Energy Market Updates

Coming off the Monday Holiday, prices surged higher Tuesday as OPEC+ heavyweights Russia and Saudi Arabia confirmed they would extend voluntary production cuts through the end of the year.  Fueling the rise from the Cpt. Obvious department, big banks publish reports to expect $107 Crude if cuts maintain.  Buy the rumor, sell the fact.  Diesel had a nice sell off going, but remember, one day doesn’t reverse the trend.  Wednesdays intraday action erased almost all of the gains only to settle down slightly.  While we still sit almost $1 higher in pricing than the beginning of the Summer, you would have to think better days are to come.  Current JUNE 24 Diesel future pricing is $.45 less than front month October 23. 

For the here and now, we all know $1 a gallon increase cuts into your bottom line significantly, many large airlines have started to float it out there not to expect good earnings due to higher fuel costs.  We can assist you in leveling out those spikes based on your specific needs.  Inventory numbers due out later today, delayed from the holiday, should give short term direction of pricing.  Even if modest drops are reported, I would expect to see the downward trend continue for diesel.  Gasoline is still disjointed from Diesel as it is starting to go into it’s seasonal specification switch which tends to push pricing down.  Timing is important in the fuel world, having an open line of communication with your supplier is vital. 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.

On February 24, 2022 Russia invaded Ukraine thrusting oil markets into one of the most volatile periods in decades, reaching prices never seen before.  At just over a year later, the APR contract is just $.01 off of where we were when this all started.  (see close on 2.24.23 below and chart) .  The circumstances around the recent drop are obviously derived from the recent banking meltdown. 

While it may take a Phd from Harvard to understand the details of what happened to the collapse of two major US banks, the underlying notion remains true no matter what decade we are in.  Fear tends to push markets much more than any fundamental or technical mechanism. 

A year ago, most were fearing that Russian oil flows would cease and cause a worldwide disruption and price spike.  While in some instances it affected physical markets, the fear of it is what drove futures higher.  With large banks dancing on the Moral Hazard line (taking on excess risk with idea of being bailed out if it sours) and paying higher interest rates, it put fear into depositors and prompted massive amounts of withdrawals, a classic bank run.  This is prompting a much larger fear, the fear of Contagion, a Financial Covid, to put it into modern day terms. 

The good news is that the recent collapse presents some buying opportunities!  We stated prior that should we dip below the $2.65 on the front month, Q2 & Q3pricing may look appetizing for a portion of your needs.   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.  Don’t fear, DKB will be here.

We are now a year removed from Russia’s invasion of Ukraine, and like many times in the past, we seemed to have made it through an extremely volatile period.  Since the onset of this “new normal” we have stressed the need to have a strong relationship with your supplier to help navigate the ever changing landscape.  Recall that we said the $2.65 level for the ULSD contract is a key support level, we have now hit that four times and bounced off it (see below) and the market is truly searching for direction with a $.25 range the last few weeks. 

A bevy of news is swaying the daily and intraday moves.  Russian price caps on crude sales, on the surface, appear to working as they continue to find more means of revenue to fund what looks to be a prolonged campaign.  Yesterdays Inventory report, while mixed, showed a staggering 22% increase in Crude exports over last week and almost 50% over last year.  All while adding 1.2mbls to our own inventory.  Many point to China as the main destination with their manufacturing activity exploding last month to levels not seen in over a decade.  Largely due to a catch up period from the removal of the zero tolerance COVID restrictions, the country is in need of any and all barrels. 

In the US, while our manufacturing activity slowed in FEB, it was less than expected and at its highest rate since OCT22, signaling rate hikes are working and brighter days to come.  This pushed markets higher even as Distillate inventories gained 200k bbls last week and demand was down over 14% from last year which is somewhat concerning.    

In what has been a fairly uneventful winter season, the Northeast is now in the midst of a cold snap with another round of snow expected in the coming days.  Winter diesel is still the safe approach as it is still available for the next week or so, be sure to contact your Rep for area specifics. 

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.

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.

Future pricing action continues to be as wild as a Patriots game ending, with the average swing intraday running over $.12 from high to low.  Yesterday’s bump higher in diesel was somewhat expected on the heels of three strong down days and a fair amount of market moving news on tap. 

First, it appears the damaged section of the Keystone Pipeline is fixed and testing runs are scheduled to take place in the next day or so, but full operation is still weeks out.  This is good news for Cushing to start to rebuild lost input in the last week. 

Secondly, a high profile visit to the White House and Congress by Ukrainian President Zelenskyy all but assured continued US backing of the non-NATO country in its efforts to stave off continued Russian advances.  Hard to interpret, as some have the sense now Ukraine can actually prevail in this, while others are viewing this as a very tight rope to walk supplying billions in aid and defense weapons, somewhat cornering Putin. 

Thirdly, Inventories showed a steep drop in crude of 5.9mbl (expected as we said last week the pipeline shutdown would show this week).  Gasoline showed a modest build of 2.5mbl but Diesel dipped for the first time in five weeks with a slight draw of just 300,000 bls.  The key driver yesterday appears to be that distillate demand is still healthy showing a 6.6% increase over last week.  Much of it appears to be attributed to the expected extreme cold taking hold of the middle part of the country and power plants stock up on alternate fuels.  Locally in the Northeast, supplies are getting better but still seeing a lot of just in time ship arrivals and kerosene pricing has eased but still at much higher values than previous years.  Hauling capacity looks to be the next hurdle facing region and should the extreme cold linger, it might get rough for some.  That strong supplier relationship we talk about will get you through the next several weeks. 

From all of us at Dennis K. Burke, Inc.  we wish you a very happy, healthy and safe Holiday season!

The Market giveth and the Market taketh. 

After falling over $.50 last week, front month ULSD has risen almost $.50 this week.  Gains were primarily on the heels of the Keystone pipeline leak that spewed 14,000 bbls (588,000g) of crude into Northeast Kansas late last week, prompting Operator TC Energy to shut down the entire pipeline.  Main note on why this is significant, is that this leg of the pipeline runs to Cushing, Oklahoma which is the primary metric for weekly Inventories.  As of this morning, product has since started to flow but still not through the damaged section which may take weeks to repair. 

Again, the fear buying of future products has pushed ULSD almost to where we were at the beginning of the month.  The spill froze any downside potential in the pits with this week’s builds in inventory yet again.  While Crude showed almost a 10mbl increase, expect that to be erased next week with little to no product flowing into Cushing. Distillates gained roughly 2mbl, still well below the 5 year average.   Oddly, demand still seems robust, specifically for diesel which again is helping to push prices higher. 

We said volatility will remain in the short term as fuel markets continue to search for a comfortable range.  I would have to believe (hope) that it is under the $3 handle for the front month.  The good news is that it appears Kero is relaxing somewhat, making winter operability cost at least palatable, relatively speaking.  Kero has come down by over $1 in the last several sessions. 

The "Price Cap" for Russian crude is somewhat confusing as to the effect or outcome it will ultimately have, as Product is very rarely traded on a fixed number, more often traded on formulas or differentials to a benchmark, so again time will tell if there is any real net impact. 

As the cold weather starts to move in, again we can not stress enough to have conversations with Suppliers on product blends, operability and availability.  Looks like we may be in store for a wild winter.

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.

Volatility continues to have a hold on the diesel market.  In the past week alone, we have dropped over $.30 and subsequently rose $.30 in just four sessions. 

There is always a hurricane premium laid into the market once storms reach the gulf.  Reality is that less than 10% of the Gulf Region Production was pulled offline in the last few days and most are back online at this point.  However, as the storm moves on, your will see a rolling port closure effect as it moves up the close which likely will cause regional increases in the next day or so.  

Inventories showed draws across the board this week with much of the same import- export spreads while some real focus was put on demand figures being stronger.  For diesel much of the increase can be attributed to the fall harvest that typically happens this time of year throughout the country.  Still, it gave traders a reason to buy over the last wo days. 

Concerning news on several “leaks” on the NORAD Stream gas pipeline that feeds much of Europe from Russia, as the issue now appears to deliberate in nature.  This could force shipments of US product overseas for the foreseeable future and keep prices elevated. 

Other bullish tidbits came in the way of Senator Manchin pulling his Fastrack Energy Permit Plan in order to prevent a Government Shutdown.  This was seen as a bright light to many in the Industry a few weeks ago.  Two up days doesn’t necessarily break the trend, but its hard to comprehend when they erase the losses we all were so happy to see.