This Week’s Rally Has Refined Products Eyeing New Bull Market

Market TalkThursday, Jan 12 2023
Pivotal Week For Price Action

Gasoline prices are trying to lead the energy complex higher for a 4th straight day, despite some bearish demand figures in yesterday’s DOE report. ULSD Prices were resisting the pull higher, trading in negative territory most of the night, but have recently pulled back into the green, and would mark a 5th straight increase if they can stay there. 

Despite the strong rally this week, refined products still have more work to do to erase the heavy losses we saw to start the year, which could make the next few sessions pivotal in determining if we’re in the early stages of a new bull market, or just stuck in a sideways range. Multiple short term technical indicators have moved into bullish territory this week, so it looks like we’ll at least see an attempt to take out the highs for the new year soon.

After the largest drop on record last week, the EIA’s estimate for total US petroleum demand did not recover much in the latest report, and is starting the new year nearly 3 million barrels/day (roughly 14%) lower than where it was to begin 2022. Gasoline is the biggest culprit in the weak domestic consumption figures, barely bouncing after last week’s huge drop, and still hovering near levels we saw during the first year of the pandemic when most companies were still working from home. 

So why did gasoline prices rally a dime on a day when the government told us that demand is terrible?  Possibly because the last week and first week of the year are always the worst times for consumption, and they’re now in the rearview mirror. Or, perhaps because the same report showed that more than 1 million barrels/day of refinery production remains offline as a handful of facilities are struggling to return to service after the Christmas blizzard. Or, even more likely it had no fundamental reason at all, and was driven by momentum chasing algorithms programmed to buy as the complex moved further away from the lows set last week. 

Diesel demand did see a healthy bounce last week, and was estimated to be slightly above year ago levels last week. All 5 PADDs are starting the year well below their 5 year average inventory levels, but most have recovered substantially over the past few months compared to the extreme tightness we witnessed for large parts of 2022. While a warm winter has been a huge help to get distillate stocks back to more manageable levels in Europe and the US East Coast, if the refinery runs can’t crank back up to normal levels in the next couple of weeks, more shortages look like a certainty.

The exception to the shortage concerns remains on the West Coast, where the unrelenting deluge continues to hammer demand, while refineries have been able to continue operating, which has pushed regional gasoline inventories to unusually high levels to start the year. 

The December CPI reading showed inflation at 6.5% in the US over the past 12 months, with “core” inflation readings at 5.7%. Both figures were in line with estimates, so they did not create big swings in either energy or equity markets in the immediate aftermath of the report. Rapidly falling gasoline and fuel oil prices helped the monthly figure drop by .1% in December, after rising energy prices were the biggest driver of inflation for most of the past 2 years. 

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

Market Talk Update 01.12.2023

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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, Apr 10 2024

Week 14 - US DOE Inventory Recap