US Stock Markets Saw Their Biggest Daily Reversal In Almost 2 Years Thursday

Market TalkFriday, Oct 14 2022
Pivotal Week For Price Action

US stock markets saw their biggest daily reversal in almost 2 years Thursday, turning heavy early losses into huge gains. Those swings trickled over into energy markets, adding to the volatility we’ve already become accustomed to in October.

While the swings in futures so far in October have been impressive, the moves in basis values have been epic. After witnessing a $2/gallon collapse in West Coast gasoline values last week, we’ve saw some historic moves in diesel Thursday.

Pretty much everyone that watches West Coast spot markets knew that LA CARB diesel was in for a big drop Thursday, after the other diesel contracts in the region had dropped sharply earlier in the week, but pricing agencies left the CARB diesel unchanged due to a lack of trading activity.  While everyone knew a big drop was coming, it’s safe to say that pretty much nobody expected those values to drop more than 78 cents in a day, from +5300 to -2500, which marks a record single day decline for distillates. Ironically, this move happened on the same day that the DOE reported West Coast diesel stocks reached a 3 year low.

We’ve seen bigger drops in gasoline basis in a single day (just last week actually), but I don’t know that any US cash market has ever seen such a swing from a big positive number (which implies very tight supplies) to a big negative (which usually accompanies a glut of product) in just one session. Of course the extreme moves in the ULSD calendar spreads are heavily influencing the daily basis swings, as -2500 vs November futures is the equivalent +1500 vs December futures, and that’s historically a strong basis value for this time of year on the West Coast.

In the other corner of the country, and side of the extreme moves, NY Harbor basis values continued their runaway rally, adding another 25 cents Thursday to now trade 75 cents over November Futures, also known as $1/gallon more than LA CARB diesel , after trading a penny below its West Coast counterpart just 1 day prior.  That 75 cent premium is the 2nd highest level recorded for NYH ULSD, and could certainly threaten the record north of $1.22 that was set during the chaotic spring trading after the war in Ukraine broke out.  The spread between ULSD values today in New York and at year end is approaching $1.30/gallon. 

November ULSD futures came within 5 points of reaching their August high of $4.1154 Thursday, before pulling back slightly ahead of the close, and moving lower overnight. That move is close enough to complete the “W” pattern on the daily charts and may set up a period of sideways trading as traders consolidate positions. That $4.11 level is looking pivotal for the back half of October as a break there leaves room on the charts for a run to $4.50, while a failure will make this look like a short term double top that could push prices sharply lower.  Given the chaos in cash markets, expect some more fireworks over the next 2 weeks. 

Notes from the DOE’s weekly status report: 

US Crude stocks climbed on the week, and nearly reached the 5 year seasonal average for the first time in 18 months. That said, the increase was once again primarily driven by the ongoing release of barrels from the SPR, which are totally more than 7 million barrels every week.  US oil production dipped for the 2nd time in 3 weeks and is holding at levels we saw 6 months ago.

Diesel stocks in the US dropped once again, and touched 24.2 days of supply based on the DOE’s demand estimate, which marks the lowest level in the 20+ years of data available.  US production of diesel is holding at nearly 1.5 million barrels/day more than the country consumes but record exports are continuing to cause traders to need to pay up to keep barrels at home.

Gasoline demand estimates from the DOE dropped by 1.2 million barrels/day last week, from the top end of the seasonal range, to below the levels we saw this time in 2020. That number is a good reminder of how challenging it is to reliably calculate demand on a short term basis, and that the driving season has officially closed and consumption typically creeps lower for the next 3 months.

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

Market Talk Update 10.14.2022

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Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

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, Nov 30 2022

Energy Markets Are Seeing A Strong Rally For A 2nd Day

Energy markets are seeing a strong rally for a 2nd day as uncertainty about the upcoming OPEC meeting and about the looming Russian oil embargo seem to have markets focusing on supply fears again, after weeks of demand-fears driving prices lower. Diesel prices are up more than 22 cents from yesterday’s low trade, while gasoline prices are up 12. The bounce puts the complex back in neutral technical territory after surviving a trip to the edge of a breakdown that could have sent prices sharply lower. 

Concerns about a pending recession continue to plague equity markets as the US Treasury yield curve is inverted to a degree we’ve only seen a couple of times in the past 25 years. As the chart below shows, these inversions have been a good indicator of a pending economic slowdown. Energy markets seem to already have gotten that selling out of their system in the short term, but this could once again become a factor if this latest rally runs out of steam. 

The European Union still can’t unite on a price cap agreement for Russian oil, less than a week before an embargo on Russian oil is set to begin. Both WTI and Brent crude have slipped into a Contango price curve near term as current supplies are proving ample as traders have had months to prepare for this change, and demand has softened globally. 

Meanwhile, Italian officials continue to race to find a way to keep their Sicilian refinery in operation after the embargo begins, asking the US to provide banks assurance that they won’t face fines for breaching sanctions given the Russian-owned status of that plant. Since the US is a consistent buyer of products from that facility, and the East Coast continues to struggle to find enough supply, perhaps it’s an offer they can’t refuse. 

OPEC and friends have decided to hold their upcoming meeting virtually, which some are taking as a sign that they will roll over their output cut agreement from October. 

The tornado outbreak in the southern US looks like it stayed far enough away from the Gulf Coast to spare the refineries in the area. The Alon refinery in Big Spring TX reported an operational issue that lasted more than 16 hours Monday, that ENT is reporting could end up causing extended downtime at that facility. While that plant is far from the Gulf Coast trading hub, downtime could add to the supply challenges to West Texas and surrounding markets.

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

Pivotal Week For Price Action
Market TalkWednesday, Nov 30 2022

Week 48 - US DOE Inventory Recap