Energy Market Updates

Even though Diesel futures have fallen roughly $.20 in the last two days, we are still almost $.40 higher than the beginning of the month.  Still optimistic that we will considerably lower in the coming weeks, however.  

Demand appears to be the underlying factor that is keeping prices from continuing higher.  Yesterdays Inventory report showed that distillate demand was down 3% over last week and down a whopping 18% over last year.  We have mentioned many times that distillates demand, more precisely diesel demand, is often viewed as the pulse of the US economy.  An 18% drop in anything is a lot…. 

The question remains as to why are we still at such high price levels, relatively speaking.  I would like to say it is simply fear of the unknown, but that should only last so long.  The world seems to be adjusting to curtailed Russian product, and Russia appears to have found other markets just fine.  Granted, we have not seen extremely cold temperatures here or abroad.  However, Kerosene pricing has skyrocketed in the last few days pushing winterized diesel in some areas up almost $2.00 in a week.  Inventories remain low, but again, so is demand and the market backwardation persists. Costs of all other goods appear to be falling, or as some say “just not rising as fast” and unfortunately, it points to the oil markets still having inflation hedge premiums built in to the price.  That will take time to remove and still hope to see futures less than $3 soon. 

The ability to capitalize on the dips for the short term appears to be the prudent approach.  Talk with your Rep about seeing if this makes sense for your business.

Diesel Futures have risen just over $.25 in the last week, for largely the same reason as they tanked the week before.  China is now lifting most Covid restrictions, as traders now see demand picking up on the world basket.  Even though we are still seeing huge weekly swings, the overall temperature of Distillates looks to be cooling off since trading some $.75 higher than presently mid summer (see below). 

Domestically, this week saw distillate demand still strong, which surprised some.  Still might be some residual power plant use feeding those demand numbers. With Crude showing a huge increase in stocks this week, gaining 19 mmbls, one would have guessed it would have set the whole market downward.  We mentioned that cold snaps, storms, and a pipeline reopening might need a week or two to shake out the inventories and traders took that to heart.  Signs of moderating inflation figures have some thinking the doom and gloom of a full blown, long term recession, might be over done and we are in for a “soft landing” or a purposeful slowing down of the economy. 

Futures are currently on the upswing of the curve, but again, the pattern suggests a sharp pull back.  The backwardation in diesel futures is still hanging around, actually widening in the last several sessions, making some suppliers keep a watchful eye on inventories.  As we work into the heart of the winter, don’t be surprised if outages of distillates pop up.  Again, a strong relationship with your supplier will keep your business running. 

In just over two weeks time, front month ULSD is down $1.00, with over $.50 coming in the last two sessions alone. 

It appears that many decided over the long holiday weekend that there is a real concern of a global recession on the horizon.  The economic contraction would ultimately be a demand killer.  Funny thing about recessions is that we are typically in them for a quarter prior to actually labeling it officially.  A recent GDP tracker indicated that the US contracted 2.1% in Q2.  Adding a Citibank forecast posted Tuesday putting WTI Crude trading in the $65 range by years end should a recession take hold.  Currently WTI is just under $100 at $99.41. This along with a surprise build in crude inventories of 3.8mbls pushed all products sharply lower yesterday despite larger than expected draws in both gas and distillates. 

The question remains if the fundamentals in the fuel markets still exist or if this is merely a speculative long position fear sell off.  As we mentioned earlier, domestically, we have the crude.  However, we lack the ability to transport and refine it quickly.  This fear/reality is what was primarily responsible for this years rise.  Shortages were and are real, but they appear to be getting better.  The backwardation prevented many from putting any finished product in tank for fear of overnight value losses.  The backwardation in ULSD still exists but is only about $.05 month to month, at one point it was over .$30. 

The good news bad news appears to be what is coming, we should see lower energy prices and more product available, but other economic indicators will likely suffer.