Energy Futures Are Back On The Move Higher To Start The Week
Energy futures are back on the move higher to start the week, after ending on a softer note Friday in what appeared to be a round of profit taking after a strong rally. The charts continue to point higher, although another big pullback is likely along the way as several short term indicators remain in overbought territory. The saber rattling on either side or Ukraine, volatile stock markets, the backside of the Omicron hill, and another attack on the UAE are all making headlines to start the week, and could each take their turn getting credit for whatever move the market takes that day. It does seem that a major selloff will be challenging until the Ukraine situation clarifies in one form or another, and as long as that’s lingering a spike to $100 for oil and $3 for products cannot be ruled out.
The East Coast is digging out from the weekend storm that dumped 2 feet of snow in places, but terminal disruptions appear to have been minimal and power outages not as widespread as feared. For those that can’t get enough of these events, you’re in luck as another major storm is set to sweep across the US in the back half of the week, which may bring the first big snow and ice event back to Texas since last year’s Polar Plunge crippled the state.
It’s the last trading day for February RBOB and HO futures, so make sure you’re looking to the March RBH/HOH contracts for direction if your market hasn’t already shifted. The Feb ULSD (HO) contract has been particularly volatile lately, rallying 26 cents last week, then dropping by a dime from its high on Friday, before moving higher again today. With just a few hours left for that contract, don’t be surprised if there are more fireworks today.
Money managers looked like they were taking some profits off the table in Crude oil and gasoline contracts last week, reducing their net length slightly as of last Tuesday after weeks of increases. The large speculative trade category continued to add length in diesel however, with both ULSD and Gasoil contracts seeing new longs added during the week, and ULSD saw a fair amount of short covering, which may help explain part of the recent spike in prices.
Baker Hughes reported 4 more oil rigs were put to work last week in the US, resuming the steady increase after last week saw the first net decline in 3 months. The Permian basin, which accounts for more than half of the total US rig count, has held flat on its total count of 293 rigs for the past month, even as the EIA predicts that the basin will set new production records this year as efficiency gains are expected to help offset the headwinds of a tight labor market and the supply-chain bottlenecks most people are tired of hearing about by now.
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The Recovery Rally In Energy Markets Continues For A 3rd Day
The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.
Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.
Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.
Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.
The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.
So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.
The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.
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Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday
Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.
RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.
The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.
PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.
Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.
Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.
Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.
California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.