Energy And Equity Markets Are Celebrating Signs Of Slowing Inflation With A Big Price Rally

Energy and equity markets are celebrating signs of slowing inflation with a big price rally, which in the case of refined products, will likely end the streak of declining retail prices, aka start increasing inflation again. Refined products are making a strong case that the summer price floor is in, with RBOB futures up 37 cents since Friday’s lows, and ULSD futures up 34 cents since bottoming out Monday. Now that we have at least a temporary floor in prices the question becomes whether the bulls will make another run, or if we’ll be stuck in a sideways price purgatory pattern for the coming weeks?

For RBOB , the next test looks to be the August high at $3.14, and if that breaks, a run to $3.36 looks likely as trading programs will look to fill the chart gap left behind by the ridiculously severe backwardation from the August to September contracts. Speaking of which, this rally may well be the last big move for RBOB prices of the year (unless there’s a hurricane) as we will transition to winter grade specs in just over a month.

For ULSD, the low $3.50s mark a good short term pivot point, and have already repelled one rally attempt overnight. If buyers can breach that level, a run back to $3.80 looks likely before month end.

Yesterday’s DOE status report showed that import/export flows continue to have major influences on US fuel stockpiles. Gasoline exports surged to their highest level since 2018 last week, and gasoline imports declined again, pushing total gasoline stocks sharply lower on the week, and stocks along the East Coast (PADD 1) to an 8 year low. Those extremely low inventory levels have helped push NY Harbor gasoline basis levels back to 50 cent premiums over their USGC counterparts, and sent the price for leasing space on Colonial to a new 8 year high. 

Diesel and crude oil inventories meanwhile both saw healthy builds as exports slowed last week from the record setting pace we’ve seen earlier in the summer. Don’t expect that trend to last, particularly for distillates, as we head into the busier demand times of the year with the fall harvest and winter heating seasons.

Gasoline saw a strong recovery in its weekly demand estimate, after last week showed figures lower than the COVID summer of 2020, but US consumption remains below last year’s levels and the 5-year seasonal average. Refinery runs did increase in all 5 PADDs, with the East Coast seeing the highest run rates since the PES refinery blew up in 2019 after PBF restarted a unit at its Paulsboro NJ facility that had been shut down due to weak economics following the pandemic.

OPEC revised its global economic and oil demand outlooks in its monthly report released this morning, citing the slowdown in Q2 GDP that we won’t call a recession. The report held supply forecasts steady, and noted that a lack of liquidity in energy commodities is adding to the price volatility we’re experiencing. The cartel’s output increased by 216mb/day in July, led by increases in Saudi Arabia, UAE and Kuwait, which were partially offset by declines in Venezuela, Libya and Iran.

A new $5.5 billion greenfield refinery project is being proposed in Texas, which would be the first new large refinery built in the US in nearly 50 years should it move beyond a pipe dream. The pitchers of the plan claim the new facility would reduce carbon emissions by 95% compared to traditional refineries, and would begin operations as soon as 2025 IF the project can clear the same major financing and permitting hurdles that have doomed every other new refinery project proposed in the past half century. 

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