Energy Markets Reeling On FED and EIA News

Energy markets got hammered Tuesday following comments from the FED president that suggested interest rates may go higher than previously forecast, and a monthly report from the EIA that suggested fuel supplies are going to heal faster than previously expected.

Within a few seconds of Jerome Powell beginning his congressional testimony we saw a harsh reaction in energy futures that moved quickly and sharply lower.  It was interesting to note that equity markets took longer to build up momentum to the downside, and were actually following energy contracts, not leading them. Prior to that testimony, Fed fund futures showed the market split 50/50 on whether rates would go up more than 75 points by July, and today 86% are betting that rates will be increasing by 100 points or more in that time.

The selloff certainly took the wind out of gasoline’s sails after reaching a 4-month high earlier in the day and looking poised to make a run at the $3 mark in March. That said, the slide hasn’t yet changed the technical outlook on the weekly charts, leaving the door open for the spring gasoline rally to continue if RBOB can hold above the $2.60 range. The technical outlook for distillates remains neutral at best and may be reliant on a pull higher from gasoline to avoid another test of support at $2.66, that could lead to a bigger move lower if it fails to hold.

The EIA thinks it figured out why they’ve had more than 2 million barrels/day of crude oil inventory show up in their weekly reports the past few weeks. EIA administrator Joe DeCarolis took to Twitter Friday to awkwardly spell out the reason why their reporting has had so many issues of late in a string of 140-character notes. They said that crude oil blending and under-reported oil output were the two key reasons for the huge builds in inventories, over the past few weeks, even though the other figures suggested we should see inventories decline. 

The blending factor is certainly a real issue, as many refiners have reported that due to the high levels of condensates blended in gathering systems, aka “Hydrocarbon Soup” that “WTI” isn’t WTI anymore, which has created challenges for processing that oil which has more light ends than many plants are configured to handle and makes them more valuable in the export market than at home, particularly when many other countries have less complex facilities and less strict pollution controls.

The report also notes that those condensates are not yet reportable in the EIA’s data, which is why their net effect ends up as an adjustment factor. The tweet storm ended with a note that suggests the agency will soon change their weekly reporting forms to better account for the extra liquid production and blending, with their plans to be laid out on March 22. 

Speaking of data not reported by the EIA, you may wonder why west coast diesel markets have been trading at a discount to futures even though PADD 5 diesel inventories look tight.   Part of the answer, besides the horrible weather to start the year that’s ground trucking and industrial demand to a standstill, is that the EIA does not yet count Renewable diesel inventories in their weekly report, so the rapidly increasing RD simply isn’t showing up in the figures. As RD continues to become more available, it’s likely we’ll see the EIA add this to the weekly figures, either on a standalone basis or as part of the total ULSD pool. We saw a similar phenomenon about 15 years ago as the EIA had to adjust their reporting to account for the steady increase in ethanol blending after congress declared grain alcohol had to be blended into fuel.

Perhaps next week the EIA can tweet why their latest short term energy outlook reduced the forecast for vehicle miles traveled over the next 2 years but increased its estimate for gasoline consumption. The monthly report also forecast that US gasoline inventories will have a counter-seasonal build this spring after refineries return from a heavy maintenance schedule in March. The forecast also says that the demand for US product exports, particularly diesel, will diminish this year as new refinery capacity comes online elsewhere in the world.

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