Energy Market Updates

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.

In the last 6 sessions we have seen ULSD futures slide just over $.50 in value.  While this is good news, the previous 6 sessions added just about the same amount. So basically we are back to the same levels we were mid-August where we all felt pretty positive pricing was moving in the right direction. Much of the rise can be attributed to money being put into the market as an inflation hedge as rates continue to rise, though it is tough to keep that money in long term with the ever present backwardation. 

The slide the last week has come as demand concerns continue to make headlines and more currently China is again locking down several major cities with COVID concerns.  Yesterdays inventory report seemed Bullish on the surface with draws on all products but like anything, the devil is in the details.  Many saw the latest news cycle highlighting the possibility of fuel shortages coming this winter.  A good explanation shows in this weeks report.  Refiners are operating at pre-Pandemic levels, yet domestic inventories of finished products are still down- the key factor is that our exports of gas and distillates are up over 500m b/d over last year. 

Again, it is still better for companies to ship products overseas to get 5x the value than if it were to sell into the US markets.  Forcing US producers to sell into US markets versus formerly heavily Russian supplied countries may appear as abandonment in their time of need politically speaking, and moreover, will that force those countries to “amend” Russian import sanctions……thus it’s a delicate balance.  

The field seems to be mixed on the last few months of the year in where pricing will be headed although the common theme is that the volatility, up or down, is here for a while.

The past two weeks has seen ULSD rise, and subsequently fall almost $.20 on the front month.  Much of the dip in the last few days came as market players were able to digest some of the details in the 785 page Inflation Reduction Act which appears to moving its way through.  One piece which many believe will have the most impact on futures is that the bill revives lease sales canceled or delayed by President Biden including: one in Alaska’s Cook Inlet  and three in the Gulf of Mexico.  This section also appears to require the Biden Administration to adopt Trump era directives for 2022 oil and gas leasing established.

 Yesterday was clearly driven by inventories and demand concerns with gasoline.  However, distillates were the red headed step child, shrugging off any loses and actually finishing the day higher as demand numbers stayed healthy and inventories dipped.  Crude and gasoline took all the attention with a surprise build in crude and an almost 8mbpd drop in gasoline demand.  It’s really an odd disconnect but many of us actually see it on a daily basis.  Construction, trucking, etc remains strong but on a personal level we may be starting to pull back our own driving habits. 

An OPEC+ hike of 100,000 bpd is rather insignificant as they usually over produce or under produce by that much anyway.  Markets will always have bounces in either direction but often time the trend is still intact, and it appears the downward trend is still there. 

With Friday and Mondays' sessions cutting into the recent losses on ULSD by about $.35, it’s important to keep in mind the trend is still your friend. With early morning action seeing ULSD down $.08, we are still down over $.80 in the last few weeks. 

Downward pressure continues on the pit with yesterday’s build across the board on crude and products, the Inventory report erased nearly all of the early morning gains.  Inventories are now almost to the low end of the 5 year average. 

The daily volatility in both gas and diesel makes it extremely difficult to provide quotes.  Shameless plug….  The DKB Exchange allows you to secure real time pricing on product…..   Yesterday, ULSD was up almost $.11 at one point and down over $.05 before closing up marginally $.0033 to $3.6659.   

Inflation is now at a 40 year high, which also posed concerns as its widely expected we will see another rate hike by the FED, which will likely pressure demand and continue to push futures down.  This time of year we always have to keep in mind NOAA hurricane estimates, and with an “above Normal” estimate in place with 14-21 named storms for this season, there could be some storm premiums shed in the market if this does not materialize.   Supplies of finished product still remain tight in areas with the backwardation not going away, albeit getting smaller. 

The hope is, that in the next 60 days or so we get back to normal spreads.

In just over two weeks time, front month ULSD is down $1.00, with over $.50 coming in the last two sessions alone. 

It appears that many decided over the long holiday weekend that there is a real concern of a global recession on the horizon.  The economic contraction would ultimately be a demand killer.  Funny thing about recessions is that we are typically in them for a quarter prior to actually labeling it officially.  A recent GDP tracker indicated that the US contracted 2.1% in Q2.  Adding a Citibank forecast posted Tuesday putting WTI Crude trading in the $65 range by years end should a recession take hold.  Currently WTI is just under $100 at $99.41. This along with a surprise build in crude inventories of 3.8mbls pushed all products sharply lower yesterday despite larger than expected draws in both gas and distillates. 

The question remains if the fundamentals in the fuel markets still exist or if this is merely a speculative long position fear sell off.  As we mentioned earlier, domestically, we have the crude.  However, we lack the ability to transport and refine it quickly.  This fear/reality is what was primarily responsible for this years rise.  Shortages were and are real, but they appear to be getting better.  The backwardation prevented many from putting any finished product in tank for fear of overnight value losses.  The backwardation in ULSD still exists but is only about $.05 month to month, at one point it was over .$30. 

The good news bad news appears to be what is coming, we should see lower energy prices and more product available, but other economic indicators will likely suffer. 

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.