Energy Market Updates

As expected, pricing has remained range bound the past week as we try to digest the often mixed data and the volatile news cycle.   Thankfully, I have a constant supply of TUMS within arm’s reach.  Pushing prices higher recently are the drop in finished products for gas and distillates as gasoline is about 2% lower than last year and distillates relatively flat.  Additionally, on a global scale, fires in Canada look to be shutting in about 250,000 b/p/d and reports are that Russia will enact another cut of 300,000 b/p/d in the coming weeks.  That is being offset by a lingering fear of another banking crisis should a debt limit deal not be reached and more importantly a pending credit crunch as rates remain elevated.  Domestic demand for both gas and diesel is down about 2% versus last year and while Chinese demand is robust, most say it is well below where it needs to be after a total lockdown. 

As we mentioned, Gasoline takes the drivers seat for the summer months and many of you have asked “why is my local station out of gas for a few hours every now and then?”  The answer is twofold.  First, the backwardation that plagued the diesel market for month has jumped over to the gasoline strip.  Outer months are priced less than near months giving suppliers little reason to have robust inventories available as any in tank product takes a loss in value on the month change.  Secondly, the lack of drivers to haul the product continues to be the 300lb gorilla that nobody really has an answer for.  Fortunately, DKB is well supplied and has a fully staffed Team of Professional drivers to continue to provide the exceptional service you expect from your fuel supplier.

Look for pricing to remain choppy as the summer progresses with the caveat that any hurricane threat to the Gulf area will quickly change the trend.

After hitting yearly lows last week, Diesel pricing has risen over $.15 in the last week.  As expected, bargain hunters typically buy in regardless of fundamentals.  The increases have been muted somewhat as there is still that languishing fear that demand will fall off the proverbial shelf in the last two quarters. However, this weeks report showed that gasoline and diesel demand in the US remains somewhat strong, posting gains over last week and last year.  While both products showed draws in inventories this week, and Crude showed a solid increase, that appears to more of a factor of less refinery production than anything else.  Inventories for all appear stable with the exception of the SPR which is expected to begin repurchasing soon. 

While recent Inflation numbers dipped below 5%, down for the 10^th straight month, it is still much higher than the FED sweet spot of 2%.  My sense is the street is correct and we will not see another rate hike in the coming months. 

Gas will start to take the lead as the summer driving season kicks off and it will be interesting to see how Americans will act ahead of relatively unstable future.  Moreover, how will the commercial sector be affected?  Speaking with a number of Customers in various fields, most are “cautiously optimistic” about the upcoming months.  Work is steady, pricing is palatable, but labor remains tough.   DKB can assist with mitigating some of the uncertainty, please do not hesitate to reach out to discuss.  Expect sideways price movements for the next week with a wide rage of $.20 on both products.

Typically Inventory levels and price direction have an inverse relationship.  When Inventories rise, prices fall…. When Inventories fall, prices rise.  As one said, “this ain’t no typical market”.   

We said several weeks ago that market direction would weigh heavy on OPEC and FED policy and we see that now as fundamental factors are temporarily moved aside.  With Distillate inventories falling by 1.2m barrels and gasoline rising by 1.8m barrels, most are focused on what is said to be the final rate increase of .25% by the FED.  This is the tenth increase in just over a year.  Demand for finished products is starting to wane year over year, signaling to some that a real slowdown is imminent and FED policy is, for lack of a better term, working . 

Diesel pricing has fallen about $.40 in the last two weeks, and for most of us it is a well needed reprieve.  However, this is the fifth “bottom” we have seen in a year, (see chart) does this mean we will see a buyback in the next several days?  With true Russian export numbers showing robust shipments, highest since 2019, I would suggest that the global market is well supplied and demand forecasts are the true driver in the marketplace. 

Look to see pricing stabilize over the next few weeks (again with large day to day movements) as you will start to hear more and more on the labor market and unemployment figures, which is the collateral damage of rising rates.  While the supply picture is much improved in the region, it is still crucial to be in communication with your supplier as many are employing a “just in time” resupply approach.  It will also be interesting to see how the pending credit crunch will affect our industry.  Having a reliable, well supplied fuel provider, like DKB, will be key in the last two quarters of the year.

We suggested last week that there would likely be sideways action in the market as everyone digests what impact production cuts will have, and that is exactly what has happened.  We have seen large daily moves, but overall we are just about where we were a week ago. 

For most of us, we are coming into our busy season, putting boats in the water, paving or landscape crews coming back, large summer construction jobs, or more runs added to the fleet.  In my many discussions with customers, most are cautiously optimistic about the coming months.  The top two topics are still People and Pricing.  The Labor problem doesn’t appear to be going away anytime soon as most of us are doing more with less, and for the most part, getting used to it.  Pricing for physical goods has started to ease,  but those “services” we all rely on remains higher (again because of the labor market). 

Fuel pricing over the summer will likely be dependent on more fundamental forces than anything else as we appear to be at a comfortable price range.  China’s demand will be a major factor as currently Crude Imports are now at their highest level in over 3 years.  Domestic Diesel demand, while falling slightly week over week, is still about 8% higher than last year.  Physical fuel supplies remain in a delicate balance as a number of supplies try to navigate the stubborn backwardation in the futures market. 

The Supplier-Customer relationship could be tested over the summer should a well timed Hurricane hit the Gulf.  Spring is always a great time to do housekeeping.  A fresh coat of paint on the fill covers, cleaning away any shrubs from tanks, making sure steps are secure, always helps us be able to serve you better. 

Oil markets moved higher this week primarily on the “surprise” production cut announced Sunday evening.  Recall two weeks ago we cautioned   “ All eyes will be on the FED and what they announce in the next meeting, more rate hikes or not?  Also look to see if OPEC+ decides to cut production to bolster prices in the coming weeks.”    

It wasn’t the shock of a million barrel cut, more of the agreement that Russia would extend their already in place cut of 500k bbls for another six months, thus totaling the Cartels cut to 1 million.  Fear not, it has been a very long time since OPEC has actually adhered to output quotes.  Most of the time the money is too good to pass up for many Nations. 

The fear with the cut is that Inflationary risk will rise as overall cost become higher.  As US manufacturing activity fell for the fifth straight month, coupled with yesterdays Inventory report showing Refining production slowing, it might signal that Inflation will continue to rise as demand remains high.  I tend to think about it differently (hold your comments) - If the cuts raise fuel prices, and people have to spend more on gas, heat, power, etc….  wouldn’t that force them to have less to spend on discretionary items therefore pushing down demand and subsequently lowering inflation?  We will leave that to people much smarter than me.  (Again, hold your comments). 

The draws across the board with inventories yesterday didn’t help any as futures again rose and we sit about $.10 higher than we did Monday morning.  As cooler heads prevail and the mentality shifts back towards the overall healthy of the economy in the months ahead, expect sideways daily pricing moves with a wide range from high to low.

A surprise increase in Distillate inventories fueled a sell off across all pits yesterday.   Distillates grew by 300k barrels while most expected a decline of about 1.5m.  This, coupled with surprisingly low demand numbers (down almost 7%) saw the pit erase the roughly $.15 in gains added in the last two weeks.  It appears that we are continuing that slow progression downwards with mindless swings in between. 

Today will be interesting as it is technically the last trading day for the APRIL ULSD contract and it is still priced above the $2.65 level with the MAY contract well under at $2.58.  Where will they meet? 

Also pushing prices down is a more optimistic view of the banking system taking hold as several major US banks are buying up deposits and loans of the now failed SVP bank.  We had said several weeks ago that if, and when, the market reaches this level it would have to “reassess” where it will move towards. 

Looking in the rearview mirror, it appears that there is still value to Q3 and Q4 fixed price gallons.  Several key fundamental factors will weigh in on direction over the next few weeks such as FED Interest rate policy and overall economic temperature, demand for products and the summer driving season.  Globally, it will be China’s demand for products, of course Russian price cap effectiveness and product movement, and as always OPEC output quotas.  The day to day price swings do not look to be going away any time soon, moreover the intraday swings are just as dramatic.

On February 24, 2022 Russia invaded Ukraine thrusting oil markets into one of the most volatile periods in decades, reaching prices never seen before.  At just over a year later, the APR contract is just $.01 off of where we were when this all started.  (see close on 2.24.23 below and chart) .  The circumstances around the recent drop are obviously derived from the recent banking meltdown. 

While it may take a Phd from Harvard to understand the details of what happened to the collapse of two major US banks, the underlying notion remains true no matter what decade we are in.  Fear tends to push markets much more than any fundamental or technical mechanism. 

A year ago, most were fearing that Russian oil flows would cease and cause a worldwide disruption and price spike.  While in some instances it affected physical markets, the fear of it is what drove futures higher.  With large banks dancing on the Moral Hazard line (taking on excess risk with idea of being bailed out if it sours) and paying higher interest rates, it put fear into depositors and prompted massive amounts of withdrawals, a classic bank run.  This is prompting a much larger fear, the fear of Contagion, a Financial Covid, to put it into modern day terms. 

The good news is that the recent collapse presents some buying opportunities!  We stated prior that should we dip below the $2.65 on the front month, Q2 & Q3pricing may look appetizing for a portion of your needs.   All eyes will be on the FED and what they announce in the next meeting, more rate hikes or not?  Also look to see if OPEC+ decides to cut production to bolster prices in the coming weeks.  Don’t fear, DKB will be here.

Futures markets appear to be content with being rangebound as the last month has seen us bounce back and forth by about $.25 in Diesel.  The last four days has seen diesel futures fall almost $.15 in value. 

While the Distillate inventory report this week showed a slight gain of 200k barrels, the real news was in demand.  Distillate demand dipped about 8% from last week, which is down almost 23% from this time last year.  Demand and FED interest rate adjustments appear to be top of mind for most.  With the FED Chairman stating that recent economic data was stronger than expected, he alluded to the fact that more rate hikes will be necessary to calm inflation.  Traders took this as a sign that it will limit growth and subsequently, demand, thus the sell off. 

Still, outward diesel months are hovering around that $2.65 level we talk about, but even more interesting is that Backwardation (outer months being cheaper) has been all but erased for the second and third quarters. (see strip below)  As we transition back to summer diesel, the hope for most of us is a less volatile market.  Unfortunately, we have seen too many times a spike follow what appears to be a calm period for any number of fundamental or technical reasons.  Having a supplier versus a marketer is, and always has been, the best course of action in dealing with volatility.

We are now a year removed from Russia’s invasion of Ukraine, and like many times in the past, we seemed to have made it through an extremely volatile period.  Since the onset of this “new normal” we have stressed the need to have a strong relationship with your supplier to help navigate the ever changing landscape.  Recall that we said the $2.65 level for the ULSD contract is a key support level, we have now hit that four times and bounced off it (see below) and the market is truly searching for direction with a $.25 range the last few weeks. 

A bevy of news is swaying the daily and intraday moves.  Russian price caps on crude sales, on the surface, appear to working as they continue to find more means of revenue to fund what looks to be a prolonged campaign.  Yesterdays Inventory report, while mixed, showed a staggering 22% increase in Crude exports over last week and almost 50% over last year.  All while adding 1.2mbls to our own inventory.  Many point to China as the main destination with their manufacturing activity exploding last month to levels not seen in over a decade.  Largely due to a catch up period from the removal of the zero tolerance COVID restrictions, the country is in need of any and all barrels. 

In the US, while our manufacturing activity slowed in FEB, it was less than expected and at its highest rate since OCT22, signaling rate hikes are working and brighter days to come.  This pushed markets higher even as Distillate inventories gained 200k bbls last week and demand was down over 14% from last year which is somewhat concerning.    

In what has been a fairly uneventful winter season, the Northeast is now in the midst of a cold snap with another round of snow expected in the coming days.  Winter diesel is still the safe approach as it is still available for the next week or so, be sure to contact your Rep for area specifics. 

While it might be hard to think about cold weather with temperatures in the 60s across the region, keep in mind that all too often, we still have an arctic blast come through late February into March.  Staying the course with a winterized fuel is critical to a smooth operation this time of year. 

A week ago we mentioned that when ULSD futures touched the 2.65 level we would likely see the market “re-evaluate” where we will go.  It has done exactly that, by trading in a modern day “tight” range of $.11 in the last several sessions.  A large crude build last week of 16.3 mbls put levels at almost a 2 year high, increases in gasoline  and a slight 1.3mbl loss in distillates are putting downward pressure on the entire market.  Strong retail sales, growing jobs, and increasing wage data is keeping inflation risk high.  This will likely cause another slight increase in rates by the FED, thus pushing commodities higher. 

One has to wonder if the increase in manufacturing and retail sales is more catch-up demand, as supply chain bottlenecks appear to be loosening.  Either way, we are walking that fine line, and the market will take some time to reassess.  This means it could be unlikely that we see large swings higher or lower for a period.  Again, demand on a world level will have a strong pull with pricing as Russia appears to be maneuvering around the price caps, selling product to the easiest outlet.  News is that new “component” export sanctions are being drafted that will limit raw materials from being shipped into Russia preventing them from build items like computers, machinery and weapons. 

Its been a slow retreat to “normal” levels and while I would like to think more is in store, we will likely take a sideways path to get there.