Energy Market Updates

As we mentioned, futures markets traded in a wide $.20 range for the last month and we are just about back to where we started on May 1^st.   Recent drops center primarily around a pending agreement on the National Debt Ceiling which is expected to roll through the Houses in the coming days.  More importantly to take notice, is that we have shrugged off the huge inventory losses last week and focused more on Chinese demand.  Reports that China’s manufacturing Index fell ½ percent signals the global demand for products and fuel may be slipping.  Domestically,  notes that the Labor market remaining tight may hint that the FED may lift rates in the coming week one last time.  And we might see a bump in Inventories this week unexpectedly as reporting can often get skewed around holiday weeks.  We are also seeing Canadian Oil fields restarting after being shut down due to wildfires.

As expected, pricing has remained range bound the past week as we try to digest the often mixed data and the volatile news cycle.   Thankfully, I have a constant supply of TUMS within arm’s reach.  Pushing prices higher recently are the drop in finished products for gas and distillates as gasoline is about 2% lower than last year and distillates relatively flat.  Additionally, on a global scale, fires in Canada look to be shutting in about 250,000 b/p/d and reports are that Russia will enact another cut of 300,000 b/p/d in the coming weeks.  That is being offset by a lingering fear of another banking crisis should a debt limit deal not be reached and more importantly a pending credit crunch as rates remain elevated.  Domestic demand for both gas and diesel is down about 2% versus last year and while Chinese demand is robust, most say it is well below where it needs to be after a total lockdown. 

After hitting yearly lows last week, Diesel pricing has risen over $.15 in the last week.  As expected, bargain hunters typically buy in regardless of fundamentals.  The increases have been muted somewhat as there is still that languishing fear that demand will fall off the proverbial shelf in the last two quarters. However, this weeks report showed that gasoline and diesel demand in the US remains somewhat strong, posting gains over last week and last year.  While both products showed draws in inventories this week, and Crude showed a solid increase, that appears to more of a factor of less refinery production than anything else.  Inventories for all appear stable with the exception of the SPR which is expected to begin repurchasing soon. 

Typically Inventory levels and price direction have an inverse relationship.  When Inventories rise, prices fall…. When Inventories fall, prices rise.  As one said, “this ain’t no typical market”.   

We suggested last week that there would likely be sideways action in the market as everyone digests what impact production cuts will have, and that is exactly what has happened.  We have seen large daily moves, but overall we are just about where we were a week ago. 

Oil markets moved higher this week primarily on the “surprise” production cut announced Sunday evening.  Recall two weeks ago we cautioned   “ All eyes will be on the FED and what they announce in the next meeting, more rate hikes or not?  Also look to see if OPEC+ decides to cut production to bolster prices in the coming weeks.”    

A surprise increase in Distillate inventories fueled a sell off across all pits yesterday.   Distillates grew by 300k barrels while most expected a decline of about 1.5m.  This, coupled with surprisingly low demand numbers (down almost 7%) saw the pit erase the roughly $.15 in gains added in the last two weeks.  It appears that we are continuing that slow progression downwards with mindless swings in between. 

On February 24, 2022 Russia invaded Ukraine thrusting oil markets into one of the most volatile periods in decades, reaching prices never seen before.  At just over a year later, the APR contract is just $.01 off of where we were when this all started.  (see close on 2.24.23 below and chart) .  The circumstances around the recent drop are obviously derived from the recent banking meltdown. 

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. 

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.