Energy Markets Saw A Huge Bounce Off Of Tuesday’s Early Lows

Energy markets saw a huge bounce off of Tuesday’s early lows, as hopes for a de-escalation of the fighting in Ukraine quickly faded and the threats of a recession take a back seat to supply concerns once again.  

After a big move lower that put some contracts near a technical breakdown Tuesday following reports of Russian troops shifting away from Kyiv, some people must have realized that Russia also claimed to have pulled troops back just a few days before invading in February and suddenly those big early losses evaporated heading into the afternoon. 

In addition to the reality that the war in Ukraine is probably a long way from over, European countries made their next moves in their chess match over Russian energy supplies. Poland said it was working to end Russian oil imports by the end of the year, while Germany warned consumers to conserve energy as it may be cut off after refusing to pay for its natural gas supply in rubles.

It’s not just futures markets that are seeing more big swings this week, basis markets around the country are seeing large moves as traders react to rapidly evolving supply realities, refinery upsets and huge swings in calendar spreads. The West Coast continues to see the most dramatic moves, with gasoline differentials completing plummeting 80 cents or more over the past 2 weeks, after rallying 90 cents to start the month.   

The API reported inventory draws across the board again yesterday, with crude oil stocks estimated to drop by 3 million barrels, gasoline down 1.3 million and diesel stocks down 215k for the week.  The DOE’s weekly report is due out at its normal time this morning. Crude output and refinery runs should be watched in today’s report to see if the uptick in drilling activity over recent weeks shows up in increased production – which has been stubbornly stagnant so far in 2022 – while refinery runs will be tested as plants ramp up to meet increasing demand after the big drop in capacity over the past 2 years.  

Speaking of which:  A report Tuesday suggested that after a brief dip due to Omicron, US road traffic volumes have recovered to pre-pandemic levels, just in time for the global supply crunch. The report does estimate that record high retail prices may curb demand this summer, but unless job growth slows, there should still be more increases in demand as we enter the driving season.

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