We’re Seeing Another Mixed Bag For Energy Markets This Morning After A Wild Tuesday Session

Market TalkWednesday, Oct 12 2022
Pivotal Week For Price Action

We’re seeing another mixed bag for energy markets this morning after a wild Tuesday session that saw a stunning recovery in refined product prices. Strong gains overnight have been largely wiped out after the September PPI report showed that inflation is not going away, which moves the hopes of a FED pivot further into the future. RBOB prices have pulled back a nickel from their overnight highs and WTI is down nearly $2 since the report. ULSD meanwhile continues to find its own path, up nearly 7 cents despite the selling in other contracts, as the realities of an extremely tight diesel market continue to ripple across the globe.

The November ULSD contract has decoupled from the rest of the complex, staging an impressive 20+ cent rally Tuesday to settle higher even as most other ULSD contracts finished with heavy losses on the day. The spread from November to December futures has soared to nearly 35 cents this week, which would set records outside of the chaotic trading we saw in March in April. The big moves in the calendar spreads is creating more chaos in basis markets around the country as cash traders try to adjust to the big swings in futures spreads. Most notable today is that NYH ULSD is now trading 40 cents over the November futures, which puts the backwardation roughly 75 cents into December, or more than 1 cent per day. 

OPEC’s oil production ticked slightly higher in September, according to their monthly oil market report released this morning. The cartel’s total output was up 146mb/day for the month, with increases from Saudi Arabia, UAE and Nigeria offsetting declines in Iraq, Iran and Venezuela. It’s worth noting that the September output is still more than 1 million barrels/day below the August target that was used as the bar for the recently announced “production cuts”. The report lowered global demand estimates for 2022 due to ongoing lockdowns in China and economic challenges in Europe. The report also noted that China’s demand loss is allowing their refiners – which are some of the only plants in the world with spare capacity this year – to ramp up exports of refined products.  That change in product flow is one of several factors that have caused tanker rates in parts of the world to double compared to last year, which is also highlighted in this report. 

A US judge approved a long awaited plan to auction off shares of Citgo to settle several long-delayed judgements for companies that had their assets seized by Venezuela’s government. It’s worth noting that the auction wouldn’t take place until late 2023 at the earliest, and would only sell enough shares to pay off the outstanding judgements, not the entire company, which could allow the refiner to continue operating as they’ve been doing, rather than breaking it up into pieces as had been discussed for years. Meanwhile, the US continues to try and negotiate with Venezuela to find a way to bring some of the 2 million barrels/day of oil production back to the world market that’s been missing for the past 7 years as the beleaguered nation spiraled into social chaos.

Tropical Storm Karl formed in the Gulf of Mexico Tuesday, which would ordinarily be a reason for fuel markets to get nervous, particularly with the supply network already stretched very thin.  The good news with this storm is it is forecast to reverse course and head south into Mexico, so there is no threat to the oil production and refining assets on the US coast.

The EIA’s Short Term Energy outlook will be released later today, while the API and DOE/EIA weekly inventory reports are both delayed due to Monday’s quasi-holiday so the API will be out later this afternoon and the DOE report tomorrow.

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Market Talk Update 10.12.22

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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