Energy Market Updates

Future pricing action continues to be as wild as a Patriots game ending, with the average swing intraday running over $.12 from high to low.  Yesterday’s bump higher in diesel was somewhat expected on the heels of three strong down days and a fair amount of market moving news on tap. 

First, it appears the damaged section of the Keystone Pipeline is fixed and testing runs are scheduled to take place in the next day or so, but full operation is still weeks out.  This is good news for Cushing to start to rebuild lost input in the last week. 

Secondly, a high profile visit to the White House and Congress by Ukrainian President Zelenskyy all but assured continued US backing of the non-NATO country in its efforts to stave off continued Russian advances.  Hard to interpret, as some have the sense now Ukraine can actually prevail in this, while others are viewing this as a very tight rope to walk supplying billions in aid and defense weapons, somewhat cornering Putin. 

Thirdly, Inventories showed a steep drop in crude of 5.9mbl (expected as we said last week the pipeline shutdown would show this week).  Gasoline showed a modest build of 2.5mbl but Diesel dipped for the first time in five weeks with a slight draw of just 300,000 bls.  The key driver yesterday appears to be that distillate demand is still healthy showing a 6.6% increase over last week.  Much of it appears to be attributed to the expected extreme cold taking hold of the middle part of the country and power plants stock up on alternate fuels.  Locally in the Northeast, supplies are getting better but still seeing a lot of just in time ship arrivals and kerosene pricing has eased but still at much higher values than previous years.  Hauling capacity looks to be the next hurdle facing region and should the extreme cold linger, it might get rough for some.  That strong supplier relationship we talk about will get you through the next several weeks. 

From all of us at Dennis K. Burke, Inc.  we wish you a very happy, healthy and safe Holiday season!

The Market giveth and the Market taketh. 

After falling over $.50 last week, front month ULSD has risen almost $.50 this week.  Gains were primarily on the heels of the Keystone pipeline leak that spewed 14,000 bbls (588,000g) of crude into Northeast Kansas late last week, prompting Operator TC Energy to shut down the entire pipeline.  Main note on why this is significant, is that this leg of the pipeline runs to Cushing, Oklahoma which is the primary metric for weekly Inventories.  As of this morning, product has since started to flow but still not through the damaged section which may take weeks to repair. 

Again, the fear buying of future products has pushed ULSD almost to where we were at the beginning of the month.  The spill froze any downside potential in the pits with this week’s builds in inventory yet again.  While Crude showed almost a 10mbl increase, expect that to be erased next week with little to no product flowing into Cushing. Distillates gained roughly 2mbl, still well below the 5 year average.   Oddly, demand still seems robust, specifically for diesel which again is helping to push prices higher. 

We said volatility will remain in the short term as fuel markets continue to search for a comfortable range.  I would have to believe (hope) that it is under the $3 handle for the front month.  The good news is that it appears Kero is relaxing somewhat, making winter operability cost at least palatable, relatively speaking.  Kero has come down by over $1 in the last several sessions. 

The "Price Cap" for Russian crude is somewhat confusing as to the effect or outcome it will ultimately have, as Product is very rarely traded on a fixed number, more often traded on formulas or differentials to a benchmark, so again time will tell if there is any real net impact. 

As the cold weather starts to move in, again we can not stress enough to have conversations with Suppliers on product blends, operability and availability.  Looks like we may be in store for a wild winter.

A few weeks ago we hoped to see ULSD trading $.50 lower, as the cash market was tumbling at warp speed.  And would you look at that, here we are! Much of those losses have come from the last 5 sessions alone. (see chart below). 

At the same time we have seen the market backwardation almost get erased.  Suppliers should be more willing to put product in tank versus working hand to mouth.  The JAN to FEB spread is now a mere $.01, it wasn’t long ago that is was over $1.00, and the summer months are all but flat.  So, cash prices have corrected, Futures prices have collapsed (again) and the backwardation is going away!  Great News!…. Let’s not break a piñata just yet. 

Inventories reported large distillate and gasoline builds, both in the range of 6mbls with exports of finished product dropping as well.  Again, what we said needed to happen.  The JAN screen is about $.17 higher than pre Ukraine invasion, and about $.70 higher than a year ago.  The key is that it appears that demand is starting to slow, be it from rate hikes (intended to slow inflation) or higher costs all around, most point out that next year will be soft in terms of demand and spending in general. The goal now is to normalize and hopefully not get too deep into a recession that could take years to recover.

OPEC is staying the course on production levels, China COVID fears are also hitting demand on a world level. The Russian Oil cap of $60 per barrel is still playing out.  Going into effect on the 5^th, the G7 measure aims to limit that what Russia can profit from their crude and subsequently curtail the money needed to sustain a Ukrainian takeover.  However, non G7 nations such as China and India are already taking additional vessels of Russian product, so the net result remains to be seen.  Point being is that there is a fair amount of fundamental variables out there that will continue to weigh heavy on the pricing of product. 

Kerosene is still very scarce across the region and cash values are still almost $3 higher than diesel thus prices will remain higher in comparison for much of the winter.   Buy the rumor, sell the fact is the old saying. I don’t see that going away anytime soon, we just may be at a new normal when it comes to pricing, thankfully much less than we have seen in the last few months.

Hope’s not a four letter word, although, probably not the best strategy in the fuel business. 

Two weeks ago we had said that hopefully we see pricing top out as supply appeared to be moving into the Northeast.  That looks to be occurring, as cash values have dropped at twice the speed of futures and almost catching up to normal spreads. (see below).  

On 11.9.22, cash prices were $1.20 higher than futures, as of today they are $.0150 higher.  This means that diesel product is being shipped, getting purchased, and somewhat loosening the supply constraints for some.  Thus the reason you have seen your prices fall so dramatically the last few weeks.  However, supplies do remain tight as the backwardation persists, limiting some Suppliers from taking product in tank along with an uneasy feeling on demand over the next few weeks. 

The other elephant in the room is Kerosene, which is in extremely tight supply throughout the region.  A niche product used primarily in the Northeast and Central US for outdoor heating and road fuel winterization is still seeing record high prices as many try to source gallons. 

As I have discussed with many of you in the last few months, diesel-kero blends for winter operability purposes will be high relative to years past.  

With Crude pricing falling to 10 month lows this week capturing much of the headlines and rumors of an OPEC+ production increase (albeit quickly dismissed) swaying markets somewhat, the real focus should remain on Distillate pricing.  Again, the volatility looks to stay in place until the forward months level out and we see how the Russian price cap plays out that is due to take effect on 12.5.22.  It was just in late September that ULSD traded roughly $.50 lower than present.  Still hope.   

As always, the Team at Dennis K. Burke is here to assist and answer any questions you have.  Have a safe and Happy Thanksgiving.

I’ve been away…..any talk about diesel supply? 

News cycles have jumped all over the fear topic of only 25 days of supply of distillates in the Northeast.  It is true that PADD1 distillate Inventories are well below the five year average and PADD1A (New England) is even more tight, however, it is important to understand the term “days of supply”.  That is defined as if everything stopped today.  No production, no pipeline shipments, no vessels, no trucking and we kept using as much distillates as we are at this very moment.  Slightly different than how it can be perceived by watching a news clip. 

Distillate inventories were actually slightly up this week as exports fell by some 300k barrels per day, although our inventories are still some 20mbl below last year.  Key to yesterdays inventory report was that refinery utilization (production) is running at 91% which is up over 4% versus last year and historically this is a high rate.

So what does all this mean?   

For many years, having supply contracts was the standard in the fuel business.  As time went on, predominantly in gasoline, this shifted to suppliers selling excess gallons at the going price, commonly referred to as “rack” gallons.  Because there is very little excess product, the rack marketer is put on the sideline while the contracted supplier keeps companies rolling. 

Future pricing turned positive yesterday on the draw of Crude stocks (makes sense because of the high production rate) and the FED adding another 75 point basis hike to key rates.   Cash values turned negative as there are some rumblings that we actually may see a release of finished product into the northeast in the next week or so.  While this is a temporary measure, it could loosen up for just enough time.  Look for price action to remain volatile over the next few weeks with hopefully a trend to the downside.

We have been saying for several weeks that the distillate inventory picture is not the brightest, even more so in New England.  The news cycle has taken hold of this, and judging by the number of calls and conversations I’ve had in the last week, it is starting to sink in. 

We currently sit about 20 million barrels below last year of distillate inventory.  The chart below shows a five year picture and very infrequently would we dip below 120mbl of storage.

With winter approaching, and New England the primary consumer of Heating Oil, the fear is there will not be enough to go around should there be an extended period of cold.  Moreover, if power plants get curtailed from using Natural gas, the alternative source is diesel fuel. 

Courtesy of NEFI, the winter temperature outlook shows the Northeast to be in the third year of a La Nina pattern and that typically means a warmer than average season ahead of us, albeit with a colder December to start. 

Exports of Distillates continue to be robust, as we are sending about 1.2mbl per day overseas.  Last week we mentioned that quick relief might come in the way of releasing finished product reserves into the market instead of unfinished crude.  That has fallen by the wayside over the last several days, as this is a market condition and not a physical event, like the last release during Super Storm Sandy. 

Government officials have been quoted as saying “nothing is off the table” in terms of a solution and we have now seen another idea floated which on the surface makes sense.  It has been suggested to relax the sulfur specification on distillates to allow shuddered refining equipment to come back online, thus boosting production and requiring products to remain domestically. 

Years ago, refiners chose not to invest into units in order to produce the ultra low sulfur products we use today (15ppm vs 500ppm).  Opponents say that the turn around time would be too long, and not the quick fix we need. 

Price action continues to be extremely volatile, and I would expect that to stay through the end of the year as the backwardation in the market remains, limiting any excess or “rack” gallons to be available.  Again, having a supplier with a redundancy of contracted supply options and the means to get you product will get you over this hump and better positioned in the future.

Many refer to Diesel as being the backbone of the American Economy.  Trucks, trains, equipment, and ships all rely upon diesel for power.  So when a blowout happens, it can affect mostly all aspects of our daily lives - from the food we buy, to the clothes we wear, and even the way we operate our businesses, even if those blowouts are short lived. 

Since last Thursday we have seen the spread between future prices and cash prices grow to $.80 on Monday only to subsequently fall to $.55 yesterday.  (see chart below).  Tuesday and Wednesday saw diesel values weaken as deals appeared to be getting done for physical product delivered into New York Harbor. 

The Northeast continues to see distillate inventories hover around precariously low levels as a new round of SPR releases were announced this morning.  This appears to be the path that Government Officials want to take but some don’t believe it to working for us New Englanders and distillate users, although Crude and Gasoline are relatively stable.  Rather than releasing crude, some suggest releasing finished diesel reserves to calm markets as the backlog in the refining process and subsequently exporting the finished goods at a higher rate than selling domestically is only prolonging the recovery process.  Capping or limiting exports looks to be off the table as it could throw global markets into a spiral and appears to be Politically too risky.   

While Heat and Diesel values appear to be correcting (knock on wood!) we are still almost $1 higher than the beginning of the month.  I would expect the next several days to be very choppy in terms of prices.  Today as an example ULSD started down over $.04 and at present is up almost $.02, not even taking into account what cash markets will actually do.  I cannot stress enough how important it is, and will be, to have a strong relationship with your supplier during these times.  Having various contracted supply points, along with the ability to get you product, will likely be a defining characteristic over the next several months.

If there is one thing that I am sure of in all my years in this Industry it is that Customers do not like surprises. 

The last two weeks (or two years for that matter!) have certainly offered up many surprises.  News over the last three days has highlighted “Crude prices falling”, however, the disconnect from Crude pricing to the finished diesel product pricing has never been more sharply contrasted. Front month Diesel futures have once again skyrocketed $.80 to touch the $4.00 level in the last two weeks for the fifth time.  The rapid rise and rapid drop cycle doesn’t seem to be ending anytime soon. 

The big surprises have come in the way of Cash Diesel prices rising more than futures.  As illustrated above, diesel cash values have blown out over $.50 over futures values.  The month prior they were practically even, and historically they tend to only be a few cents apart.  So why?  

Realistic concerns over product shortages in New York Harbor hit the market in the last several days as not many offers were taken on barges. What that means is that product is still moving overseas versus into US ports, thus slowing resupply and pushing up pricing for any product already in tank.  Cash markets move racks more than futures do, although most only look at the NYMEX as the driver. These types of cash to screen blowouts are historically short lived. (We can only hope this is not another “historic” trend change, I think we can all agree that we’re tired of those).

Be sure your Supplier has adequate, guaranteed supply and the ability to get product to you as the fewer the surprises you have, the better.

Volatility continues to have a hold on the diesel market.  In the past week alone, we have dropped over $.30 and subsequently rose $.30 in just four sessions. 

There is always a hurricane premium laid into the market once storms reach the gulf.  Reality is that less than 10% of the Gulf Region Production was pulled offline in the last few days and most are back online at this point.  However, as the storm moves on, your will see a rolling port closure effect as it moves up the close which likely will cause regional increases in the next day or so.  

Inventories showed draws across the board this week with much of the same import- export spreads while some real focus was put on demand figures being stronger.  For diesel much of the increase can be attributed to the fall harvest that typically happens this time of year throughout the country.  Still, it gave traders a reason to buy over the last wo days. 

Concerning news on several “leaks” on the NORAD Stream gas pipeline that feeds much of Europe from Russia, as the issue now appears to deliberate in nature.  This could force shipments of US product overseas for the foreseeable future and keep prices elevated. 

Other bullish tidbits came in the way of Senator Manchin pulling his Fastrack Energy Permit Plan in order to prevent a Government Shutdown.  This was seen as a bright light to many in the Industry a few weeks ago.  Two up days doesn’t necessarily break the trend, but its hard to comprehend when they erase the losses we all were so happy to see. 

If you were to read the news, it is almost impossible to tell which way the Oil markets are going as the volatility has all pits in wild daily swings.  Fortunately for most of us, diesel prices have corrected over $.30 in the last three days and all but erased the early August climb. 

Demand, Economy, and Inventory are the fundamentals that continue to push futures around.  Reports from the IEA on worldwide demand “coming to a halt” in the fourth quarter due to slowing global economies and continued lockdowns in China rippled through the market yesterday along with interesting Inventory news.  Demand right now sits at its lowest point since JAN21.   

Shown below, gas stocks fell to a 10 month low, but was taken lightly as it is typical this time of year as we switch seasonal grades.  The bearish news came with Distillates building for a third week in a row, albeit still 12% off from a year ago.  Unfortunately for us in the Northeast, our stocks fell by 3%.   Exports of distillates finally fell last week but again they are a staggering 83% higher than last year. With the FED poised to make another 75 basis point rate hike, most anticipate the collateral damage to be demand.  Thus fueling sell off. 

This summers price action is truly one for the record books.  Since May, ULSD has gone up $1, down $1, Up $1 and down $1.  Remember the days that if the market moved $.01 you had  a meeting to figure out what to do?   

Having a good relationship with your supplier is critical during these times.  While it is impossible to predict what the pits will do, its always best to at least know what is happening.