Energy Market Updates

No, You're Reading that Right: ULSD Futures up .80 in 5 Sessions on Ukraine

What you are seeing on your nightly pricing is real, unfortunately.  ULSD futures have risen over .80 in just 5 sessions.  Since late November 2021, when the concern of the latest Covid Variant were announced, the pit has risen over $1.65. 

As we all know that leading driver is the uncertainty surrounding the Russian- Ukrainian ordeal.  Financial Sanctions on Russian assets, banning imports, along with OPEC+ group not willing to increase production has attributed to the fear spike in the markets. 

There is a bright side. 

Front Month ULSD is presently trading at the $3.60 level… however, if you look at the outer months, such as JUL & AUG, they are in the $3.00 range.  This is a .60 backwardation in the market.  In all my years, which has seen Hurricanes, Wars, Attacks on US Soil, I have never seen this large of a backwardation.  As we all know, there is typically a “carry” in the markets where outer months are typically higher.  This is a very good indication that we are in a short term situation.  Its just a matter of getting through this.  I am sure we are sick of the phrase “WHEN THIS IS OVER”! but....

Below you can see the live market chart along with last nights settle highlighting the backwardation.

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Russian Strikes in Ukraine Push Prices to Multiyear Highs

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Oil prices surged another 7% today. At peak intraday highs, WTI hit $105.14/bbl before settling at $103.41.

Refined products followed suit skyward, with front month ULSD up +.2198 to $3.1511, and RBOB up .1562 to $3.0887 (May trading closed +.1915, $3.0381 ULSD/+.1532 $3.0621 RBOB).

Monday we saw WTI close over $100/bbl for the first time since 2014.

The obvious driver for the spiking prices we’ve been seeing has been the ongoing military strikes in Ukraine by Russia, and the resultant fears of not just supply disruptions themselves, but the further impacts that multinational involvement in the conflict could have globally.

Today, the US and allies (Germany, the UK, Italy, Japan, Netherlands, and South Korea) announced their agreement to release 60 million barrels from strategic reserves, half of which will come from the United States.

Markets were not comforted much by the announcement (although we did see a slight tempering), largely because the strategic reserve release is much more a symbolic gesture than one that solves supply concerns on a fundamental level.

A multinational agreement to release gallons is more of a statement of solidarity against what is seen as Russian aggression, and a message that countries are willing to take extraordinary measures to prevent global impacts rather than softening their stance on Ukraine. It’s also meant to reassure citizens of allied countries that are facing rapidly increasing prices at the pump that all available measures are being taken to minimize the impact. Currently AAA figures have gas prices in the US averaging $3.62 today, up 9 cents this week and 24 this month, and without a reversal on the markets and an end to the Russia-Ukraine war, that’s not likely to change.

Other measures being taken on the Energy Market side of things have included talks with the Saudis about supply adjustments to backfill any potential shortfalls. It’s unclear that such a jump in production for stability of the markets would be in the cards, however. The thought seems to be that assistance from OPEC/Saudi countries to offset disruption would mostly be necessary should Russia choose to restrict supply or short commitments in an attempt to manipulate the situation. As of right now, they have not given any indication that would be their next move, but as sanctions begin to take severe effect on the Russian economy, essentially anything is possible.

Sanctions and specific company withdrawals from Russia seem to be having impact already on some fronts. Maersk, the worlds largest shipping firm, has halted service to and from Russia, and countries like Britain are not accepting Russian ships at their ports. Major oil companies, including BP and Shell are exiting Russian operations, and TotalEnergies announced a halt to any further capital investment in Russian projects. The Ruble (Russian currency) is tanking after SWIFT banking sanctions took effect and it is currently valued at less than a penny in American dollars.

Long story longer, the situation is very much ongoing, escalating, and uncertain on the ground in Russia, and it remains anyone’s guess how the real world impacts and the market impacts will shake out.

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Energy Markets Spike on Escalation in Ukraine

shutterstock_1009265824Oil prices closed up over 3% today, shooting up again on both continuing supply issues, and escalating tension at the Russia/Ukraine border.

This week we saw Russia reject NATO & US offered compromise measures aimed at deescalating the situation. Subsequently, it was announced that extremely strict sanctions would be imposed by NATO allies should Russia use the troops they continue to ramp up at the border to make an actual physical strike on Ukraine.

Sanctions mentioned included both bans on financial transactions, and potential closing of the newly constructed Natural Gas pipeline to Germany. (As we saw when the prior Russia/Ukraine issues occurred in 2014, the implementation of sanctions can ultimately end up its own conflict down the line, but that’s another story for another day).

Putin Administration officials continue to insist that Russia has no intention of striking Ukraine, while simultaneously increasing troop presence across multiple possible fronts. Thus –anxiety is building.

Trading volumes hit peaks shortly before the closing bell, presumably some of the jump in pricing during that period is Friday afternoon related – no one wants to be short Monday morning should an invasion happen over the weekend that could impact supplies, understandably. However, should an invasion NOT happen this weekend (which is equally likely) we could see modest corrections early next week.

At the close, Brent and WTI Crude both broke the highs we saw Monday (that we hadn’t previously seen since 2014). Brent closed 3.3% higher at $94.44/bbl, and WTI shot up 3.6% to $93.10/bbl. Refined products closed up sharply as well, front month ULSD jumped .0837 to $2.9109, RBOB jumped .0732 to $2.7386. (April trading moved just as sharply, +.0755 on ULSD, +.0812 on RBOB.)

As discussed previously regarding Russia, the risk posed to the overall global supply picture should disruptions occur in their region is hard to overstate. (Refresher on that here: WTI Breaks 90/bbl for first time since 2014)

Definitely a situation to keep an eye on, as it will likely continue to rattle energy markets until some sort of resolution is found. Watch for either a correction or a ramp up in pricing early next week, likely dependent on the developments this weekend.

Stay Tuned!!

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WTI Breaks $90/bbl for First Time Since 2014

shutterstock_1740797837Today saw WTI Crude prices break the $90/barrel threshold for the first time since 2014.

2022 has seen WTI shoot up 20% (despite it still being the first week of February), and that’s in addition to the gain of 50% in value we saw throughout the course of 2021.

So what’s going on?

At the OPEC+ meeting Wednesday, the group announced they would be adding 400K bpd to agreed upon production levels for March, continuing their apparent strategy to slowly bring production back online.

If you recall, in April 2020 OPEC+ pulled around 10 million bpd from production in an effort to “stem the bleeding” as energy markets collapsed due to demand plummeting across the globe in the wake of sudden shutdowns for the coronavirus pandemic.

The initial OPEC+ strategy to slowly bring production back online to keep energy markets balanced appeared wise at the time, but in the wake of global economic struggles and skyrocketing prices, the group has come under enormous pressure and criticism from non-member nations, including the U.S.

Domestically, we have seen prices shoot up over the past several months in the wake of global economic concerns, growing tensions abroad, and changes to the domestic energy policy enacted by the incoming Biden Administration in January 2021.

The feeling in the U.S. is that OPEC+ needs to revise the slow and steady approach given the current circumstances in the energy market. OPEC accounts for 40% of global oil supply, so the consensus outside the group is that reupping production levels would take a lot of the pressure off markets and allow prices to settle.

In 2014, when we saw prices hit these levels before, the United States was in the midst of its fracking & shale production heyday and had become a major price influencer, having overtaken Russia & Saudi Arabia as the largest single oil producing nation. That was an enormous factor in stabilizing prices, and subsequently pushing global prices down. (For a refresher on that, read this: Fuel Marketers News: This Time it is Different )

Currently, moratoriums on drilling and financial and permitting difficulties for existent producers post the COVID price crashes are making the US essentially unable to exert the same control this time around. 

In addition to the already existent demand crunch, growing tensions and war games between Russia and Ukraine are raising fears of additional, and potentially severe, supply disruptions.

Russia (an OPEC+ member) produces approximately 10 million barrels of oil per day, so any disruption of their supply output or pipelines puts a huge portion of Europe at risk for outages, and analysts just don’t see alternative supply being available to cover any Russian shortfalls.

So as always, it ultimately comes down to three things – Supply, Demand, and Politics. And as always, its anyone’s guess how any one of those factors ultimately shakes out.

Stay Tuned!

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Demand Concerns Temper Prices Despite Supply Crunch

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Oil prices are continuing to slide back down some after multiyear highs last week. (At time of writing at 10 this morning, both refined products are trending down)

All of the issues with energy supply and labor shortages are still in play (obviously) so what’s going on?

The other side of the coin – demand, is once again raising concerns and tempering some of the bullishness on the markets.

The US reported lower industrial output for September, which is dampening enthusiasm over economic rebound and rising demand in the industrial sector. A large factor in play in the lower U.S. numbers is the continuing (worsening?) global semiconductor shortage. The lack of availability is severely hampering production and availability of motor vehicles and slowing progress on large scale tech projects.

Additionally, China’s data did not do much to allay demand fears, third quarter economic growth hit a low for the year, as did daily Crude processing levels. China’s lackluster reports are largely due to supply bottlenecks and shortages like the US data is.

As mentioned however, seasonal supply concerns for the upcoming winter, labor shortages (particularly in the trucking industry), generally positive economic rebound, OPEC cuts, and an uncertain trajectory for COVID-19 cases as we enter the flu season are still all factors very much in play in the markets, all of which we would normally expect to push prices higher.

So the ongoing question becomes which way the pendulum will swing between the supply issues and the demand requirements. Supply (at the moment) is what it is, the major variable is whether demand moves up and forces supply crunch related price hikes, or if the labor situation and slowing economic growth drop the demand enough overall to drop prices in the longer term.

All that being said – make hay while the sun shines as they say. Not a bad time to lock a prompt in case tomorrow flips the screens positive again.

Stay Tuned!

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Spiking Prices & Labor Shortages Complicate Energy Outlook

Lots of interconnected events in Energy News this past week or so – we’ll run through and touch on some of the major items and attempt to keep it (relatively) brief.

Here we go:

US Crude Oil prices hit $80 Monday for the first time in 7 years, largely on the basis of surging demand and simultaneous supply issues for power & gas globally, particularly in China, India and Europe.

Last week we saw Natural Gas hit historic highs of $185 per mwh on the supply crunch, although prices have backed off highs this week upon the announcement from Russia’s Vladimir Putin that Gazprom would increase output to Europe to help ease their supply woes.

Speaking of Putin, he went on record Wednesday that he believes Oil could reach the $100/bbl mark (again). OPEC+ (which includes Russia) has been resistant to calls to up their production increases, choosing instead to stick with the previously agreed upon increases.

The Biden Administration has reportedly been relaying their concerns about rising energy costs to unnamed OPEC+ senior officials, and more publicly has called on oil producing nations to “do more” to up supply in order to ease price increases and global supply issues. So far they have not been successful, largely because longer term economic and demand growth numbers don’t look exceptionally promising, so OPEC+ member nations are unwilling to jump up supply to ease pricing when the longer term demand required to keep pricing reasonably benchmarked does not appear to be there.

Additionally, Reuters is reporting  this afternoon that the White House has been speaking with domestic producers about helping to bring down costs. It’s unclear exactly what they are hoping for on that front, or what may have been discussed specifically.

Gasoline in the US is at a 7 year high (averaging $3.29) and the EIA Short Term Energy Outlook reporting this morning indicated that consumers can also expect to pay substantially more for energy this winter

(you can read that report here: https://www.eia.gov/outlooks/steo/report/WinterFuels.php)

Domestic output has not rebounded to pre pandemic levels, and is well off from 2019 highs. In addition, the surge in natural gas pricing means dual fueled power generation systems are likely to be looking at diesel to offset some of the cost this winter. This is what helped dampen prices on Crude & Diesel today somewhat – Crude demand will exceed earlier expectations if power generation does in fact move toward a more diesel heavy mix than we see in a typical winter…. Theoretically.

One of the factors we will need to see play out however, is that increased diesel demand is all well and good, but the ongoing (and apparently worsening) labor issues in the United States may complicate that option. The driver shortage is impacting delivery times and logistics across the country, nowhere is that more clear than the ports. The Biden Administration just announced the Port in Los Angeles will run 24/7 in order to attempt to catch up with backlogged demand and offload stranded container ships. The problem however, is these are backlogged in the first place because of labor & driver shortages, so it isn’t clear how effectively 24 hour runs will solve the backlog. The news is warning of transportation issues already ahead of the holiday shopping season rush, so the lingering question becomes how well will transportation companies and fleets be able to pivot and meet demands with the pressure of labor shortages on their backs, if in fact they continue. 

At the end of the day, lots of news directly or indirectly impacting the energy markets the last few weeks, most of it less than optimistic. However, its worth remembering that we’ve seen supply crunches, or demand outlook changes, or OPEC pivots, or US Presidents’ remarks rile up the markets and send the news analysts into a tailspin, only to resolve themselves in the short term a million times. As always, it ain’t over til it’s over, and we will have to see the longer-term implications of the multiple competing factors currently at play.

Stay Tuned!

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NYMEX flirts with Double Digit Increases on Vaccine Approval, Weaker Dollar

Oil prices reversed their 7 day losing streak this morning. Last week WTI shed 9% to hit multi-month lows, and this morning it rebounded up to 5% on intraday trading.

Refined products are up huge with both products flirting with double digit increases. At time of writing (1:30pm), refined products were up substantially, with ULSD up $.0997 Sept, $.1001 OCT and Gasoline up $.0937 SEPT, $.0926 OCT. Additionally, WTI is up over the $65/bbl benchmark at $65.68 (+3.54).

The causes are being cited as both a weaker dollar (it's down from highs on Friday) and FDA full approval of the Pfizer-BioNTech COVID-19 Vaccine for everyone aged 16 and over (versus the Emergency Use Approval it has had since December). There is some hope that full FDA approval will quell some skepticism and lead to higher overall vaccination rates among eligible people. 

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One of the major factors that has been weighing on commodities (as discussed) has been the looming threat of shut downs and travel restrictions that would continue to effect demand in the event that COVID has a resurgence from the delta variant. 

It would seem, however, that approval of the vaccine may not be a valid reason to fully discard those demand concerns in the longer term. After all, we are seeing some restrictions being placed in China and other countries regarding travel. Additionally, supply levels are high, and Baker Hughes indicated a higher domestic rig count last week which indicates further upticks in production (despite demand lowering). 

On the other hand, full approval may signal to markets that shut downs will not be an inevitability and thus the demand hiccups we are seeing will be shorter term than has been priced in so far. 

As usual, we will have to wait and see.  

Stay Tuned! 

 

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Uptick in COVID Cases & Strengthening Dollar Push Prices Down

Ramped up COVID cases and a stronger dollar pushed oil prices down today - intraday prices had Crude down to 3 month lows (off 4%) . Refined products tanked as well, lunchtime saw ULSD off almost 7 cents (.0674) and RBOB off .0868 on front month trading. 

At the close, the losses pared somewhat with ULSD settling at 1.9690 (-.0522) and RBOB at 2.0815 (-.0662) for September contract. (ULSD 1.9714 and RBOB 1.9525 for OCT). WTI Crude settled out at 63.69/bbl.

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As discussed previously, the uptick in COVID cases has been making traders (and the rest of us!) nervous, particularly as it relates to economic growth and demand slippage.  Goldman Sachs has revised projections for third quarter GDP down in anticipation of Delta variant induced economic slowing. 

In addition, although demand outlooks are lower, it looks extremely unlikely that OPEC+ will walk back their recent production increases, as despite prices slipping, they are still at a profitable level for member nations (at least for the time being). 

The paring of losses we saw on the screen as the afternoon wore on were largely the result of the US Dollar strengthening. Somewhat ironically, the dollar is strengthening largely because of indications from the Fed that stimulus measures put in place to mitigate COVID impacts will be phasing out over the coming year. 

So on one side, the dollar is stronger on phasing out COVID measures and on the other, demand outlook is weaker on the back of rising COVID cases, and both of those factors are dropping prices. Riddle me that. 

The other wildcard in play generally with the markets is the ongoing situation in Afghanistan, where the Taliban have (re)seized control of the nation. It is unclear for the moment what the longer term impacts will be both on the region and internationally. That is true both in terms of the markets and how the international handling of the humanitarian crisis unfolding develops . We will keep an eye on that developing situation. 

Stay tuned!

 

 

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High Outputs, High Case Numbers, and Low Economic Growth Crush Refined Product Prices

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Weak economic data from the United States & China, combined with higher OPEC outputs and rising COVID cases have again raised concerns about oversupply and weakening demand and pushed markets into sell off territory.

Today saw Crude drop 4% to 71.26/bbl, and refined products followed suit, with front month trading closing down .0598 on ULSD to 2.1358 and down an even .06 on RBOB to 2.2747. 

So what's going on?

China reported its slowest factory activity growth in almost a year and a half, which has raised concerns about the strength of the global recovery, particularly as China, in addition to having the world's second largest economy, has had the most robust recovery of the Asian region thus far. In the US, manufacturing activity slowed for the second month as well - so we are two for two on the world's largest economies showing signs of weakness and slowing recovery. 

Globally, we are also seeing an increase in the number of COVID cases reported as a result of the delta variant. Despite reassurances from Fauci and the government at large that the United States will not be looking at a second round of lockdowns because vaccination rates should be sufficient to avoid them,  the resurgence of mask mandates and other protocols in some areas has led to some skepticism that economic recovery and therefore demand growth will continue. 

At the same time these concerns mount on the demand side, on the supply side, the output from OPEC+ countries for July hit its highest level since the beginning of the Pandemic (April 2020).  The OPEC+ member nations had begun a reversal on previously agreed to output cuts largely based on oil price recovery and a sunny outlook on demand.

It's possible, but unlikely, that the strategy will be reversed again even as we see the demand outlook be flipped on its head. 

So once again, the standing headline conclusion is "we have to wait and see" on both how COVID shakes out, and what OPEC+ may do. 2020 Deja Vu all over again!

Stay Tuned! 

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EIA Draws Slow COVID Resurgence Induced Sell Offs

shutterstock_1707677488EIA Inventory report showed much larger draws across the board on all products than anticipated. By the official count, Crude drew down 4.1mmb (2.9 expected), distillates 3.1mmb (435K expected) and gasoline 2.25mmb (916K expected). 

  The draws indicate a continuing tightness on the supply side in     the face of massive demand recovery as economies by and large get back to work as "normal". However, the past few weeks we've seen drops consistently on heightening concern about COVID resurgence and the spread of the Delta variant. 

Concern lingers as countries report a rise in cases and some have reintroduced some lockdown measures, or revised guidelines (including new guidance by the CDC on masks in the US). The growing fear is that extension of lockdown measures, or a return to lockdowns in a given sector could once again plummet demand and send markets reeling.  . 

On the other hand, global market supply is still extremely tight, even with additional produced gallons by OPEC+ member countries coming online. 

So, we essentially are in a weird spot where demand alone is the critical piece of whether the market will rally or slide - global supply is low which would support price increases, but if China does in fact crack down on imports of Crude as they appear to be doing, and COVID continues to tick up globally again the demand drop could be such that we don't see a rally materialize.

It's really anyone's guess as to how the world responds to continuing COVID fears should the cases continue to rise. 

Stay Tuned!  

 

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