Energy Market Updates

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.

A surprise increase in Distillate inventories fueled a sell off across all pits yesterday.   Distillates grew by 300k barrels while most expected a decline of about 1.5m.  This, coupled with surprisingly low demand numbers (down almost 7%) saw the pit erase the roughly $.15 in gains added in the last two weeks.  It appears that we are continuing that slow progression downwards with mindless swings in between. 

Today will be interesting as it is technically the last trading day for the APRIL ULSD contract and it is still priced above the $2.65 level with the MAY contract well under at $2.58.  Where will they meet? 

Also pushing prices down is a more optimistic view of the banking system taking hold as several major US banks are buying up deposits and loans of the now failed SVP bank.  We had said several weeks ago that if, and when, the market reaches this level it would have to “reassess” where it will move towards. 

Looking in the rearview mirror, it appears that there is still value to Q3 and Q4 fixed price gallons.  Several key fundamental factors will weigh in on direction over the next few weeks such as FED Interest rate policy and overall economic temperature, demand for products and the summer driving season.  Globally, it will be China’s demand for products, of course Russian price cap effectiveness and product movement, and as always OPEC output quotas.  The day to day price swings do not look to be going away any time soon, moreover the intraday swings are just as dramatic.

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 5^th, 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.

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. 

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

On Tuesday morning we were feeling pretty good, relatively speaking, as the ULSD pit was almost .40 less than a week ago.   Demand concerns over China’s lockdown and slowing production rates put pressure on an already inflated market. 

Unfortunately, in the last two session we have gained all that back and then some.   News flow is the clear driver, although fundamentals gave support for yesterdays jump.  As fears of no end in sight for the conflict in Ukraine heighten, it forces NATO countries to impose stricter sanctions on Russia - even floating the dreaded “embargo” word around.  Additionally, OPEC stated it does not intend to increase output to offset any Russian barrels in the marketplace. 

Fundamentally speaking, Wednesdays inventory broke a cardinal rule for traders…. Don’t surprise them.  

Expectations for gasoline were for a 800,000 bl draw with a 3.6mbl draw being reported.  Distillates were expected to fall 1.5mbl and that doubled with a 2.9mbl draw on inventory.  Keep in mind, we typically see a destocking period this time of year due to product changes.  It doesn’t appear that domestically there will be any policy changes that could calm the market. 

Looking forward, as you can see from the chart below, are a full $1.00 higher than where we should be.  It certainly is a challenge for all dealing with these prices, as it affects every part of your business. But as we have seen in the past, this market has the ability to pivot at any time and we could very well see another .50 down day.

Oil prices surged another 7% today. At peak intraday highs, WTI hit $105.14/bbl before settling at $103.41.

Refined products followed suit skyward, with front month ULSD up +.2198 to $3.1511, and RBOB up .1562 to $3.0887 (May trading closed +.1915, $3.0381 ULSD/+.1532 $3.0621 RBOB).

Monday we saw WTI close over $100/bbl for the first time since 2014.

The obvious driver for the spiking prices we’ve been seeing has been the ongoing military strikes in Ukraine by Russia, and the resultant fears of not just supply disruptions themselves, but the further impacts that multinational involvement in the conflict could have globally.

Today, the US and allies (Germany, the UK, Italy, Japan, Netherlands, and South Korea) announced their agreement to release 60 million barrels from strategic reserves, half of which will come from the United States.

Markets were not comforted much by the announcement (although we did see a slight tempering), largely because the strategic reserve release is much more a symbolic gesture than one that solves supply concerns on a fundamental level.

A multinational agreement to release gallons is more of a statement of solidarity against what is seen as Russian aggression, and a message that countries are willing to take extraordinary measures to prevent global impacts rather than softening their stance on Ukraine. It’s also meant to reassure citizens of allied countries that are facing rapidly increasing prices at the pump that all available measures are being taken to minimize the impact. Currently AAA figures have gas prices in the US averaging $3.62 today, up 9 cents this week and 24 this month, and without a reversal on the markets and an end to the Russia-Ukraine war, that’s not likely to change.

Other measures being taken on the Energy Market side of things have included talks with the Saudis about supply adjustments to backfill any potential shortfalls. It’s unclear that such a jump in production for stability of the markets would be in the cards, however. The thought seems to be that assistance from OPEC/Saudi countries to offset disruption would mostly be necessary should Russia choose to restrict supply or short commitments in an attempt to manipulate the situation. As of right now, they have not given any indication that would be their next move, but as sanctions begin to take severe effect on the Russian economy, essentially anything is possible.

Sanctions and specific company withdrawals from Russia seem to be having impact already on some fronts. Maersk, the worlds largest shipping firm, has halted service to and from Russia, and countries like Britain are not accepting Russian ships at their ports. Major oil companies, including BP and Shell are exiting Russian operations, and TotalEnergies announced a halt to any further capital investment in Russian projects. The Ruble (Russian currency) is tanking after SWIFT banking sanctions took effect and it is currently valued at less than a penny in American dollars.

Long story longer, the situation is very much ongoing, escalating, and uncertain on the ground in Russia, and it remains anyone’s guess how the real world impacts and the market impacts will shake out.

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!

Lots of interconnected events in Energy News this past week or so – we’ll run through and touch on some of the major items and attempt to keep it (relatively) brief.

Here we go:

US Crude Oil prices hit $80 Monday for the first time in 7 years, largely on the basis of surging demand and simultaneous supply issues for power & gas globally, particularly in China, India and Europe.

Last week we saw Natural Gas hit historic highs of $185 per mwh on the supply crunch, although prices have backed off highs this week upon the announcement from Russia’s Vladimir Putin that Gazprom would increase output to Europe to help ease their supply woes.

Speaking of Putin, he went on record Wednesday that he believes Oil could reach the $100/bbl mark (again). OPEC+ (which includes Russia) has been resistant to calls to up their production increases, choosing instead to stick with the previously agreed upon increases.

The Biden Administration has reportedly been relaying their concerns about rising energy costs to unnamed OPEC+ senior officials, and more publicly has called on oil producing nations to “do more” to up supply in order to ease price increases and global supply issues. So far they have not been successful, largely because longer term economic and demand growth numbers don’t look exceptionally promising, so OPEC+ member nations are unwilling to jump up supply to ease pricing when the longer term demand required to keep pricing reasonably benchmarked does not appear to be there.

Additionally, Reuters is reporting  this afternoon that the White House has been speaking with domestic producers about helping to bring down costs. It’s unclear exactly what they are hoping for on that front, or what may have been discussed specifically.

Gasoline in the US is at a 7 year high (averaging $3.29) and the EIA Short Term Energy Outlook reporting this morning indicated that consumers can also expect to pay substantially more for energy this winter

(you can read that report here: https://www.eia.gov/outlooks/steo/report/WinterFuels.php)

Domestic output has not rebounded to pre pandemic levels, and is well off from 2019 highs. In addition, the surge in natural gas pricing means dual fueled power generation systems are likely to be looking at diesel to offset some of the cost this winter. This is what helped dampen prices on Crude & Diesel today somewhat – Crude demand will exceed earlier expectations if power generation does in fact move toward a more diesel heavy mix than we see in a typical winter…. Theoretically.

One of the factors we will need to see play out however, is that increased diesel demand is all well and good, but the ongoing (and apparently worsening) labor issues in the United States may complicate that option. The driver shortage is impacting delivery times and logistics across the country, nowhere is that more clear than the ports. The Biden Administration just announced the Port in Los Angeles will run 24/7 in order to attempt to catch up with backlogged demand and offload stranded container ships. The problem however, is these are backlogged in the first place because of labor & driver shortages, so it isn’t clear how effectively 24 hour runs will solve the backlog. The news is warning of transportation issues already ahead of the holiday shopping season rush, so the lingering question becomes how well will transportation companies and fleets be able to pivot and meet demands with the pressure of labor shortages on their backs, if in fact they continue. 

At the end of the day, lots of news directly or indirectly impacting the energy markets the last few weeks, most of it less than optimistic. However, its worth remembering that we’ve seen supply crunches, or demand outlook changes, or OPEC pivots, or US Presidents’ remarks rile up the markets and send the news analysts into a tailspin, only to resolve themselves in the short term a million times. As always, it ain’t over til it’s over, and we will have to see the longer-term implications of the multiple competing factors currently at play.

Stay Tuned!

Ramped up COVID cases and a stronger dollar pushed oil prices down today - intraday prices had Crude down to 3 month lows (off 4%) . Refined products tanked as well, lunchtime saw ULSD off almost 7 cents (.0674) and RBOB off .0868 on front month trading. 

At the close, the losses pared somewhat with ULSD settling at 1.9690 (-.0522) and RBOB at 2.0815 (-.0662) for September contract. (ULSD 1.9714 and RBOB 1.9525 for OCT). WTI Crude settled out at 63.69/bbl.

As discussed previously, the uptick in COVID cases has been making traders (and the rest of us!) nervous, particularly as it relates to economic growth and demand slippage.  Goldman Sachs has revised projections for third quarter GDP down in anticipation of Delta variant induced economic slowing. 

In addition, although demand outlooks are lower, it looks extremely unlikely that OPEC+ will walk back their recent production increases, as despite prices slipping, they are still at a profitable level for member nations (at least for the time being). 

The paring of losses we saw on the screen as the afternoon wore on were largely the result of the US Dollar strengthening. Somewhat ironically, the dollar is strengthening largely because of indications from the Fed that stimulus measures put in place to mitigate COVID impacts will be phasing out over the coming year. 

So on one side, the dollar is stronger on phasing out COVID measures and on the other, demand outlook is weaker on the back of rising COVID cases, and both of those factors are dropping prices. Riddle me that. 

The other wildcard in play generally with the markets is the ongoing situation in Afghanistan, where the Taliban have (re)seized control of the nation. It is unclear for the moment what the longer term impacts will be both on the region and internationally. That is true both in terms of the markets and how the international handling of the humanitarian crisis unfolding develops . We will keep an eye on that developing situation. 

Stay tuned!