The Big Bounce Continues For Energy Futures, With ULSD Prices Leading The Charge Again

The big bounce continues for energy futures, with ULSD prices leading the charge again, trading 36 cents above the lows set last Thursday. The rally in RBOB has been less impressive, but gasoline prices are still up more than 20 cents from Monday’s lows, keeping the door open for another push higher. 

The monthly data deluge of monthly and weekly inventory reports that started yesterday is giving the world a harsh reminder that there just is no short term solution available to the energy supply crunch, and the charts continue to favor higher prices now that support held up once again. 

The API reported large declines of around 5 million barrels for both diesel and gasoline stocks yesterday, while crude inventories were estimated to have a large increase of 7.7 million barrels. 

OPEC’s oil production increased by 54mb/day in March, just a fraction of what the cartel was targeting as it continues its return from voluntary production cuts that started during the COVID demand collapse. The supply chain problems that seem to be hitting just about every industry these days, and the reality that oil production isn’t as simple as its often made out to be, seem to be at play here as well, with several countries seeing declines in their production even as they’re trying to increase.  Make no mistake, if these countries were able to cash in on prices north of $100 they would be doing it - as OPEC used to have to work hard to keep these countries from over-producing their agreed-upon quotas in prior years.

The OPEC monthly report also dropped its forecast for both global supply and demand for the balance of the year due to the war in Ukraine. It’s worth noting that despite the reduced supply estimates, non-OPEC oil production is still expected to grow this year, just not by enough to offset the expected loss of Russian supply. The report also highlighted the surge in refining margins caused by the tight diesel (particularly Jet Fuel) markets around the world. See the charts below for more from the OPEC report.

The DOE/EIA’s monthly report also revised its global demand estimates lower as the economic models it uses predict a slow-down in GDP growth as a result of the war, and the high prices for food and energy that are coming along with it. The report predicts that US retail gasoline prices will stay at record highs this summer, but below the levels we saw in 2014 after adjusting for inflation, before declining through 2023. The EIA’s forecast suggests that it will still take another year for US oil producers to reach pre-COVID levels, but that global production increases will be enough to build inventories every quarter through next year, despite the assumed drop in Russian supplies.

You think our inflation is bad? Take a look at the last chart from the EIA’s STEO report below showing international natural gas prices, which are running 7-10 times the prices for natural gas in the US. 

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