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High Prices are the Cure for High Prices?

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

ULSD MAy 6

 

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News & Fundamentals Reverse ULSD Slide

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.

4.14 ULSD

 

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Russian Strikes in Ukraine Push Prices to Multiyear Highs

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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.

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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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Spiking Prices & Labor Shortages Complicate Energy Outlook

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!

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Uptick in COVID Cases & Strengthening Dollar Push Prices Down

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.

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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!

 

 

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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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OPEC+ Production Reversal signals Economic Optimism, Props Prices

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Last month, the OPEC+ decision to stay the course on previously announced production cuts pushed the market up. Yesterday, the OPEC+ decision to reverse course and bring more supply online over the next 3 months (May, June, July) resulted in....surprise! The market going up! 

The announcement on the OPEC+ production level change came initially around noon - normally we would see an immediate drop on the screens in the event of a production increase announcement.

So why not yesterday?

It seems the sentiment is that the sudden reversal is a strong vote of confidence for global economic recovery and a resulting surge in demand, and that confidence, along with some hopeful signs of demand upticks (resuming air travel, refinery utilization increases, import resurgence) is supporting higher price levels. 

This morning, the first jobs report published under new Labor Secretary (Boston's own!) Marty Walsh showed a surprising uptick in jobs. Non farm payrolls shot up 916,000 jobs (analysts had predicted 675K), and the unemployment rate dropped to 6% (last April the unemployment rate was 14.7%).

The markets were closed today in observance of Good Friday so we were not able to see the reports full impact, outside of some upticks in bonds, but it would seem to support the optimistic stance taken by OPEC+ regarding economic recovery. Major economic indicators are still up in the air however, and while countries are making progress with vaccinations and easing of restrictions, we are certainly not "past" COVID as of yet, so optimism should likely be tempered with some caution. 

In terms of the numbers, yesterday Crude closed out at $61.45/bbl - surprisingly tight to the close on the last day of trading in February despite March's volatility (last day of Feb trading Crude settled $61.50). April 1 close for ULSD on front month trading was $1.8316 (+.0618) and gasoline was $2.0223 (+.0626). 

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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