Energy Market Updates

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Northeasts' Diesel Supply Crunch Keeps Price Pressure Up

There is a fair amount of news on the lack of diesel available in the northeast, and it is actually true. Last week’s DOE report showed that PADD 1 (East Coast) had 95mbls of diesel, that is down from 123mbls last year and 142mbls from 2 years ago. 

The question is why? 

There are primarily three main roots to the current situation.  First, the East Coast has only about 7 refineries operating now, with a capacity of just over 800,000 bpd.  That is about half from what it was 12 years ago.  Most have closed due to lack of margins and increasingly more difficult EPA standards to meet and the costs associated with those updates.  This means product must come from the Gulf coast via the Colonial pipeline or barged in. 

Secondly, with the steep backwardation in the market, many traders were not willing to take the chance on sending product into the Northeast. Rather, they are taking the sure bet by shipping distillates to Europe. 

Finally, Europe’s diesel based economy is seeing astronomical pricing for the much needed product.   With about 10% of their typical supply coming from Russia, the ongoing conflict in the Ukraine is pushing pricing for distillate barrels to record highs. 

Again, we know refiners are putting out as much distillates as they can right now.  There will be some trying to capitalize on the current high prices and once those barrels hit, we should see some price easing.  It is just a matter of when.

 

5-16 ulsd

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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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Wild Intraday Swings on ULSD

The last three sessions have seen .4373 get peeled off the ULSD front month contract, with massive intraday swings.  Yesterday at the open, APR22 ULSD fell almost .25 before rallying back to finish down only .0673. 

The big drop on Monday was attributed to China locking down Shanghai amid new outbreaks for a minimum of four days thus putting demand fears into the market.  Tuesday saw traders take into account that there appeared to be progress in peace talks amongst Ukrainian and Russian delegates, but that subsided as the day went on.  This morning that sentiment furthered as it appeared there was nothing to report on the situation other than both sides would agree to meet again.  It is clear that many sanctions that have been put in place, may have a longer stay even if there is a withdrawal.

Pricing is wild right now, cash markets are making it even more challenging. 

The Chart below doesn’t do much other than confirm Warren Buffett’s take “that if you flip it over, it says the same thing.” 

With Demand appearing to take a hit in this week’s DOE report, and subsequently Inventory rising, products have come off there morning highs by about .15 and are only up about .04 at present.  On a positive note, most OPEC nations have come out and stated the they would not let Politics get in the way of production levels, which may calm supply fears, evident in the .32 backwardation APR to MAY.

ULSD 3.30.22

 

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March Comes in Like a Lion -ULSD See-Saws on Russia, Inventories

March came in like a lion, lets hope it goes out like a lamb…..  

So far this month, front month Diesel shot up over $1.80 to peak just above $4.60, then proceeded to fall $1.60 to just under $3.00 and now has risen back over $1.00 to be currently trading just north of $4.00.  What’s even more wild are the intraday swings.  Believe it or not, yesterday morning we were actually negative for a bit earlier in the session before finishing up over .25 on the day.  Today is opposite thus far, being up almost .10 early on, and now trading down .04. 

Obviously the Russian invasion is still the main catalyst for the rise, as fears linger that the US does not have a quick enough reaction time, or a plan in place to domestically produce more should this conflict linger.  Unfortunately, politics are weighing in on some rational decisions.  Many sanctions put in place have special caveats carving out energy like todays joint action from the European Union to date has carved out sanctions exemptions to allow continued imports of natural gas and oil from Russia, given the difficulty and expense of quickly finding alternative supplies “  Yesterdays big rise was after the weekly inventory report that showed large draws in all products, again not fundamentally tied to any Russian sourced product, just the fear of our inability to react. 

I am asked 50 times a day, What is going to happen? I honestly wish I knew, but what I can say that from a business perspective is that you need to be nimble and able to pivot. While I doubt this is going to be the new normal and will likely short lived, the effects of these records prices are going to linger for some time.

Market Screen 3.24.22

 

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No, You're Reading that Right: ULSD Futures up .80 in 5 Sessions on Ukraine

What you are seeing on your nightly pricing is real, unfortunately.  ULSD futures have risen over .80 in just 5 sessions.  Since late November 2021, when the concern of the latest Covid Variant were announced, the pit has risen over $1.65. 

As we all know that leading driver is the uncertainty surrounding the Russian- Ukrainian ordeal.  Financial Sanctions on Russian assets, banning imports, along with OPEC+ group not willing to increase production has attributed to the fear spike in the markets. 

There is a bright side. 

Front Month ULSD is presently trading at the $3.60 level… however, if you look at the outer months, such as JUL & AUG, they are in the $3.00 range.  This is a .60 backwardation in the market.  In all my years, which has seen Hurricanes, Wars, Attacks on US Soil, I have never seen this large of a backwardation.  As we all know, there is typically a “carry” in the markets where outer months are typically higher.  This is a very good indication that we are in a short term situation.  Its just a matter of getting through this.  I am sure we are sick of the phrase “WHEN THIS IS OVER”! but....

Below you can see the live market chart along with last nights settle highlighting the backwardation.

apr 2022 candlestickapr 2022 price chart

 

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Russian Strikes in Ukraine Push Prices to Multiyear Highs

shutterstock_2125123799

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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Energy Markets Spike on Escalation in Ukraine

shutterstock_1009265824Oil prices closed up over 3% today, shooting up again on both continuing supply issues, and escalating tension at the Russia/Ukraine border.

This week we saw Russia reject NATO & US offered compromise measures aimed at deescalating the situation. Subsequently, it was announced that extremely strict sanctions would be imposed by NATO allies should Russia use the troops they continue to ramp up at the border to make an actual physical strike on Ukraine.

Sanctions mentioned included both bans on financial transactions, and potential closing of the newly constructed Natural Gas pipeline to Germany. (As we saw when the prior Russia/Ukraine issues occurred in 2014, the implementation of sanctions can ultimately end up its own conflict down the line, but that’s another story for another day).

Putin Administration officials continue to insist that Russia has no intention of striking Ukraine, while simultaneously increasing troop presence across multiple possible fronts. Thus –anxiety is building.

Trading volumes hit peaks shortly before the closing bell, presumably some of the jump in pricing during that period is Friday afternoon related – no one wants to be short Monday morning should an invasion happen over the weekend that could impact supplies, understandably. However, should an invasion NOT happen this weekend (which is equally likely) we could see modest corrections early next week.

At the close, Brent and WTI Crude both broke the highs we saw Monday (that we hadn’t previously seen since 2014). Brent closed 3.3% higher at $94.44/bbl, and WTI shot up 3.6% to $93.10/bbl. Refined products closed up sharply as well, front month ULSD jumped .0837 to $2.9109, RBOB jumped .0732 to $2.7386. (April trading moved just as sharply, +.0755 on ULSD, +.0812 on RBOB.)

As discussed previously regarding Russia, the risk posed to the overall global supply picture should disruptions occur in their region is hard to overstate. (Refresher on that here: WTI Breaks 90/bbl for first time since 2014)

Definitely a situation to keep an eye on, as it will likely continue to rattle energy markets until some sort of resolution is found. Watch for either a correction or a ramp up in pricing early next week, likely dependent on the developments this weekend.

Stay Tuned!!

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WTI Breaks $90/bbl for First Time Since 2014

shutterstock_1740797837Today saw WTI Crude prices break the $90/barrel threshold for the first time since 2014.

2022 has seen WTI shoot up 20% (despite it still being the first week of February), and that’s in addition to the gain of 50% in value we saw throughout the course of 2021.

So what’s going on?

At the OPEC+ meeting Wednesday, the group announced they would be adding 400K bpd to agreed upon production levels for March, continuing their apparent strategy to slowly bring production back online.

If you recall, in April 2020 OPEC+ pulled around 10 million bpd from production in an effort to “stem the bleeding” as energy markets collapsed due to demand plummeting across the globe in the wake of sudden shutdowns for the coronavirus pandemic.

The initial OPEC+ strategy to slowly bring production back online to keep energy markets balanced appeared wise at the time, but in the wake of global economic struggles and skyrocketing prices, the group has come under enormous pressure and criticism from non-member nations, including the U.S.

Domestically, we have seen prices shoot up over the past several months in the wake of global economic concerns, growing tensions abroad, and changes to the domestic energy policy enacted by the incoming Biden Administration in January 2021.

The feeling in the U.S. is that OPEC+ needs to revise the slow and steady approach given the current circumstances in the energy market. OPEC accounts for 40% of global oil supply, so the consensus outside the group is that reupping production levels would take a lot of the pressure off markets and allow prices to settle.

In 2014, when we saw prices hit these levels before, the United States was in the midst of its fracking & shale production heyday and had become a major price influencer, having overtaken Russia & Saudi Arabia as the largest single oil producing nation. That was an enormous factor in stabilizing prices, and subsequently pushing global prices down. (For a refresher on that, read this: Fuel Marketers News: This Time it is Different )

Currently, moratoriums on drilling and financial and permitting difficulties for existent producers post the COVID price crashes are making the US essentially unable to exert the same control this time around. 

In addition to the already existent demand crunch, growing tensions and war games between Russia and Ukraine are raising fears of additional, and potentially severe, supply disruptions.

Russia (an OPEC+ member) produces approximately 10 million barrels of oil per day, so any disruption of their supply output or pipelines puts a huge portion of Europe at risk for outages, and analysts just don’t see alternative supply being available to cover any Russian shortfalls.

So as always, it ultimately comes down to three things – Supply, Demand, and Politics. And as always, its anyone’s guess how any one of those factors ultimately shakes out.

Stay Tuned!

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Stocks Slide, Energy Rebounds, and MH17 Fallout Intensifies International Standoffs

Line charts depicting the stock market scattered on a table

Continuing fallout over the downed Malaysian jetliner led to increased international tensions today (deja vu?). Russia called US accusations that it supplied the anti aircraft missles responsible "groundless". President Obama insisted that Russian involvement warranted further sanctions by Western nations. And thats what we saw happen this afternoon - Canada issued new sanctions targeting financial and energy related companies (much like the US sanctions from last week) and instituted travel bans on certain individuals. 

Brent was obviously up on the news and continuing tensions that undermine stability in the markets and international relations in general. WTI was up today as well. ULSD closed up a whopping 0.0448 to 2.9157, despite distillate inventories hitting 125.9 million barrels (up 1.64 million barrels) . Gasoline took an unexpected jump as well today - after initially hanging flat to slightly down this morning and closing down 0.0233 yesterday. Inventories have been up on gas, while demand is uncharacteristically low for mid-sumer  (aka mid driving season). In fact, gasoline inventories hit a four week high - but demand hit a 6 week low, and prices still went up. Funny business. 

Additionally, its just breaking this afternoon that Israel has rejected a cease fire proposition brokered by the US, so expect ongoing turmoil there for the time being.

In the broader markets, - stocks slid basically across the board globally, with the exception of the S&P 500 and the Shanghai Index. US Treasury Yields were down and the dollar was up after dissapointing durable goods order numbers - poor numbers on durable goods indicate that there is a lack of capital expenditure still ongoing which is presumably due to a lack of confidence in the stability of the economy.

All in all another busy week with a lot of balls still in the air, and next Friday we can expect the Jobless Report, and the Fed makes a scheduled announcement on their continuing direction next Thursday,,,,, in other words the saga continues! 

Have a great weekend everyone!

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