The Highest Inflation Reading In 30 Years
The highest inflation reading in 30 years sparked a round of risk-off selling Wednesday as traders seem concerned that these rising prices can no longer be considered transitory, which will force the FED to tighten its monetary policy sooner than later. Energy and equity markets were both caught up in the selling early in the session, the DOE’s weekly report didn’t help as petroleum futures continued moving lower throughout the day.
The big selloff keeps the rounding top pattern in play for RBOB, with a good chance that we’ll see another 20 cent drop if prices break below $2.25 in the next week or so. WTI and ULSD are more neutral technically that gasoline, and also have a better seasonal outlook, but need to hold above last week’s lows of $2.39 for ULSD and $78 for WTI to avoid another move lower.
The total US petroleum demand estimate for the week dipped below 2020 levels for the first time since March, when we were comparing to pre-lockdown levels. While the DOE’s weekly consumption estimates are notoriously volatile, they did offer a harsh reminder that demand doesn’t only move higher after 18 months of recovery, especially this time of year. Charts from the DOE’s weekly report are below.
OPEC’s monthly oil market report kept forecasted supply and demand figures steady for next year, but like the EIA’s outlook earlier this week noted that gas-to-oil switching for electricity generation should boost demand and prices this winter. The cartel’s oil output continued moving higher in October as they made good on the plan to slowly return production to the global stage. The report also highlighted the recovery in refining margins globally over the past few months that is helping keep some plants that were on the verge of permanently closing still operating.
A surprise agreement between the US & China announced Wednesday may end up being the most meaningful result of the COP26 meetings, as the 2 largest emitters in the world account for roughly 40% of greenhouse gases. As with most of the pledges made at this conference, the details are scarce, and it’s likely to take years before actual changes are made, but the sign of cooperation does open the door to more US exports of LNG replacing Chinese coal, which is arguably the most impactful step available to reduce emissions short term.
We will be attending our company’s annual meeting tomorrow and will not send out an update in the morning.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
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Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.