It’s Another Big Selloff For Energy Prices To Start Wednesday’s Session With Gasoline Futures Already Dropping More Than 20 Cents In The Brief New Year

It’s another big selloff for energy prices to start Wednesday’s session with gasoline futures already dropping more than 20 cents in the brief new year, while distillates are down more than 30. A pair of bearish supply & demand headlines from China, and another round of coast to coast storms sapping demand in what’s already the worst time of year for domestic fuel consumption all seem to be weighing heavily on futures this week.

China raised its export quota for refined products by nearly 50% over year ago levels, which by some estimates could bring an additional 50 million barrels of gasoline and distillates to the global market and go a long way to offsetting the lack of Russian supply to Europe over the next few months.   That quota is a good reminder of how China is one of only a handful of nations with substantial excess refining capacity, and that the world’s largest oil importer continues to see sluggish domestic fuel consumption due to COVID issues. 

Speaking of which, while official estimates are low, mounting evidence suggests that COVID deaths are surging in China, which seems to be contributing to the negative market sentiment as it could have widespread repercussions on both demand and more negative impacts on global supply chains. 

Kuwait’s newly expanded Al Zour refinery is ramping up output and export volumes this week, in what will be a new 600,000 barrel/day operation once startup is completed this year, which is about the same size as the largest US refineries. That expansion, along with those previously mentioned in China are a big reason why the world has more solutions to the global distillate shortage in 2023 than we did in 2022, although the logistical hurdles of getting that product to where it’s needed still remain.

While the fundamental arguments are stacking up in the bearish column so far this week, technically the move is not a big deal so far, with most short term studies still stuck in neutral territory. We’ll need to see the December lows of $2.79 for ULSD and $2.02 for RBOB (which are 20-27 cents below current levels respectively) taken out before we get too excited about this latest sell-off as anything more than a good opportunity for those who have been impatiently waiting to buy the dip.

Several news sources have also blamed a surging US dollar for the drop in energy prices this week, even though the correlation between the USD and WTI has been positive over the past couple of months, which is opposite of the normal “Strong dollar, weak commodity” relationship theory. A similar pattern holds true for the relationship between equity markets and energy prices, which can move in lockstep at times, but in the past few months have been going their own way.  

After more than 4 years, the US Chemical Safety board released its final report on the Superior WI refinery explosion that wiped out that facility. The report places the blame on the former owners Husky Energy, who have an unfortunate record of blowing up refineries recently. The Superior plant is still being rebuilt, while the Toledo facility is working to resume operations, both under the new ownership of Cenovus.

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