US Stock Markets Saw Their Biggest Daily Reversal In Almost 2 Years Thursday

US stock markets saw their biggest daily reversal in almost 2 years Thursday, turning heavy early losses into huge gains. Those swings trickled over into energy markets, adding to the volatility we’ve already become accustomed to in October.

While the swings in futures so far in October have been impressive, the moves in basis values have been epic. After witnessing a $2/gallon collapse in West Coast gasoline values last week, we’ve saw some historic moves in diesel Thursday.

Pretty much everyone that watches West Coast spot markets knew that LA CARB diesel was in for a big drop Thursday, after the other diesel contracts in the region had dropped sharply earlier in the week, but pricing agencies left the CARB diesel unchanged due to a lack of trading activity.  While everyone knew a big drop was coming, it’s safe to say that pretty much nobody expected those values to drop more than 78 cents in a day, from +5300 to -2500, which marks a record single day decline for distillates. Ironically, this move happened on the same day that the DOE reported West Coast diesel stocks reached a 3 year low.

We’ve seen bigger drops in gasoline basis in a single day (just last week actually), but I don’t know that any US cash market has ever seen such a swing from a big positive number (which implies very tight supplies) to a big negative (which usually accompanies a glut of product) in just one session. Of course the extreme moves in the ULSD calendar spreads are heavily influencing the daily basis swings, as -2500 vs November futures is the equivalent +1500 vs December futures, and that’s historically a strong basis value for this time of year on the West Coast.

In the other corner of the country, and side of the extreme moves, NY Harbor basis values continued their runaway rally, adding another 25 cents Thursday to now trade 75 cents over November Futures, also known as $1/gallon more than LA CARB diesel , after trading a penny below its West Coast counterpart just 1 day prior.  That 75 cent premium is the 2nd highest level recorded for NYH ULSD, and could certainly threaten the record north of $1.22 that was set during the chaotic spring trading after the war in Ukraine broke out.  The spread between ULSD values today in New York and at year end is approaching $1.30/gallon. 

November ULSD futures came within 5 points of reaching their August high of $4.1154 Thursday, before pulling back slightly ahead of the close, and moving lower overnight. That move is close enough to complete the “W” pattern on the daily charts and may set up a period of sideways trading as traders consolidate positions. That $4.11 level is looking pivotal for the back half of October as a break there leaves room on the charts for a run to $4.50, while a failure will make this look like a short term double top that could push prices sharply lower.  Given the chaos in cash markets, expect some more fireworks over the next 2 weeks. 

Notes from the DOE’s weekly status report: 

US Crude stocks climbed on the week, and nearly reached the 5 year seasonal average for the first time in 18 months. That said, the increase was once again primarily driven by the ongoing release of barrels from the SPR, which are totally more than 7 million barrels every week.  US oil production dipped for the 2nd time in 3 weeks and is holding at levels we saw 6 months ago.

Diesel stocks in the US dropped once again, and touched 24.2 days of supply based on the DOE’s demand estimate, which marks the lowest level in the 20+ years of data available.  US production of diesel is holding at nearly 1.5 million barrels/day more than the country consumes but record exports are continuing to cause traders to need to pay up to keep barrels at home.

Gasoline demand estimates from the DOE dropped by 1.2 million barrels/day last week, from the top end of the seasonal range, to below the levels we saw this time in 2020. That number is a good reminder of how challenging it is to reliably calculate demand on a short term basis, and that the driving season has officially closed and consumption typically creeps lower for the next 3 months.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.