Energy Market Updates

Over the last 2 weeks front month ULSD has risen almost $.80  in futures trading,  but it looks like the driver of the run up maybe that crazy cousin RBOB.  Gasoline typically rises this time of year but many thought this year would be different.  Sky high retail prices and massive inflation concerns were thought to put a dent on demand.  However, this weeks inventory report showed a surprise draw in gasoline stocks and strong demand numbers.  It may be a holiday weekend anomaly, but Americans appear to be taking it all in stride, thus giving buyers no reason not to keep buying. 

Diesel has been the passenger the last two weeks.   With a surprise build in inventories (still lowest levels since 2005), most believe it would take a substantially large increase to derail the upward trend.  Demand numbers started to show softening, which is concerning to many, as it may start to show some slowing in the US business cycles. 

While OPEC agreed to hike production for July & August by about 600bpd and China put the kibosh on fully reopening major cities, futures shrugged it off as we have only had 2 down days in the last 14 sessions.  Physical supply issues in the Northeast is still a lingering concern as the backwardation, while thinning, is still $.10  to AUG and $.18 to SEPT (see close chart).  This is preventing many from bringing in large slugs of product on fear of the carry loss.  Put it this way.  If you were to buy a house today for $500,000 but were told that in 20 days it would only be worth $400,000, would you do it? 

At this point, it appears that the only thing that will bring us back to reasonable levels is strong builds in inventories which will only come with a reduction in the backwardation which will likely occur with weakening demand.  And let us not forget the Ukraine and export situation.

Diesel prices remain the talk of the table as they have shed over $1.00 in the last 15 days.  Spot cash prices which at one point in early May were $1.25 over futures have since retraced to be roughly $.20 over.   Still, by way of comparison, high to the first quarter of the year where they were pegged mostly flat  to the screen.   (see below). 

As we mentioned, these blowouts are typically short lived - but nonetheless still very painful for many. 

Northeast diesel supply appears to be slowly loosening up as the backwardation from JUNE to JULY screens sits at roughly $.13, still very high but not as high as a two weeks ago.  While some suppliers are willing to take in product, it has made rack pricing extremely volatile.  Typical spreads from high to low are maybe $.08 to $.10, at present, these spreads are $.40 to $1.00, not to mention figuring out who actually has product to sell.  On que, refiners' distillate production is up over 5% thus far in Q2, capitalizing on the high prices and pipeline scheduling appears to be full.  While this a good news for consumers, we are still at very high prices. 

With China slowly reopening, expected high US gas demand and all eyes on the FED wondering if there will be another rate hike to tame inflation, I would expect it to be a while before we start to see substantially lower prices. 

The suggested release of diesel reserves is not typically looked at as a fix of underlying issues, more of like taking aspirin for a tooth ache, and will likely not have much of an effect on pricing. 

There is a fair amount of news on the lack of diesel available in the northeast, and it is actually true. Last week’s DOE report showed that PADD 1 (East Coast) had 95mbls of diesel, that is down from 123mbls last year and 142mbls from 2 years ago. 

The question is why? 

There are primarily three main roots to the current situation.  First, the East Coast has only about 7 refineries operating now, with a capacity of just over 800,000 bpd.  That is about half from what it was 12 years ago.  Most have closed due to lack of margins and increasingly more difficult EPA standards to meet and the costs associated with those updates.  This means product must come from the Gulf coast via the Colonial pipeline or barged in. 

Secondly, with the steep backwardation in the market, many traders were not willing to take the chance on sending product into the Northeast. Rather, they are taking the sure bet by shipping distillates to Europe. 

Finally, Europe’s diesel based economy is seeing astronomical pricing for the much needed product.   With about 10% of their typical supply coming from Russia, the ongoing conflict in the Ukraine is pushing pricing for distillate barrels to record highs. 

Again, we know refiners are putting out as much distillates as they can right now.  There will be some trying to capitalize on the current high prices and once those barrels hit, we should see some price easing.  It is just a matter of when.

The volatility within the ULSD pit continues to keep everyone scrambling.  $.20 swings from high to low have become the norm.  That coupled the lack of product in the Northeast is putting real stress on not only suppliers but customers alike.  As we mentioned a few days ago, refiners are stocking up on crude and producing as much distillates as they can.  Evident in yesterdays Inventory report that showed Crude surge 8.5mbls and distillate output up over 160,000 bpd.  While diesel inventories still remain low, down almost 1mbls, the demand numbers, down almost 200bpd are pointing to sure fire demand destruction. 

Again, the timing of when that downward drop may take hold is tough to tell.  Judging by the chart below, we may already be at the beginning stages of it.  The backwardation of roughly .20 JUNE to JULY is still keeping many from bringing in any inventory which is keeping cash prices high.  Those differentials, at historic highs, really have only one way to go I would like to think. 

Most of us are hoping to wake up to pit that is down $.50 but it seems that the market is always able to find something to erase the losses.  Today is a perfect example.  ULSD was down almost .20 earlier and found a way to get almost .04 higher during the session.  As I type it is down roughly $.04.  Inflationary risk buying appears to be the driver, which I would have though that we would have seen less of as last month’s squeeze that sent shockwaves through the market with lingering effects. 

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The other day I mentioned how the futures markets rose, yet the cash markets fell.  Yesterday was the reverse for some.  While ULSD futures closed down $.1557 to $4.0413, ARGUS cash trading edged up .0193.  We are obviously in the most volatile period I have seen in all my years.  

Of note in the last day we have heard that OPEC+ nations will stick to their planned production increases that were set in place back in July 2021 rather than opening the spigots to temper prices.  Additionally, it appears as though most European nations will move forward with a stepped embargo plan of Russian fuels. 

The backwardation in the diesel pit over the last two weeks put crimp on in tank inventories especially here in the Northeast.  That situation appears to be getting better as the JUNE to JULY backward spread is roughly $.20 and word is that the supply picture is getting better.  But again, when prices shoot up like a rocket, they fall like a feather.  It will take some time for these prices to get back to a “normal” level as it noted that most refiners have moved to what is called Max Distillate Production,  meaning they are trying to produce the most Diesel, Jet Fuel, Heating oil, etc. possible, so that they can capitalize on the high crack spread. 

We have said many times before, high prices are the cure for high prices. 

As you have all now seen street diesel prices over $6 per gallon, this has to be a hit on demand in the short term and those extra distillate barrels should hit the market at the same time.  I would like to see us retrace a $1.00 from here, but my guess is that it might take the summer to do so. Then again, as shown below on March 9^th we did drop almost .50 in a day.  I would think we would need a cease fire in Ukraine for that to occur.

Unfortunately you are all reading your nightly pricing correctly.  As seen below, ULSD prices have risen almost a full $1 in the last four sessions. 

As I mentioned earlier in the week, it is likely due to a short squeeze versus anything fundamentally related to the Oil Markets.  Although there are some pointing to distillate stocks being at their lowest level in 14 years as a driver, it appears that is being over played because demand for ULSD has fallen for the fifth week in a row. 

Front month MAY ULSD (which falls off the board Friday) is a full $1 higher than JUNE trading presently at $4.9950.  It is $1.50 higher than front moth NL @ $3.5250.  Its important to note the disconnect to Crude which is “only” at $103 and change.  For those of you that remember July of 2008, when Crude was at an all time high of $147, Diesel was trading just above $4.00.  All the more evidence to point towards a squeeze versus fundamental factors. 

The problem is, how long does this last?   Looking at the strip above, the backwardation is still healthy out through December, not as pronounced but still present. 

I would like to say that we are past this after Friday, but my feeling is the rocket ship-feather theory will hold true. 

On Tuesday morning we were feeling pretty good, relatively speaking, as the ULSD pit was almost .40 less than a week ago.   Demand concerns over China’s lockdown and slowing production rates put pressure on an already inflated market. 

Unfortunately, in the last two session we have gained all that back and then some.   News flow is the clear driver, although fundamentals gave support for yesterdays jump.  As fears of no end in sight for the conflict in Ukraine heighten, it forces NATO countries to impose stricter sanctions on Russia - even floating the dreaded “embargo” word around.  Additionally, OPEC stated it does not intend to increase output to offset any Russian barrels in the marketplace. 

Fundamentally speaking, Wednesdays inventory broke a cardinal rule for traders…. Don’t surprise them.  

Expectations for gasoline were for a 800,000 bl draw with a 3.6mbl draw being reported.  Distillates were expected to fall 1.5mbl and that doubled with a 2.9mbl draw on inventory.  Keep in mind, we typically see a destocking period this time of year due to product changes.  It doesn’t appear that domestically there will be any policy changes that could calm the market. 

Looking forward, as you can see from the chart below, are a full $1.00 higher than where we should be.  It certainly is a challenge for all dealing with these prices, as it affects every part of your business. But as we have seen in the past, this market has the ability to pivot at any time and we could very well see another .50 down day.

The last three sessions have seen .4373 get peeled off the ULSD front month contract, with massive intraday swings.  Yesterday at the open, APR22 ULSD fell almost .25 before rallying back to finish down only .0673. 

The big drop on Monday was attributed to China locking down Shanghai amid new outbreaks for a minimum of four days thus putting demand fears into the market.  Tuesday saw traders take into account that there appeared to be progress in peace talks amongst Ukrainian and Russian delegates, but that subsided as the day went on.  This morning that sentiment furthered as it appeared there was nothing to report on the situation other than both sides would agree to meet again.  It is clear that many sanctions that have been put in place, may have a longer stay even if there is a withdrawal.

Pricing is wild right now, cash markets are making it even more challenging. 

The Chart below doesn’t do much other than confirm Warren Buffett’s take “that if you flip it over, it says the same thing.” 

With Demand appearing to take a hit in this week’s DOE report, and subsequently Inventory rising, products have come off there morning highs by about .15 and are only up about .04 at present.  On a positive note, most OPEC nations have come out and stated the they would not let Politics get in the way of production levels, which may calm supply fears, evident in the .32 backwardation APR to MAY.

March came in like a lion, lets hope it goes out like a lamb…..  

So far this month, front month Diesel shot up over $1.80 to peak just above $4.60, then proceeded to fall $1.60 to just under $3.00 and now has risen back over $1.00 to be currently trading just north of $4.00.  What’s even more wild are the intraday swings.  Believe it or not, yesterday morning we were actually negative for a bit earlier in the session before finishing up over .25 on the day.  Today is opposite thus far, being up almost .10 early on, and now trading down .04. 

Obviously the Russian invasion is still the main catalyst for the rise, as fears linger that the US does not have a quick enough reaction time, or a plan in place to domestically produce more should this conflict linger.  Unfortunately, politics are weighing in on some rational decisions.  Many sanctions put in place have special caveats carving out energy like todays joint action from the European Union “to date has carved out sanctions exemptions to allow continued imports of natural gas and oil from Russia, given the difficulty and expense of quickly finding alternative supplies “ .   Yesterdays big rise was after the weekly inventory report that showed large draws in all products, again not fundamentally tied to any Russian sourced product, just the fear of our inability to react. 

I am asked 50 times a day, What is going to happen? I honestly wish I knew, but what I can say that from a business perspective is that you need to be nimble and able to pivot. While I doubt this is going to be the new normal and will likely short lived, the effects of these records prices are going to linger for some time.

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.