Big Swings Overnight Driven By Compromise News

It looks like a quiet morning for energy futures that are holding near break-even for the day, and still hovering close to 6 year highs. Don’t be fooled into thinking the market isn’t still volatile however, as the current values don’t show that refined products dropped 4 cents overnight (wiping out Monday’s 3-4 cent gains) only to bounce back violently to erase those losses in a span of just about 20 minutes shortly after 6 a.m. central. For now, the charts continue to favor higher prices with the 8-month-old bull trend intact, but we’ll need to see last week’s highs taken out before month end or there’s a good chance that a big correction lower will come soon.

The big swings overnight appear to be driven by news that Saudi Arabia and the UAE have reached a compromise, which should eventually bring more oil to market. The eventually piece may be what encouraged buyers to step back in so quickly as the new output – IF the deal is confirmed - isn’t likely to come online for several more months.

As has become the pattern of late, the API reported another large draw in oil inventories last week at 4 million barrels. Gasoline stocks were also estimated to be lower, by 1.5 million barrels, but distillates increased by nearly 4 million barrels, which helps explain ULSD futures seeing the most downward pressure overnight. The EIA’s weekly report is due out at its normal time this morning. Last week’s report saw an all-time record for the gasoline demand estimate, which coincided with the pre-holiday rush now that most people are back to moving about. There’s evidence on the ground of a substantial holiday hangover with retail volumes dropping last week, but it’s hard to say if that will translate to the official numbers which only measure product removed from the bulk system.  

EIA prophecy? Monday the EIA highlighted its Southern California Daily Energy report, (which is ominously published at eia.gov/special/disruptions/summer/) and then Tuesday a refinery near Los Angeles was reportedly forced to shut most of its units due to a power failure. That news sparked a modest rally in LA spot diesel basis, which had been languishing in negative territory for the past 2 months. So far the moves are relatively minor, just a penny or two, nothing like the wild swings the LA Spot market has been used to in years past, but have gone dormant over the past year. (See chart below)

Caught short: A violent spike in corn prices had RINs rallying early in Tuesday’s session, but quickly gave up those gains when the grain rally proved short lived.  It appears someone may have got caught short on the expiring July corn contract, which were up 80 cents (nearly 12%) at one point before giving up almost all of those gains later in the session, while the forward contracts did not move much at all. Not sure what that means? Think back to when crude went negative last April on the day before the May contract expired…it’s just like that, just less extreme and in reverse.  

More big news in the Carbon markets this week. The EU is set to release 13 policies today aimed at combating climate change this decade. The centerpiece is an expansion of the Emissions Trading Scheme (their word not mine). China meanwhile is launching the world’s largest Emissions-Trading program this week, which sounds impressive but also makes sense because they’re the world’s largest carbon emitter. Not sure what these various programs mean or how they work? You’re not alone, the segmentation in this rapidly expanding and evolving space is creating plenty of confusion, and like we saw in with the Renewable Fuel Standard, will likely attract plenty of fraudsters making up fake credits.

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