Energy Market Updates

It has been a tough start for many this summer, the heavy rains throughout the region have delayed projects, hindered marina activity, and limited travel in general.  New Englanders, like the market, are resilient.  We always find a way to bounce back, move forward and DKB will be right there with you. 

There seems to be somewhat of a divorce between what IS happening and what conventional wisdom says SHOULD happen in the fuels arena.  Production cuts, inflation numbers, and demand figures have all weighed in on the direction the last week.  The last several days saw diesel pricing break out of that $.20 range we’ve been discussing, unfortunately to the high side. 

Inventories showed a large increase on crude and distillates this week, with an eye on diesel demand being at its lowest point in months, a staggering 12% lower than this time last year.  Gas stocks were flat while demand fell about 8% to last week, again likely a weather related phenomenon.  These numbers SHOULD send pricing lower. 

A mixed sign on the Inflation front, JUNE saw inflation rise only 3%, its lowest gain in 2 years and a far cry from the 9% increase last June, and closer to the 2% FED target.  This SHOULD make futures rise as an optimistic view remains of  a stronger future.  But, most anticipate another ¼ rise in rates by the Fed, thus increasing borrowing costs and forcing holders of oil to sell product to reduce overall costs and SHOULD push futures lower.  The market appeared comfortable about $.20 ago and I would anticipate a return to that level in the coming weeks. 

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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.

While it might be hard to think about cold weather with temperatures in the 60s across the region, keep in mind that all too often, we still have an arctic blast come through late February into March.  Staying the course with a winterized fuel is critical to a smooth operation this time of year. 

A week ago we mentioned that when ULSD futures touched the 2.65 level we would likely see the market “re-evaluate” where we will go.  It has done exactly that, by trading in a modern day “tight” range of $.11 in the last several sessions.  A large crude build last week of 16.3 mbls put levels at almost a 2 year high, increases in gasoline  and a slight 1.3mbl loss in distillates are putting downward pressure on the entire market.  Strong retail sales, growing jobs, and increasing wage data is keeping inflation risk high.  This will likely cause another slight increase in rates by the FED, thus pushing commodities higher. 

One has to wonder if the increase in manufacturing and retail sales is more catch-up demand, as supply chain bottlenecks appear to be loosening.  Either way, we are walking that fine line, and the market will take some time to reassess.  This means it could be unlikely that we see large swings higher or lower for a period.  Again, demand on a world level will have a strong pull with pricing as Russia appears to be maneuvering around the price caps, selling product to the easiest outlet.  News is that new “component” export sanctions are being drafted that will limit raw materials from being shipped into Russia preventing them from build items like computers, machinery and weapons. 

Its been a slow retreat to “normal” levels and while I would like to think more is in store, we will likely take a sideways path to get there.

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. 

With Friday and Mondays' sessions cutting into the recent losses on ULSD by about $.35, it’s important to keep in mind the trend is still your friend. With early morning action seeing ULSD down $.08, we are still down over $.80 in the last few weeks. 

Downward pressure continues on the pit with yesterday’s build across the board on crude and products, the Inventory report erased nearly all of the early morning gains.  Inventories are now almost to the low end of the 5 year average. 

The daily volatility in both gas and diesel makes it extremely difficult to provide quotes.  Shameless plug….  The DKB Exchange allows you to secure real time pricing on product…..   Yesterday, ULSD was up almost $.11 at one point and down over $.05 before closing up marginally $.0033 to $3.6659.   

Inflation is now at a 40 year high, which also posed concerns as its widely expected we will see another rate hike by the FED, which will likely pressure demand and continue to push futures down.  This time of year we always have to keep in mind NOAA hurricane estimates, and with an “above Normal” estimate in place with 14-21 named storms for this season, there could be some storm premiums shed in the market if this does not materialize.   Supplies of finished product still remain tight in areas with the backwardation not going away, albeit getting smaller. 

The hope is, that in the next 60 days or so we get back to normal spreads.

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. 

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