Equity And Energy Markets Are Moving Sharply Lower To Start Friday's Session

Equity and energy markets are moving sharply lower to start Friday’s session, with ULSD prices now leading the way lower, after pulling the complex higher for most of the week. Yesterday we saw ULSD rebound from a similar early selloff, with the January contract bouncing by 10 cents, and resisting the pull lower as US stocks had their worst day in 3 months.

The rally in calendar spreads for refined products this week would have been something to write about in an average year, but in 2022 they barely register on the charts. A big question as we move through the winter is whether or not the extreme backwardation we lived through is gone, or if weather and other factors will push prompt prices sharply higher once again.

Speaking of which, part of the pullback in distillates today may also be attributed to European natural gas prices dropping after the continent weathered its first big test of the winter season without major issues, reducing the potential need for supplemental heating supplies near term. 

On the subject of overseas energy trading, ICE is threatening to move its gas trading hub outside of Europe if the EU countries force a price cap on natural gas, in part because that attempt may actually push natural gas prices even higher, adding yet another reason for member states to disagree on how to handle their energy supply crunch.

China continues to take advantage of the energy supply chaos, buying discounted Russian crude and increasing export volumes to Europe thanks to refinery runs reaching their highest level of the year in November.  2 new Chinese refineries came online in November which will add more than 500,000 barrels/day of production capacity once they’re fully up to speed.  Compare that to the US where the only major new refinery project slated for the next couple of years will add 250,000 barrels/day, which replaces only about 20% of the capacity lost over the past few years.

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