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Fundamentals Continue to Push Futures Around

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.

 

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Volatility Continues with Economic Concerns, Export Increases

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.

Sept 1 ULSD

 

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Wild Intraday Swings on ULSD

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.

ULSD 3.30.22

 

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Demand Concerns Temper Prices Despite Supply Crunch

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Oil prices are continuing to slide back down some after multiyear highs last week. (At time of writing at 10 this morning, both refined products are trending down)

All of the issues with energy supply and labor shortages are still in play (obviously) so what’s going on?

The other side of the coin – demand, is once again raising concerns and tempering some of the bullishness on the markets.

The US reported lower industrial output for September, which is dampening enthusiasm over economic rebound and rising demand in the industrial sector. A large factor in play in the lower U.S. numbers is the continuing (worsening?) global semiconductor shortage. The lack of availability is severely hampering production and availability of motor vehicles and slowing progress on large scale tech projects.

Additionally, China’s data did not do much to allay demand fears, third quarter economic growth hit a low for the year, as did daily Crude processing levels. China’s lackluster reports are largely due to supply bottlenecks and shortages like the US data is.

As mentioned however, seasonal supply concerns for the upcoming winter, labor shortages (particularly in the trucking industry), generally positive economic rebound, OPEC cuts, and an uncertain trajectory for COVID-19 cases as we enter the flu season are still all factors very much in play in the markets, all of which we would normally expect to push prices higher.

So the ongoing question becomes which way the pendulum will swing between the supply issues and the demand requirements. Supply (at the moment) is what it is, the major variable is whether demand moves up and forces supply crunch related price hikes, or if the labor situation and slowing economic growth drop the demand enough overall to drop prices in the longer term.

All that being said – make hay while the sun shines as they say. Not a bad time to lock a prompt in case tomorrow flips the screens positive again.

Stay Tuned!

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High Outputs, High Case Numbers, and Low Economic Growth Crush Refined Product Prices

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Weak economic data from the United States & China, combined with higher OPEC outputs and rising COVID cases have again raised concerns about oversupply and weakening demand and pushed markets into sell off territory.

Today saw Crude drop 4% to 71.26/bbl, and refined products followed suit, with front month trading closing down .0598 on ULSD to 2.1358 and down an even .06 on RBOB to 2.2747. 

So what's going on?

China reported its slowest factory activity growth in almost a year and a half, which has raised concerns about the strength of the global recovery, particularly as China, in addition to having the world's second largest economy, has had the most robust recovery of the Asian region thus far. In the US, manufacturing activity slowed for the second month as well - so we are two for two on the world's largest economies showing signs of weakness and slowing recovery. 

Globally, we are also seeing an increase in the number of COVID cases reported as a result of the delta variant. Despite reassurances from Fauci and the government at large that the United States will not be looking at a second round of lockdowns because vaccination rates should be sufficient to avoid them,  the resurgence of mask mandates and other protocols in some areas has led to some skepticism that economic recovery and therefore demand growth will continue. 

At the same time these concerns mount on the demand side, on the supply side, the output from OPEC+ countries for July hit its highest level since the beginning of the Pandemic (April 2020).  The OPEC+ member nations had begun a reversal on previously agreed to output cuts largely based on oil price recovery and a sunny outlook on demand.

It's possible, but unlikely, that the strategy will be reversed again even as we see the demand outlook be flipped on its head. 

So once again, the standing headline conclusion is "we have to wait and see" on both how COVID shakes out, and what OPEC+ may do. 2020 Deja Vu all over again!

Stay Tuned! 

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EIA Draws Slow COVID Resurgence Induced Sell Offs

shutterstock_1707677488EIA Inventory report showed much larger draws across the board on all products than anticipated. By the official count, Crude drew down 4.1mmb (2.9 expected), distillates 3.1mmb (435K expected) and gasoline 2.25mmb (916K expected). 

  The draws indicate a continuing tightness on the supply side in     the face of massive demand recovery as economies by and large get back to work as "normal". However, the past few weeks we've seen drops consistently on heightening concern about COVID resurgence and the spread of the Delta variant. 

Concern lingers as countries report a rise in cases and some have reintroduced some lockdown measures, or revised guidelines (including new guidance by the CDC on masks in the US). The growing fear is that extension of lockdown measures, or a return to lockdowns in a given sector could once again plummet demand and send markets reeling.  . 

On the other hand, global market supply is still extremely tight, even with additional produced gallons by OPEC+ member countries coming online. 

So, we essentially are in a weird spot where demand alone is the critical piece of whether the market will rally or slide - global supply is low which would support price increases, but if China does in fact crack down on imports of Crude as they appear to be doing, and COVID continues to tick up globally again the demand drop could be such that we don't see a rally materialize.

It's really anyone's guess as to how the world responds to continuing COVID fears should the cases continue to rise. 

Stay Tuned!  

 

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Markets Up on OPEC+ Hope and Coronavirus Slowdown

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WTI Crude traded & settled below $50/bbl earlier this week, as prices continued to slide across commodities. Today, however, we saw the trend reversing, with the market up this morning by almost 3%. (Early on, we were up over the 3% mark but gains dropped off slightly after the EIA inventory reports were released this morning.) 

EIA Inventories showed builds on Crude of 7.5mmb, well above analyst expectations. Gasoline drew down 100K bbl, and distillate stocks dropped 2mmb, as well. Distillate numbers were essentially in line with expectations. Crude pared about .5% on the builds, and gasoline moderated but stayed up, as analysts were predicting builds of ~700K barrels versus the actual drop of 100K barrels reported. 

In broader news, most of today's increases are being pegged on confidence that the OPEC+ production cuts supposedly forthcoming will both be in effect quickly, and will see full member adherence to new lower limits.

Also, China is reporting the lowest number of new Coronavirus cases since January, which is continuing to restore confidence in their economy and calming fears regarding a longer term global slow down on oil demand growth.

At the close, Crude settled back up over $50 again at $51.17/bbl (Tuesday's close was $49.94), ULSD closed up .0490 to $1.6757 and RBOB closed up .0668 to $1.5810.

Stay tuned!

 

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US-China Trade Deal Keeps Markets Range Bound

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Prices have been somewhat up and down, but largely range bound over the past several days of trading.

It's not because there's nothing going on but because there is a lot happening but it's sort of up in the air which way everything will go. 

The ongoing US/China trade tension situation is both the major factor and a good example - "Phase One" of a trade agreement is in the books as of Wednesday, including a pledge by China to buy "at least 52.4 billion of US Energy products over the next two years" (although what that entails specifically was not clarified)... That sounds like news that should be pushing oil up substantially -  but we don't actually know if any trade deal will change demand forecasts, so it may be that pricing is largely unaffected. 

Some of the confusion is that this is "just phase 1" and the US has announced that they are not removing tariffs on billions of dollars of Chinese goods until phase 2 (whatever that is) is agreed to, but we have revised tariffs down substantially on 120 billion OTHER Chinese goods previously at a higher rate.

Essentially, no one is really sure what we can expect to see in terms of real impacts from Phase 1 -or how long Phase 2 will take. 

(You can read the details of Phase 1 in this article on MarketWatch: "Trump signs landmark China deal and says removal of tariffs would come in next phase"). 

Yesterday (Wednesday) The EIA inventory report for the week ending January 10 showed surprisingly huge builds on distillates and gasoline, 6.7mmb and 8.2mmb, respectively. (Analysts had predicted 3.3 on gas and 1.3 on distillates). Crude also surprised traders with a 2.5mmb decline (against a 1.1mmb speculated build). Wednesday's close reflected the report with a drop of .0324 ($1.8779) on ULSD, a drop of .0176 on gas ($1.6368) and a final number of $57.81/bbl on WTI Crude. 

Today we have been mixed most of the day as the trade deal news gets analyzed and digested, primarily. At the close, ULSD was down .0179 to $1.8600, RBOB gained .0180 to $1.6548 and Crude settled at $58.52, from $57.81 Wednesday.  

This week the EIA also revised its expectation for WTI & Brent crude for 2020, putting WTI at an average of $59.25, pretty close to where we have been trending the past week or so (1/8-1/16: 58.08-59.61/bbl)

Stay tuned! 

 

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Mixed Market Week on Same Old Concerns

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Happy Friday!

We are ending out a mixed week on the NYMEX today, to put it mildly. Monday & Tuesday were both substantial down days with the market shedding over 4 cents (.0433 and .0473, respectively) on ULSD both days, and landing Crude at $55.21 at Tuesday's close. 

Wednesday & Thursday however, saw the NYMEX jump up substantially.

Wednesday's inventory numbers fell short of expected builds and we saw intraday highs over 5 on refined products, with the close reflecting +.0347 on ULSD ($1.8921) and +.0526 on RBOB ($1.6563) and Crude closed at $57.11. 

Thursday gains were around 2% with ULSD closing up +.0526 to $1.9447, RBOB +.0481 to $1.7044 and Crude up to $58.58, a two month high. 

Today we saw the market shed some of the week's earlier gains, with ULSD down -.0153 to $1.9294, RBOB off -.0301 to $1.6743 and Crude closed out at $57.77, about back where it was Wednesday mid-morning. 

So what's going on? Good question. It seems a lot of the back-and-forth action this week (and for a few weeks prior) has primarily been the result of ongoing speculation and reaction on three repeating themes 1) China-US Trade War 2) OPEC Cut questions 3) Global economic concerns.

Essentially we have been bouncing up or down based on reaction to inventory reporting, economic reports, rumors of progress then retreat on ongoing China-US discussions, tariff delay questions, and uneasiness about what OPEC may or may not announce regarding cuts at their December 5th meeting. 

Hopefully there is some solid direction on any of these questions over the next few weeks, or it's anyone's guess when the see-saw action will subside. Until then, it's Deja Vu all over again, as they say. 

Stay tuned!

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Markets Tumble on Trade War Tensions

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The NYMEX tumbled back down today, erasing Friday's rally. At the close, ULSD shed .0546 to $1.8356, and RBOB dropped .0635 to $1.7180, with Crude closing at $54.69, which puts us back in the territory we saw on Thursday, essentially. (We were $1.8529, $1.7499 and $53.95 at the close Thursday after record slides).

The NYMEX wasn't the only market down today, as global stock markets slid on US/China trade war tensions.

So today, China threatened retaliatory action after the Trump Administration did not back down from tariff imposition threats. And then (stop me if you have heard this one before) Chinese currency hit suspicious new lows against the US dollar, which prompted renewed accusations of currency manipulation on the part of China by President Trump, which didn't sit well with Wall Street, who is looking for any sign of hope that tariffs and a potential full on trade war are not looming on the horizon....And then everything tumbled across the board, from the Dow Jones to the Nikkei. Phew. 

Bank of America also announced today that should China choose to purchase Iranian oil in response to US Tariffs, we could see oil tumble to "$20-$30/bbl" (although they did not revise their 2020 prediction of $60/bbl). The decision to purchase from Iran would serve to both weaken the impact of US backed sanctions on that country, as well as take a substantial amount of the impact out of the tariffs imposed on China. However, the move would not be without consequence, as Iran would be stepping outside the agreed upon production cut strategy in the region and that would likely not go over well with their neighbors (particularly Saudi Arabia) and would essentially force a heavier partnership than China may be interested in maintaining.

On the fundamentals, supply is still vastly outpacing demand, and economic indications continue to suggest that global demand will continue to soften. Whatever does or does not happen in terms of shorter news cycle events - seized tankers, trade disagreements, etc, the fundamental supply/demand levels will ultimately dictate a large portion of where crude & refined products settle out.... at least until another short term cycle event throws a wrench in the gears.

Stay Tuned!  

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