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EIA Inventories

PADD1 Inventory Fears Keep Pressure on Suppliers

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I’ve been away…..any talk about diesel supply? 

News cycles have jumped all over the fear topic of only 25 days of supply of distillates in the Northeast.  It is true that PADD1 distillate Inventories are well below the five year average and PADD1A (New England) is even more tight, however, it is important to understand the term “days of supply”.  That is defined as if everything stopped today.  No production, no pipeline shipments, no vessels, no trucking and we kept using as much distillates as we are at this very moment.  Slightly different than how it can be perceived by watching a news clip. 

Distillate inventories were actually slightly up this week as exports fell by some 300k barrels per day, although our inventories are still some 20mbl below last year.  Key to yesterdays inventory report was that refinery utilization (production) is running at 91% which is up over 4% versus last year and historically this is a high rate.

So what does all this mean?   

For many years, having supply contracts was the standard in the fuel business.  As time went on, predominantly in gasoline, this shifted to suppliers selling excess gallons at the going price, commonly referred to as “rack” gallons.  Because there is very little excess product, the rack marketer is put on the sideline while the contracted supplier keeps companies rolling. 

Future pricing turned positive yesterday on the draw of Crude stocks (makes sense because of the high production rate) and the FED adding another 75 point basis hike to key rates.   Cash values turned negative as there are some rumblings that we actually may see a release of finished product into the northeast in the next week or so.  While this is a temporary measure, it could loosen up for just enough time.  Look for price action to remain volatile over the next few weeks with hopefully a trend to the downside.

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Distillate Inventory Concerns Persist, Particularly in New England

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.

inventory chart

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. 

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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.

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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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Inflation Reduction Act Helps Keep Downward Trend Intact

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. 

August 4 ULSD

 

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Volatility on Diesel Keeps Everyone Scrambling

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. 

We are working day and night to maintain our service standards and product levels.  Please do not hesitate to reach out with any questions.

 

Thu 5-12

 

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March Comes in Like a Lion -ULSD See-Saws on Russia, Inventories

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.

Market Screen 3.24.22

 

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Prices Rally as EIA Reports Say Lower Inventory, Higher Demand

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By noon trading today Crude was up almost 5%, and on the refined products side, ULSD was up 7 cents and Gas up almost 6 (+.0586) and the market looked like we could see the highest close since mid-March. 

So what's going on?

EIA Reports! The EIA demand outlook was increased signaling the agency sees a continuing growth in demand for petroleum products going forward. On top of that, the EIA Inventory reports this morning showed a draw of 5.9mmb on Crude for the week ending 4/9. This is actually pretty close to the number analysts had predicted on Crude - however, analysts had predicted builds on gasoline of 5.65mmb, and that's what kept prices in range Tuesday. The actual reporting from the EIA showed a build of only 300K, obviously a far cry from the priced-in 5.65mmb, and that took the brakes off of holding prices back.

So essentially, the EIA is predicting more demand and reporting dropped inventories at the same time, and that's pushing prices north. 

Other bullish factors behind prices moving up include substantial growth in Chinese oil usage (imports increased a reported 21% last month) and continuing positive economic indicators in US.

On the other side of the equation however, we are seeing a continually slow vaccine rollout (particularly in Europe) while we simultaneously see explosions in cases in some areas (ie Brazil). Yesterday, we also saw an announcement that the United States is "pausing" administration of the Johnson & Johnson one-shot vaccine for COVID-19 after reports of potentially fatal blood clots in a small number of recipients. The pause reportedly will be for "weeks or even days not months" according to officials, but the major concern is a PR one, that the pause will cause hesitation in getting vaccinated among those who have not yet, which could hypothetically impact both case numbers, and how quickly the country is able to be fully back open for business. 

So vaccination concerns and case numbers are basically the black rain clouds over a potentially stronger, longer rally on prices, and it's anyone's guess which side of the equation wins out over the next few weeks. 

Stay tuned!

 

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Oil Spikes on OPEC+ Agreement

shutterstock_651733465WTI jumped over 5% late this morning, as news broke that OPEC+ members would be agreeing not to raise production levels in April. According to reports, the current established levels for each of the member countries will be continuing as is through April and May, and the Saudi's are planning to forge ahead with continuing to keep the additional 1 million barrels per day offline as agreed to for February and March.

The news of continued cuts leaking from the (currently still happening) meeting surprised the markets, which is part of why we are seeing such a jump - often the predicted outcomes are "priced in" but today analysts fully expected that the ruling would be to let production cuts expire at the end of March as scheduled, and assumed Saudi Arabia would be ramping up production. We have started to see signals of demand levels returning, which, along with the ongoing price rally, had made analysts comfortable that OPEC would begin to ramp production levels back up. Reports indicate that Saudi Arabia urged caution and pushed for today's cut extensions, with Energy Minister Prince Abduliziz bin Salaman saying "Let us be certain the glimmer we see ahead is not the headlight of an oncoming express train"

Yesterday, prices jumped as well as the weekly EIA data for the US showed that the snowstorms and widespread freezing that impacted states in the Gulf Coast region continued to wreak havoc on refinery utilization. Crude stockpiles ramped up by 21.5 million barrels for the week ending Feb 26. That build is even larger than what we saw last April when the sudden imposition of COVID lockdowns demolished demand across essentially all sectors immediately. Crude built as a result of the lack of refinery capacity still in effect, and the opposite was seen (of course) on refined products. Although draws on refined products were clearly predicted, the EIA report still shocked as it showed draws on gasoline of 13.6 million barrels (about 5 times the anticipated draw) and distillates drew down 9.7 million barrels, versus the 3 million predicted.

In other news today, Houthi rebels in Yemen are claiming responsibility for a missile strike on a Saudi oil facility in Jiddah, in a continuation of infrastructure strikes in the ongoing proxy war. The conflict is definitely something to keep an eye on - as we saw in September 2019, attacks on Aramco infrastructure can rock the markets pretty severely. 

At today's close, WTI settled at $63.83. ULSD +.0603 to $1.8960, Gasoline up .0461 to $1.9979

 

 

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Markets Up on Second Stimulus Hopes, Unemployment Numbers

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Today we opened up slightly on the NYMEX, and the big drops kicked in around 11am, (up to almost 3% on WTI temporarily) when Speaker Pelosi announced that they expected "pen on paper" for a second round of stimulus packages. The announcement came as somewhat of a surprise, as much of the activity on the second stimulus as of late has involved blocking, show bills, and discussions of everything being postponed until after the Election (and other typical political maneuvering).

The other factor lifting hopes and the market today was the jobless claims number released this morning by the US Department of Labor, which put new weekly jobless claims in the US at 787K, much lower than analysts expected. (Projections were 870K+ new claims would be filed, so the report was MUCH better than anticipated)

At the Close, ULSD gained .0208 to 1.1607 (Dec: +.0211 to 1.1687), Gasoline was up .0078 to 1.1581 (Dec +.0181 to 1.1452) and WTI was 40.64 (up about 2%). 

Wednesday we saw prices slide, largely due to the EIA inventories showing massive builds in gasoline (+1.9 mmb), and lower production than the prior week - both of these indicate a continuing drop in gasoline demand domestically and were more than enough to overwhelm the slight draws on Crude also reported by the EIA.

Overall, the demand outlook seems to be pretty grim globally for the short term, particularly as COVID-19 cases continue to trend upward in the West, so it remains to be seen how the markets will play out. If job numbers continue to improve and there is movement on stimulus, it could signal continued upticks in pricing based on economic outlooks improving.

One of the wild cards at play however, is COVID-19 and more specifically, it's impact economically and on global oil demand. We saw Ireland become the first European nation to return to lockdown today, and if that becomes a continuing trend, it's hard to see the market maintaining optimism about economic recovery. 

We will have to wait and see how it shakes out over the next several weeks.

Stay tuned! 

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