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The Furious 2 Month Rally That’s Added More Than 40% To Most Energy Contracts Is Taking A Breather This Morning

Monday, Feb 7 2022
Market Talk

The furious 2 month rally that’s added more than 40% to most energy contracts is taking a breather this morning, with refined product prices showing modest gains, but pulling back 3-4 cents after hitting fresh 7 year highs overnight, while crude oil contracts slip into the red after reaching their own multi-year highs on Friday. 

Signs of progress in nuclear negotiations with Iran are getting credit for the pullback this morning, even though both the US and Iran suggest they’re still a long way off from a deal that would allow most of Iran’s potential oil exports to resume.

The squeeze on prompt ULSD continues with March futures up more than 1.5 cents on the day, even as the rest of the curve trades lower. The spread between March & April HO futures is now almost 13 cents/gallon, and nearly 25 cents separates the March and June contracts.  Tight diesel supplies and strong demand leave the market vulnerable to a price spike near term that could easily surpass the $3 mark, but the severe backwardation also suggests that when the diesel bubble bursts, the drop will be spectacular.

Speaking of a squeeze, a cyberattack in Europe’s largest oil hub is causing vessel delays, and adding yet another reminder that Russia is Europe’s largest supplier of both energy and hackers.    

Money managers continue to steadily add to their net length in refined products, with RBOB and Gasoil contracts both standing at their highest levels for large speculators in more than a year. Brent was the only contract of the big 5 petroleum futures to see a reduction in managed money net length last week.

Baker Hughes reported a net increase of 2 rigs drilling for oil in the US last week, with Texas and North Dakota both adding 3 rigs, while several other states had small declines. While the EIA and IEA both still project that US oil production will reach an all-time high later this year, a WSJ article suggests that the end of the shale boom is in sight and will keep production growth limited despite high prices.

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