ULSD Wiped Out The 8 Cent Gains From Tuesday

Market TalkThursday, Feb 23 2023
Pivotal Week For Price Action

Energy contracts were trying to bounce to start Thursday’s session after another heavy wave of selling knocked them sharply lower on Wednesday and saw ULSD wipe out the 8 cent gains from Tuesday.

WTI has traded lower for 6 consecutive trading sessions, but still doesn’t look overly bearish on the charts, as it remains above the lows set in each of the prior 3 months. That said, the contract is “only” $5 away from setting new lows for the past year, and if the December support near $70 breaks, there’s not much on the charts to stop a slide to $62. 

Russia is trying to stop the slide in oil prices, with reports suggesting plans to cut exports from Western ports by 25%, in excess of the already announced production cuts. The relative lack of reaction to that latest attempt to stir the oil pot is yet another sign of the weak market sentiment compared to a year ago when the war broke out.

ULSD still looks the most bearish on the charts, even though fundamentally there’s a strong argument that diesel stocks remain in the most precarious position. Even with today’s modest gains, ULSD prices are just 7 cents off of their lows for the past 12 months and if the $2.66 range fails to hold it looks like there’s a good chance, we’ll see a quick move towards $2.50.

The API reported another large build in US Crude stocks of nearly 10 million barrels last week, adding to last week’s estimate of a 10.5-million-barrel gain. The API’s figures seem to be catching up to the EIA’s data that showed stocks swelled by 16 million barrels last week as refiners cut runs due to heavy maintenance scheduled and numerous unplanned outages.  The API also estimated small builds in gasoline and diesel inventories, in line with seasonal expectations. The EIA’s report is due out at 11am Eastern.

California’s LCFS credits spiked to a 6 month high this week after CARB suggested it would propose accelerating its emissions reduction targets this week to prop up prices that have come under steady selling pressure over the past 2 years thanks to a surge in renewables production.  The $20 increase in credits this week adds roughly 2.5 cents/gallon to the cost of each gasoline and diesel (which create a deficit under the program) sold in the state but increases the value of Renewable Diesel by 10-13 cents/gallon depending on the CI value of the product

California’s Cap and Trade program credits (CCAs) didn’t move on this news, as that program has a set credit amount, rather than a mechanism for renewable producers to create credits.  The February CCA auction results are expected later this afternoon, which can be a market moving event depending on where prices settled out in the quarterly auction vs where they’ve been trading in the open market.

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

Market Talk Update 02.23.2023

News & Views

View All
Pivotal Week For Price Action
Market TalkMonday, Apr 15 2024

Gasoline And Crude Oil Prices Reached Fresh Multi-Month Highs Friday Morning As News Of The Anticipated Attacks Spread

Buy the rumor, sell the news seems to be the pattern for energy contracts that are heading lower this morning after Iran’s well-telegraphed attack on Israel over the weekend was thwarted by a coalition of air forces and no further escalation has ensued so far.

Gasoline and crude oil prices reached fresh multi-month highs Friday morning as news of the anticipated attacks spread, and those new highs keep the technical outlook pointing higher on the weekly charts, but we’ll need to see a new high set this week or else the argument for the end of the spring rally may begin.

Marathon reported unplanned flaring at the Wilmington section of its Los Angeles area refining complex early this morning, a week after reported issues at the Carson facility, which combined make up the largest refinery in the state. California’s basis values did pull back sharply after a big rally last week, and now we’ll wait to see if this latest upset sends them higher once again.

Money managers continue to act moderately bullish on energy contracts, adding net length across the board last week, even as new short positions were added in most of the contracts.

Perhaps most notable in the COT report last week was a surge in open interest with RBOB gasoline reaching its highest level in 3 years, while Brent crude oil contracts reached their highest levels since the full-scale invasion of Ukraine kicked off more than 2 years ago.

It seems likely that the increased violence around the Middle East, and the attacks on Russian refineries are contributing to the increase in bettors in the energy space, particularly now that margin requirements have returned to more tolerable levels after spiking during the chaotic trading of 2022. This same pattern may also be contributing to the surge in energy company stock prices, even though margins are far below the record-setting levels we saw the prior 2 years.

The big increase in short bets on gasoline last week also suggests that some traders are starting to prepare for the spring peak in prices that often happens in late April or May.

A Reuters report suggests that Russia has been able to repair nearly 1/3 of the refining output that was taken offline due to Ukraine’s drone strikes, bringing the offline capacity to 10% down from 14% at the end of March, but that still means more than 650,000 barrels/day of capacity is offline, roughly the size of the largest refinery in the US.

Baker Hughes reported a drop of 2 oil rigs last week, erasing the increase in the rig count we saw the week before. Natural gas rigs continue to decline, falling by 1 last week to a fresh 2 year low at 109 total for the US. Baker Hughes changed the format of their report a couple of weeks ago, which is still challenging some data providers and analysts who continue to report the last numbers that show up on the old report.

A CNN article over the weekend highlighted the challenges still being faced at the PES refinery outside of Philadelphia nearly 5 years after an explosion knocked that plant offline for good. This type of struggle is one major factor in why some refiners are choosing to convert their facilities to renewables production in recent years, which effectively extends their timeline on any remediation needed if the facility was closed for good.

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

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.