Energy Market Updates

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backwardation

ULSD Cash Markets Correct & Backwardation Cools

A few weeks ago we hoped to see ULSD trading $.50 lower, as the cash market was tumbling at warp speed.  And would you look at that, here we are! Much of those losses have come from the last 5 sessions alone. (see chart below). 

At the same time we have seen the market backwardation almost get erased.  Suppliers should be more willing to put product in tank versus working hand to mouth.  The JAN to FEB spread is now a mere $.01, it wasn’t long ago that is was over $1.00, and the summer months are all but flat.  So, cash prices have corrected, Futures prices have collapsed (again) and the backwardation is going away!  Great News!…. Let’s not break a piñata just yet. 

Inventories reported large distillate and gasoline builds, both in the range of 6mbls with exports of finished product dropping as well.  Again, what we said needed to happen.  The JAN screen is about $.17 higher than pre Ukraine invasion, and about $.70 higher than a year ago.  The key is that it appears that demand is starting to slow, be it from rate hikes (intended to slow inflation) or higher costs all around, most point out that next year will be soft in terms of demand and spending in general. The goal now is to normalize and hopefully not get too deep into a recession that could take years to recover.

OPEC is staying the course on production levels, China COVID fears are also hitting demand on a world level. The Russian Oil cap of $60 per barrel is still playing out.  Going into effect on the 5th, the G7 measure aims to limit that what Russia can profit from their crude and subsequently curtail the money needed to sustain a Ukrainian takeover.  However, non G7 nations such as China and India are already taking additional vessels of Russian product, so the net result remains to be seen.  Point being is that there is a fair amount of fundamental variables out there that will continue to weigh heavy on the pricing of product. 

Kerosene is still very scarce across the region and cash values are still almost $3 higher than diesel thus prices will remain higher in comparison for much of the winter.   Buy the rumor, sell the fact is the old saying. I don’t see that going away anytime soon, we just may be at a new normal when it comes to pricing, thankfully much less than we have seen in the last few months.

ULSD 12.8

 

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Cash vs Future Spread & Precarious Supply Picture Keeping Diesel Users on Edge

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.

Cash vs Futures

 

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Cash vs NYMEX Blowout on Supply Concerns Keeps Diesel Elevated

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.

 

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High Prices are the Cure for High Prices?

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 9th we did drop almost .50 in a day.  I would think we would need a cease fire in Ukraine for that to occur.

ULSD MAy 6

 

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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.

apr 2022 candlestickapr 2022 price chart

 

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