It’s Been A Volatile Week For Energy And Prices As The Fear Trade Continues

It’s been a volatile week for energy and prices as the fear trade continues to manifest itself in various ways as the trio of monthly energy market reports had some mean things to say about demand, and worse to say about supply. 

The November ULSD contract is at it again this morning, rallying more than a dime overnight only to fall 18 cents from those highs and trade sharply lower even before the September CPI report that showed inflation remains stubborn, sending equity markets sharply lower. There was a similar wave of selling in the contract late in Wednesday’s session that knocked the Nov/Dec spread back from a $.3975/gallon high to settle at $.31…only to see the spread rally right back to $.35 this morning. 

While those values are extreme, the premise is simple:  If you have the ability to ship diesel, will it be worth more to you to sell it in Europe – which is desperate for more supply – or the US East Coast, which is becoming so. NYH basis markets continue to try and entice those barrels, reaching a 53 cent/gallon premium to November futures for prompt barrels, creating a spread of nearly 90 cents between now and December.  With those types of price moves in the front half of the month, all bets are off for what prices could do as the November contract approaches expiration, and price swings like we saw back in the spring cannot be ruled out.

The EIA’s monthly report (STEO) had all sorts of bad news, lowering both supply estimates due to OPEC’s announcement and lackluster production in the US, and demand due to large declines in GDP expectations globally next year.  Perhaps worst of all however is that the report called for a colder than average winter and noted how that will translate for much larger heating bills for consumers due to tight natural gas and diesel supplies. 

On the bright side, the report did do a nice job answering the political theatre questions posed by California’s elected appointed chair of the state’s energy commission on why gasoline prices were so high.  See the note below.

The IEA sounded even more distraught in their monthly oil market report, citing “The relentless deterioration of the economy…” for a large reduction in their global demand estimates while calling what we’re experiencing “the worst global energy crisis in history” . The report also had a harsh reminder that Europe’s actual embargoes on Russian supplies haven’t taken full effect yet and the continent still hasn’t found a replacement option for roughly half of that fuel. 

Right on cue: Europe’s largest refinery had a major malfunction overnight, which will only compound the issues stemming the ongoing refinery strikes in France and the race to stock up supplies for winter with options ranging between bad and worse. 

The API reported a large draw in US diesel inventories of more than 4.5 million barrels last week while gasoline stocks increased by 2 million barrels, and crude inventories added 7 million barrels, thanks to another 8 million barrels being released from the SPR.  The DOE/EIA’s weekly report is due out at 10am central. Why the report is delayed 24.5 hours after a federal holiday is as much of a mystery as the latest federal holiday itself.

Tropical Storm Karl is making its course reversal in the Gulf of Mexico and heading away from US oil production and refining assets. While US supply is dodging another bullet, the storm is targeting the recently commissioned, though still not operational, Olmeca refinery near the port of Dos Bocas. While this storm probably won’t get strong enough to do significant damage, it could continue to delay efforts to finish the refinery that is already far behind schedule and billions over budget. 

Federal investigators reported that a corroded pipe was to blame for the explosion and fire that destroyed the PES refinery, way back in 2019 before shutting down refineries went mainstream. 

Click here to download a PDF of today's TACenergy Market Talk.