Energy Market Updates

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.

Diesel futures continue to oscillate on both technical and fundamental influences.  We had mentioned to many, don't be surprised if the March contract touches the support level of $2.65 area when in it was trading above $3.25 in late January.  Low and behold on Monday it bounced off $2.6649 before jumping another $.20 over the next two sessions. 

It appears that warmer temps both here and in Europe (except for this past weekend) started the sell off as the fear of a product shortage for power generation is subsiding.  With OPEC+ agreeing to stick to current production levels, it casts doubt on what demand will really look like as China begins to reopen.  Presently it appears that their need wont be as much as anticipated. 

Domestically, we appear to be making strides on inventory increases with builds across the board yesterday.  Specifically with diesel, we rose 2.9mbls on the backs of strong imports, even with a 2% increase in demand. (partly attributed to power plant usage, as expected). I have said that should we touch the support level of $2.65, we would likely have to reset for a time and figure out where and what will drive the market.  Coming out of winter, we will need to keep a close eye on factors such as China’s demand, future interest rate adjustments, and domestic needs specifically on the transportation and construction side.  

There is still a tremendous amount of volatility within the day as double digit ranges from high to low are now the norm.  I would like to think we will see softer pricing over the next few weeks as the market tries to erase the backwardation that continues to linger.  (keep in mind the outer months are likely to not fall as much)

The wild ride continues as in just under two weeks, we have erased $.50 of value on the futures market.  Front month ULSD fell $.1937 yesterday setting us up for a test of key technical support levels. 

As we thought, we are now firmly under the $3.00 mark, and eying more downside to follow.  Several news worthy factors pushed markets lower yesterday, none of which were attributed to Tom Brady’s retirement.   

The big news was the increase in inventories across the board yesterday with distillates adding 2.3mbl with exports falling slightly.  As we mentioned previously, the trend appears to be taking shape as physical markets in New York Harbor fell even more as supply becomes more available.  Additionally another small rate hike of 25 basis points by the FED appears to have put traders in a sell mode as inflation risk subsides. 

We always have to look at the off Broadway news to get a real pulse of the market.  Not widely reported on yet, the White House appears to be stepping back on drilling leases, as an agreement was made to allow a scaled down drilling plan on the Alaskan North Slope yesterday.  This is a big reversal from a previous stance which I would imagine kept the sell off going yesterday. 

Even the most severe cold air entering the Northeast in several years could not keep futures from taking a nose dive.  (see our update yesterday on best practices for your fleet).  Largely seen as a regional event, if power plants get curtailed this weekend, it will likely show up in draws next weeks inventories. 

Overall, it appears the our range is continuing to get lower, that is - when we spike, we don’t spike as high as the previous.  Q2 pricing is starting to look attractive again, but be sure to be in contact with your Rep as the markets are still extremely volatile.

Even though Diesel futures have fallen roughly $.20 in the last two days, we are still almost $.40 higher than the beginning of the month.  Still optimistic that we will considerably lower in the coming weeks, however.  

Demand appears to be the underlying factor that is keeping prices from continuing higher.  Yesterdays Inventory report showed that distillate demand was down 3% over last week and down a whopping 18% over last year.  We have mentioned many times that distillates demand, more precisely diesel demand, is often viewed as the pulse of the US economy.  An 18% drop in anything is a lot…. 

The question remains as to why are we still at such high price levels, relatively speaking.  I would like to say it is simply fear of the unknown, but that should only last so long.  The world seems to be adjusting to curtailed Russian product, and Russia appears to have found other markets just fine.  Granted, we have not seen extremely cold temperatures here or abroad.  However, Kerosene pricing has skyrocketed in the last few days pushing winterized diesel in some areas up almost $2.00 in a week.  Inventories remain low, but again, so is demand and the market backwardation persists. Costs of all other goods appear to be falling, or as some say “just not rising as fast” and unfortunately, it points to the oil markets still having inflation hedge premiums built in to the price.  That will take time to remove and still hope to see futures less than $3 soon. 

The ability to capitalize on the dips for the short term appears to be the prudent approach.  Talk with your Rep about seeing if this makes sense for your business.

Diesel Futures have risen just over $.25 in the last week, for largely the same reason as they tanked the week before.  China is now lifting most Covid restrictions, as traders now see demand picking up on the world basket.  Even though we are still seeing huge weekly swings, the overall temperature of Distillates looks to be cooling off since trading some $.75 higher than presently mid summer (see below). 

Domestically, this week saw distillate demand still strong, which surprised some.  Still might be some residual power plant use feeding those demand numbers. With Crude showing a huge increase in stocks this week, gaining 19 mmbls, one would have guessed it would have set the whole market downward.  We mentioned that cold snaps, storms, and a pipeline reopening might need a week or two to shake out the inventories and traders took that to heart.  Signs of moderating inflation figures have some thinking the doom and gloom of a full blown, long term recession, might be over done and we are in for a “soft landing” or a purposeful slowing down of the economy. 

Futures are currently on the upswing of the curve, but again, the pattern suggests a sharp pull back.  The backwardation in diesel futures is still hanging around, actually widening in the last several sessions, making some suppliers keep a watchful eye on inventories.  As we work into the heart of the winter, don’t be surprised if outages of distillates pop up.  Again, a strong relationship with your supplier will keep your business running. 

Extreme volatility continues grip the futures markets as the USLD pit erased almost $.30 in the last two days.  Even though its up about $.05 currently, expect this sell off to continue for the short term. 

Much of the market has hinged on the anticipated rebound in global demand, largely centered around China.  After being basically cut off from the rest of the world for the last two years, signs were pointing to Covid restrictions and cases easing.  Those hopes took a gut punch Tuesday as reports surfaced that a surge in Covid cases has caused the country to basically halt their rollback of restrictions. 

Fundamentally, the market appears to be better supplied, which is also putting downward pressure on futures.   Physical markets are still seeing wide ranges in price action from one day to the next and some local outages are still popping up. The good news is that last weeks cold snap that pushed freezing temps into the heart of production country left little to no damage to refiners - lessons learned from the hard freeze a few years back. 

Demand spiked briefly last week as many power plants were forced to burn oil for a few days.  It will be interesting to see what inventories look like (which are due today, delayed a day for the holiday).  Keystone is operational, but will not be 100% for another few weeks so there will likely be some shaking out period with the numbers. 

Overall, it looks like we are starting another pull back which hopefully puts front month ULSD futures in the $2.70 range.

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.