Energy Market Updates

At first glance of yesterday's inventory report you would assume that a solid up day was in the making.  As has been the case, the devil is in the details.  While all products showed modest drops, they were largely offset with massive exports, known refinery maintenance and switching to winter grade gas.  The largest market mover was the FED maintaining rates but signaling they expect possibly 2 more rate hikes in the coming months.  A large sell-off took hold pushing diesel futures down almost $.10 before settling down just under $.05.  The profit taking ideology is that if rates get higher, it dampens economic growth thus curbing overall fuel demand, add in that it makes it more expensive for foreign currency buyers of products. 

Additionally, truck tonnage was down 2.3% in August, marking the sixth straight month of year over year declines.  Many point to last year being a shipping anomaly coming out of COVID, but it is still hard not to take into account the declines.  Even though we are seeing a rebound today, expect a choppy downward progression as we close in on the winter months.  Speaking of winter….. It’s not too early to start thinking about winter product and the associated costs.  Availability of Kero as a blending component appears to be a concern for many.  Feel free to reach out to discuss how we can assist and also talk about pricing next year's needs. Schedule a Meeting

Depending on the News outlet you watch or read, you will hear two very different narratives.  The one where “prices rises as Idalia makes landfall”….. or “soft demand figures push futures lower.”  It really a tale of two products right now between gas and diesel. 

Gas is more consumer centric while diesel is tied more to the Industrial world.  One is rising while the other is starting to fall.  Quick note, hurricane Idalia had little to no impact on any petroleum facilities in the Gulf or in the Mid-Atlantic, just more of a news gimmick to grab your attention. 

Consumer spending, thus gasoline demand, has been surprisingly resilient this Summer, as many of us thought that demand would crash as unemployment rose.  That really hasn’t happened and hints that the FED may still raise rates one more time are starting to come out.  While gas futures have risen roughly $.60 since the beginning of summer, it doesn’t compare to the over $1 rise seen on Diesel.  Diesel has had an unconventional run this summer.  Soft demand and varying inventories have kept pricing elevated for reasons I can not understand.  The last three days have shaved off almost $.20 in pricing and I would like to hope we are starting a nice correction in the coming weeks. 

Keep in mind, as the front months retreat, it will not be as pronounced in the outer months.  For instance, yesterday front month ULSD dropped $.11, yet MARCH24 ULSD only fell $.01.  Steep backwardation has reemerged in the diesel pit, next summer pricing is roughly $.40 lower than current. 

Two thoughts remain, will this prevent some from bringing in product again and see outages or suppliers sitting on the sidelines and also does this represent a buying opportunity for next summer needs?  We will have product for sure, and we are always willing to talk on securing some pricing. If you want to schedule a meeting to discuss your specific needs or questions, you can do so here:  Schedule a Meeting

Fuel markets appeared to have shrugged off what could have been a historic week, should an actual Coup attempt in Russia transpired.  The current market mood appears to be focused more on actual supply and demand factors.  Crude inventories showed a massive 9m barrel loss this week while finished gas and diesel were relatively flat.  Gasoline futures soared yesterday taking ULSD  along for the ride, although not as much. 

Again, we are still in this range since early May as demand figures temper any long run increases.  While diesel demand is at a 6 month low and is over 7% less than last year, gasoline is up almost 4%.  Some attribute the gasoline rise to more people returning to the office regularly.  As we say often, diesel usage in the U.S. is the barometer of the economy and if that is soft, so goes the economy.  That, along with hints of another FED rate hike are keeping future pricing in check. 

The price backwardation that affected distillates for so long has found its way into the Gasoline market, far more than the normal product seasonality we typically see.  Again, this limits most from bringing in gasoline to storage as the hedge costs are not justifiable and outages can occur.  The right size tank, and a strong supplier relationship will always get you through.  Look for the day to day swings to continue as we head into the summer driving season.

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. 

While recent Inflation numbers dipped below 5%, down for the 10^th straight month, it is still much higher than the FED sweet spot of 2%.  My sense is the street is correct and we will not see another rate hike in the coming months. 

Gas will start to take the lead as the summer driving season kicks off and it will be interesting to see how Americans will act ahead of relatively unstable future.  Moreover, how will the commercial sector be affected?  Speaking with a number of Customers in various fields, most are “cautiously optimistic” about the upcoming months.  Work is steady, pricing is palatable, but labor remains tough.   DKB can assist with mitigating some of the uncertainty, please do not hesitate to reach out to discuss.  Expect sideways price movements for the next week with a wide rage of $.20 on both products.

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 said several weeks ago that market direction would weigh heavy on OPEC and FED policy and we see that now as fundamental factors are temporarily moved aside.  With Distillate inventories falling by 1.2m barrels and gasoline rising by 1.8m barrels, most are focused on what is said to be the final rate increase of .25% by the FED.  This is the tenth increase in just over a year.  Demand for finished products is starting to wane year over year, signaling to some that a real slowdown is imminent and FED policy is, for lack of a better term, working . 

Diesel pricing has fallen about $.40 in the last two weeks, and for most of us it is a well needed reprieve.  However, this is the fifth “bottom” we have seen in a year, (see chart) does this mean we will see a buyback in the next several days?  With true Russian export numbers showing robust shipments, highest since 2019, I would suggest that the global market is well supplied and demand forecasts are the true driver in the marketplace. 

Look to see pricing stabilize over the next few weeks (again with large day to day movements) as you will start to hear more and more on the labor market and unemployment figures, which is the collateral damage of rising rates.  While the supply picture is much improved in the region, it is still crucial to be in communication with your supplier as many are employing a “just in time” resupply approach.  It will also be interesting to see how the pending credit crunch will affect our industry.  Having a reliable, well supplied fuel provider, like DKB, will be key in the last two quarters of the year.

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.”    

It wasn’t the shock of a million barrel cut, more of the agreement that Russia would extend their already in place cut of 500k bbls for another six months, thus totaling the Cartels cut to 1 million.  Fear not, it has been a very long time since OPEC has actually adhered to output quotes.  Most of the time the money is too good to pass up for many Nations. 

The fear with the cut is that Inflationary risk will rise as overall cost become higher.  As US manufacturing activity fell for the fifth straight month, coupled with yesterdays Inventory report showing Refining production slowing, it might signal that Inflation will continue to rise as demand remains high.  I tend to think about it differently (hold your comments) - If the cuts raise fuel prices, and people have to spend more on gas, heat, power, etc….  wouldn’t that force them to have less to spend on discretionary items therefore pushing down demand and subsequently lowering inflation?  We will leave that to people much smarter than me.  (Again, hold your comments). 

The draws across the board with inventories yesterday didn’t help any as futures again rose and we sit about $.10 higher than we did Monday morning.  As cooler heads prevail and the mentality shifts back towards the overall healthy of the economy in the months ahead, expect sideways daily pricing moves with a wide range from high to low.

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. 

While the Distillate inventory report this week showed a slight gain of 200k barrels, the real news was in demand.  Distillate demand dipped about 8% from last week, which is down almost 23% from this time last year.  Demand and FED interest rate adjustments appear to be top of mind for most.  With the FED Chairman stating that recent economic data was stronger than expected, he alluded to the fact that more rate hikes will be necessary to calm inflation.  Traders took this as a sign that it will limit growth and subsequently, demand, thus the sell off. 

Still, outward diesel months are hovering around that $2.65 level we talk about, but even more interesting is that Backwardation (outer months being cheaper) has been all but erased for the second and third quarters. (see strip below)  As we transition back to summer diesel, the hope for most of us is a less volatile market.  Unfortunately, we have seen too many times a spike follow what appears to be a calm period for any number of fundamental or technical reasons.  Having a supplier versus a marketer is, and always has been, the best course of action in dealing with volatility.

Oil & Refined products all plunged today on a series of events. Both Brent & WTI were down over 3% this morning, and by 2pm refined products were down over 11 cents.

At the close, ULSD was down .1178 to $1.8529, RBOB shed .1129 to close at $1.7499, and WTI Crude was $53.95, down from $58.58 at the close yesterday.

Yikes.

So here's what appears to be going on in a very basic nutshell:

The Federal Reserve announced a single rate cut of 0.25% versus the series of cuts expected to be coming down the road. The interest rate cut was expected to begin a series of cuts to shore up the domestic economy against global economic concerns about general weakness but evidently will be a one shot deal. 

The dollar hit two year highs post Fed announcement, and oil crashed as a result. 

U.S. supplies were down for July and OPEC production hit record lows (below 2011 levels) as a result of the OPEC+ deal, which normally would serve to boost prices, or at least hold them steady. However, global supply & output levels are still very high, particularly from the United States, and additional influxes from former member nations who opted out of the OPEC+ production cut agreements. (When combined, that's an offset of around 12mmb per day against the cuts by OPEC countries) 

Finally, this afternoon, the Trump Administration announced abruptly that effective September 1, the US would impose a 10% tariff on an additional $300 billion dollars of Chinese goods. Not exactly helpful for allaying concerns about global trade, the global economy, or weakening demand, to put it mildly.

The announcement came out later in the day, so we will have to see how the markets shake out tomorrow - whether the demand concern seeming to dominate now holds out, or if we flip the markets the other way on overall economic concerns tariffs can raise. 

As always, stay tuned & feel free to reach out if you have questions. 

The last day of trading in 2014 saw Crude close out at $53.27/bbl, which was down 45% from the prior year. 2015 continued the trend with WTI dropping another 30% over the year - with December 31, 2015 settling out at $37.04.

This week we crashed down through the $35-36 dollar support levels and are rapidly approaching the next one of $32.50/bbl after todays tumble resulted in Crude closing out at $33.97/bbl.

Let's take a step back and look at what went on this week to push oil prices down 8% since December 31st.

Monday, January 4th, markets initially shot up with ULSD and RBOB both jumping over a nickel by 10am (+.0516 and +.0576, respectively), before almost immediately changing course - both products were down by noon to flat on ULSD and only up .0156 on gas. So what happened?

Monday brought the news that the Saudi's had cut all diplomatic ties with Iran and ordered all Iranian diplomats to leave the country within 24 hours. This was in response to the Kingdom executing 47 people over the New Years weekend, including and most importantly, a renowned Shiite cleric, which prompted riots and vandalism to the Saudi embassies in Iran and Bahrain. 

As the day went on however, the analysis of the story moved from fear of international conflict bumping up cost over supply disruptions, to the realization that the standoff between Iran and Saudi Arabia meant that this could essentially be the death knell for OPEC. As far as the bears see it, this breakdown of relations essentially guarantees the Saudis will not take any moves to cut production in order to stabilize pricing, because to do so would greatly help Iran, in that the newly allowed exports they promise to flood the markets with would generate them much more revenue. 

Economic data from China Monday supports the bears as well. It was a factor in pushing down oil prices, as well as being responsible for crushing European markets and resulting in the single worst year opening for the Dow Jones since 1932. Overnight, Chinese stocks crashed over 7% and led to a halt in trading across the board - a halt that didnt come soon enough not to pummel stocks internationally. One can only hope the old Wall Street adage "As goes January, so goes the year" is wrong this time. 

There was some bouncing around Tuesday, particularly on the overnights as investors and analysts weighed the API projections that predicted draws in Crude stocks to be announced Wednesday. However, today's EIA report showed just the opposite, and swiftly tanked the market across the board. At the close, ULSD lost -.0446 to settle at 1.0807, RBOB shed almost ten cents (-.0949) to close at 1.1618 (very close to the $1.10 support level) and Crude settled down $2 at $33.97.

What next? Bears are predicting oil hits and potentially breaks through the $32.50 support level for a brief stint in the upper 20's ($28 range), while the Bulls are predicting a jump back to the $37 level. We shall see. 

Stay Tuned!

This past week has been a wild one.

Wednesday we saw WTI shed almost $2/barrel (4.6%) to close out under $40 at $39.94/bbl and both ULSD and RBOB shed over 6 cents each (-0641 and -0699, respectively) on the EIA Inventory report, which once again showed unexpected builds.  Crude inventories built 1.2mmb, marking the 10th consecutive week of builds.  

An additional weight on oil and other commodities was the dollar, which surged to a 12 year high after the Fed indicated they were likely to move forward with a rate hike. (Friday's strong jobs report makes that even more likely).

Thursday the reverse situation happened, as investors and traders waited with baited breath on the hopes that OPEC would come to a consensus at Friday's meeting to lower output.

Today however, its official - OPEC did not come to any formal policy change and will not be cutting production or lowering the ceiling. Iran has been vocal and vehement for the past few weeks that they would absolutely refuse any cuts in production just when Western Sanctions are coming down and allowing them to reenter the market. They plan to come online at as much capacity as possible in Tehran, and the Saudi's essentially cited the "complication" of Iran's new ability to ramp up output as the reason today's meeting was fruitless. 

Predictably, oil was down on the announcement, as it effectively seals the deal in terms of all but guaranteeing the oil glut not just continues, but worsens. (Crude settled at $39.97, down from Thursday's $41.08)

The pressure now will be on higher cost producers like the US. However, that's been the case (and the OPEC strategy) to some degree for over a year now and hasn't solved the problem. The real losers in the lack-of-a-deal are the smaller OPEC and non-OPEC oil producing countries who lack the capital reserves of countries like Saudi Arabia - namely Brazil, Venezuela, etc. If oil continues to slide, we could start seeing serious economic impacts and unrest in oil-revenue dependent nations.

Stay Tuned!