Early Rally In Both Energy And Equity Markets
Gasoline futures are making a run at one dollar this week, trading up eight cents/gallon this morning, after bouncing sharply off of trend-line support during Wednesday’s sell-off. Diesel prices are also up sharply today, but can’t keep pace with gasoline, and are well off their highs for the week following weak fundamental data.
Positive export figures reported by China seem to be contributing to the early rally in both energy and equity markets today, which is comical interesting given all that’s been made about that government falsifying data in recent weeks.
Gas vs. diesel spread trades are known as a “widow maker” as they were once thought to be a relatively safe seasonal play, only to show extreme volatility that would end careers. That volatility has been on full display over the past few months as gasoline prices plummeted to a 50 cent discount to diesel in March, only to rally to a premium today.
The uneven effects of the COVID-19 lock-downs are the main driver behind those wild swings, as diesel demand didn’t fall nearly as hard, but is now lagging the recovery seen in gasoline, as was on full display in the DOE reports this week.
Stagnate demand, and steady refinery output sent diesel inventories up more than nine million barrels for the week, completing the largest four-week build in history for distillates. Domestic diesel stocks are now holding north of 48 days’ worth of supply, compared with a seasonal five year average of 33 days.
Gasoline meanwhile has seen the opposite track the past two weeks, reversing from an all-time high of 51 days of supply to 38 days currently as Americans are beginning to hit the road again. The gasoline recovery seems more simple than diesel, as it will tie directly to the relaxation of stay at home orders, with the biggest risk being reopening too soon sparking a second wave of the virus. The equation is more complex for diesel, since U.S. producers rely on more than one million barrels/day of exports to countries that may still be in lock-down, and demand from mass transit systems that may be avoided for some time even when businesses reopen.
Crude oil inventories built less than many forecasts were predicting last week as refiners started increasing run rates, domestic output continued to be cut back, and exports remain surprisingly strong. That smaller inventory build kept total U.S. oil inventories below the record high set back in 2017, and when factoring in the capacity available in the SPR suggests that the industry is solving the storage puzzle.
Click here to download a PDF of today's TACenergy Market Talk.
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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.
Click here to download a PDF of today's TACenergy Market Talk
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.