The API Reported Oil Stocks Up Just Under 2 Million Barrels

After a healthy 2 day rally to start the week, energy markets are ticking modestly lower Wednesday as traders await the weekly inventory report and the first FOMC rate cut in 4 years.

The October RBOB contract managed to settle above the $2 mark Tuesday. There’s a nice rounding bottom on the daily RBOB chart that could propel prices up to the $2.20 range and fill the gap left behind by the RVP transition if prices can hold above $2 this week.

The technical outlook isn’t as optimistic for ULSD prices, despite a 10 cent rally off of their 33 month lows last week. So far the bounce looks more like a consolidation pattern that’s more of a pause on the way even lower, and we’ll need to see a bounce back above the $2.20 range to break the bearish trend on weekly charts. One sign of optimism for diesel bulls is that so much speculative money has already been placed on short bets, there may not be much more available to keep pushing prices lower, and if the recovery rally does get above the $2.20 mark, short covering by those funds may force an even faster rally.

CARBOB basis values continued their slide in both the LA and San Francisco markets Tuesday. Meanwhile, PBF reported its 8th unplanned flaring episode of the past 10 days at its Torrance CA refinery to the AQMD overnight, citing another “mechanical/electrical malfunction”. No word on what the reporting limit is before those events can no longer be considered “unplanned” but the local market also doesn’t seem to care much as basis values have declined over that time. The lone holdout on elevated basis values in the region is San Francisco diesel, with CARB #2 values still holding more than 45 cents above ULSD futures, and the neighboring LA spot market. Speaking of San Francisco, the 49ers are reportedly the first NFL franchise to purchase SAF, with a report this morning highlighting the team’s purchase to cover their travel to LA this weekend. Perhaps paying more for fuel will help the team forget about their loss to the Vikings last weekend, but probably isn’t enough to erase the past couple of Superbowl defeats.

According to the CME’s Fedwatch tool, 1 week ago, 86% of bets on Fed Fund futures expected just a 25 point cut at today’s meeting, and today only 37% are betting that way while 63% now expect a 50 point reduction. What that big swing in bets really means is nobody knows, which sets the stage for volatile trade this afternoon and tomorrow as the market digests the new reality. Perhaps more important than today’s 25 point debate will be the outlook for future rate cuts as currently 90% of bettors expect a 100-150 points in cuts by the December meeting and any signals that the rate may be slower is likely to induce another market tantrum.

The API reported inventory builds across the board yesterday with oil stocks up just under 2 million barrels, while gasoline and diesel stocks were both up around 2.3 million barrels on the week. The DOE’s weekly report is due out at its normal time today, but only minimal impact from Hurricane Francine is expected in today’s numbers as the data reported was as of Friday, which was barely more than a day after landfall. Based on reports this week of oil production and refining assets quickly resuming operations, the impact on oil and refinery output should be not much more than a brief dip on the charts.

There’s a potential storm system in the Caribbean that the NHC gives 20% odds of developing by next week, which has a good chance of getting into the Gulf of Mexico if it does form. Keep in mind that Hurricane Francine was also given just 20% odds of developing early on.