Chicago reached a 2.5 year low just ahead of the holiday.  

Baker Hughes reported the US oil rig count held steady at 500 active rigs last week, while natural gas rigs increased by 3. 

The first of perhaps several refining casualties caused by the rapid increase in new capacity over the past two years was reported last week. Scotland’s only refinery, which has a capacity of 150mb/day is preparing to shutter in 2025.

The CFTC’s commitment of traders report was delayed due to the holiday and will be released this afternoon.

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

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Market TalkWednesday, Nov 22 2023

Week 47 - US DOE Inventory Recap