Energy Prices Continue To Fall In May, Money Managers Bet On Lower Prices

Mayday: Energy prices are off to a rough start to the month with refined products losing another 4 cents/gallon in the early going and setting a new 16 month low for ULSD in the process. While the bearish sentiment continues for refined products, equity markets are so far calmly acknowledging the 2nd largest bank failure in US history, which was done in relatively orderly fashion over the weekend. 

Betting on a drop: Many money managers are cheering today’s selling after they added heavily to bets on lower oil and refined product prices last week, pushing the net length held by large speculators in diesel contracts to multi-year lows.

ICE Low Sulphur Gasoil contracts (the European equivalent to ULSD) dropped to a net short position held by large speculators for the first time since 2020. ULSD meanwhile saw net length held by speculators drop to its lowest since January 2021. The main difference between the European and US diesel contracts is that Gasoil has seen a steady increase in Swap Dealer length over the past year, while ULSD has seen that category – which is a proxy for hedgers that access the market through a bank – continue to decline. For those that view the Money Manager positions as a contrary market indicator, the big bearish bets may be seen as a reason that the market may be nearing a floor.

Baker Hughes reported that the US Oil rig count held steady last week, while natural gas rigs increased by 2. The Permian Basin and Gulf of Mexico both saw a tick higher in their rig counts, offsets by declines in the Bakken and Eagle Ford. A Reuters article over the weekend suggests that the recent increase in Gulf of Mexico activity will cause output to reach a new record high in 2025, but some companies are getting more interested in the carbon capture potential for the area than its oil.

California reported another increase in LCFS credit generation in Q4 2022, with the surge in new renewable diesel production, along with new renewable electricity options offsetting declines in ethanol and biodiesel. More Soy and Corn oil were used to produce that renewable diesel than ever before, which is further complicating an already tricky food security dilemma in China. 

The increase in renewable electricity meanwhile may eventually add more pressure to RIN values assuming the EPA’s proposal to allow eRIN generation starting next year.

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