The obvious market moving story is the impact on world fuel markets of the Hamas – Israeli conflict that appears to be growing more intense by the day. As traders are trying to digest what could turn into a regional mess, expect wild swings for the short term.
A very different picture is painted this week after an almost $.18 drop in Diesel Futures posted yesterday, and another $.07 off presently this morning. Prior to this, it appeared as though we were on a slow progression downward but instead the proverbial bubble burst. Call it profit taking or a change in sentiment, it is clear that this correction is needed. Should another heavy down day remain, we could be in for a return of pricing not seen since early May, which is about $.80 lower.
At first glance of yesterday's inventory report you would assume that a solid up day was in the making. As has been the case, the devil is in the details. While all products showed modest drops, they were largely offset with massive exports, known refinery maintenance and switching to winter grade gas. The largest market mover was the FED maintaining rates but signaling they expect possibly 2 more rate hikes in the coming months. A large sell-off took hold pushing diesel futures down almost $.10 before settling down just under $.05. The profit taking ideology is that if rates get higher, it dampens economic growth thus curbing overall fuel demand, add in that it makes it more expensive for foreign currency buyers of products.
Coming off the Monday Holiday, prices surged higher Tuesday as OPEC+ heavyweights Russia and Saudi Arabia confirmed they would extend voluntary production cuts through the end of the year. Fueling the rise from the Cpt. Obvious department, big banks publish reports to expect $107 Crude if cuts maintain. Buy the rumor, sell the fact. Diesel had a nice sell off going, but remember, one day doesn’t reverse the trend. Wednesdays intraday action erased almost all of the gains only to settle down slightly. While we still sit almost $1 higher in pricing than the beginning of the Summer, you would have to think better days are to come. Current JUNE 24 Diesel future pricing is $.45 less than front month October 23.
Depending on the News outlet you watch or read, you will hear two very different narratives. The one where “prices rises as Idalia makes landfall”….. or “soft demand figures push futures lower.” It really a tale of two products right now between gas and diesel.
It is difficult sometimes to stay positive when you see your fuel bill increase $.70 in a month, but recall how we said “Hope’s not a four letter word”. The last five days (not including today) have seen about $.15 in value come off in diesel pricing so hopefully we are on our way to a modest correction. It is even more difficult to make clarity of market factors, as most times, human sentiment moves pricing more than data. With a large Crude drop of almost 6m barrels per day, one would assume a modest increase in futures yesterday. Not so, as weekly numbers are often subject to sharp swings and monthly numbers are more reliable. Monthly diesel demand appears flat to slightly down. The market shrugged off the Inventory data and focused more China lagging economy and Fed policy.
Starting off this week it appeared that we may have seen the top of the recent rally in the Commodity sector. That changed Tuesday morning as the EIA released a guidance report that they expect US crude production to increase an additional 200,000 barrels per day based on….. yep, higher prices. This fueled the indexes in a self-fulling prophecy sort of way and turned around what was a $.05 down day to a $.07 up day. The buying carried over to Wednesday as the inventory report showed a solid increase in crude stocks with the products showing losses. Key note on the crude gains is that it looks to be largely due to slashing exports. Something we have been saying might be a prudent step for a while now. Distillates are now $.80 higher than July 1st, erasing the steady 8 month decline that we have enjoyed. Sentiment is fixated on Saudi led OPEC cuts and appears to shrug off any fundamental data. It’s almost like mob mentality really. Crude builds, soft demand, economic uncertainty, should all push prices lower.
There is no sauce that can make crow taste good. I’ve been holding to the mindset that Diesel futures market should correct to the mid $2.30s for about a month now. We have risen over $.50 in that time with every day for the last two weeks being up. Well, I am going on “the bound to win” theory and sticking with it!
Fuel prices sit about $.30 higher today than the beginning of the month as we broke out of the comfortable range in MAY through JUNE. The three week rally can mainly be tied to production cuts, unpredictable inventory reports and mostly an optimistic view on the overall health of the US economy. The bright side is we are over $1.00 lower than this time last year. The question remains, does this rally have any legs?