It’s another sleepy Friday for the market, with crude and refined products moving well below 1% in either direction. After some losses yesterday, crude markets are continuing their gentle descent, giving up 35 cents (-.7%) this morning. Crude prices are currently $50.94.
Diesel markets are rising higher this morning, up 63 points (+.35%) to $1.7830. After losing almost three cents yesterday, the small gains appear to be some light buying. In general, refined products have been performing better than crude today. Gasoline is trading flat, avoiding crude oil’s losses this morning. Gasoline prices are $1.6449, basically unchanged from their closing level yesterday.
Chicago diesel fuel buyers are seeing some of the highest local premiums in two years. Basis, the difference between NYMEX prices and wholesale spot prices in the greater Chicago area have risen to 17 cents, the first time they’ve surpassed a dime since 2015, when prices skyrocketed by 37 cents over national NYMEX prices. Strong fall harvest demand is driving demand higher, while ExxonMobil’s refinery in Joliet, Illinois is undergoing planned maintenance. Those factors combined to cause one of the largest Midwest stock draws in years, sending basis soaring. For consumers who have not hedged their basis risk in the area, strap in for some hefty price premiums for diesel fuel compared to other areas.
In renewables markets, Renewable Identification Numbers (RINs) have soared to two month highs after the EPA announced they were backing down on reforms to the Renewable Fuel Standard. The EPA, led by Scott Pruitt, had announced that they were considering cutting the renewable volume obligation lower for 2017, causing renewable markets to shudder. Yesterday, the organization announced that they would not be reducing the volume requirement, adding confidence for renewables suppliers and causing tax credit prices to soar.
It’s been a bumpy week, with oil markets being shaken by international events as much as fundamental data. Production shutdowns in Kurdistan, which is currently in contention with the Iraqi federal government, have helped boost markets, though some of the risk had already been priced into the market. On the fundamental side, a steep crude stock draw of 5.7 million barrels gave markets a small boost, though the draws were driven by disruptions from Hurricane Nate rather than underlying concerns. OPEC continued signaling that a production cut extension in 2018 is on the table, and many countries have supported the idea.
Crude markets have been up and back down this week, opening today just a penny below Monday’s opening price. Over the past 7 weeks, crude markets have gained $6.50, with this week marking just the second week of falling prices. Of course, before that, prices gave up $5.74 in August and early September. Markets are continuing their seesaw, waiting for a larger market mover to shake it up. Markets opened this morning at $51.42, towards the higher end of the $45-52 range markets have traded in all year.
Unlike crude, diesel prices are down 2 cents this week, opening today at $1.7767 today, though so far the general trend is towards higher prices today. Markets opened the week at $1.7975, just shy of the $1.80 price level they’ve been hovering around. It was just one month ago today that prices surpassed $1.80 for the first time in years, and now it’s become the norm. Many believe diesel prices are about as high as they can go for now, and that a correction may be in order.
Diesel prices often trend 20-40 cents or higher above gasoline prices during the fall as gasoline demand falls and heating oil needs pick up. In 2015 and 2016, that range stayed mainly between 10-20 cents as overall prices plummeted and crude flooded the markets. Now that markets are beginning to sure up, it’s possible that diesel may once again reign supreme. Prices are already at the top of that 20 cent range, and could move even higher as winter heating oil demand takes hold.
Surprisingly, gasoline has gained 2.4 cents this week, extending their gains from the past two weeks. Prices have oscillated significantly over the past few weeks, with prices quickly shooting up and falling back down. With that said, prices are down slightly this morning, as the market has been fairly quiet this morning. While markets have made some gains over the past couple weeks, overall markets are expecting gasoline to remain low this winter as inventories remain sufficient to meet demand.
Oil prices are generally seeking higher ground, responding to yesterday’s EIA inventory report. Crude prices are up $.50 today to $52.64, after trading flat yesterday. Just last week, crude prices peaked above $50 for the first time in months; in the past, prices hitting $50 has triggered selling and traders bidding the market down again. This time prices have held their ground, signaling the bullish sentiment in the market.
Refined products are mixed. Diesel is flat at $1.8471, after trading slightly lower yesterday. As the Market at a Glance chart below shows, diesel prices have broken out and soared higher, gaining over 40 cents since June. The
Gasoline is a bit lower this morning, down roughly a penny from yesterday’s close to $1.6442. Gasoline gave up almost four cents yesterday in response to the EIA’s inventory report, bringing it back down from highs earlier this week. Prices are up from this morning, when prices opened in the $1.63 range.
The EIA released their inventory report yesterday, and markets are finally beginning to respond to the EIA’s report, with stock movements more or less inversely correlated with price. Crude stocks fell 1.8 million barrels (MMbbls), a larger draw than the API predicted and a complete reversal from the market’s expected stock build. Crude stocks have built 15 MMbbls over the past month following Harvey, so the draw is seen as a strong sign of market normalization. Gasoline also proved to be a surprise player, with a 1.1 MMbbl build, compared to an expected stock draw.
On the international front, tensions are escalating in Iraq. After a 93% vote by Kurds in favor of independence, Iraq is moving troops into Kirkuk, one of the contested areas, to take control of oil fields in the area. Turkey continues to support Baghdad, hoping that a decisive response to the referendum will help prevent the movement from spreading to Turkish Kurds. Turkey PM Erdogan has warned that the nation may close off the pipeline that connects the Iraqi Kurd’s oil fields to outside markets. Markets are closely watching to see if the situations devolves into conflict and instability, particularly focusing on how the situation will affect oil production.
Crudes prices are down to $46.58 this morning after significant losses yesterday and continued losses this morning. After some early morning strength yesterday, prices gave up 94 cents (-2.0%) following the EIA’s inventory report. Crude prices have fallen $.20 (-.43%) since closing yesterday as the markets continue to process the news.
Refined products also took a strong beating yesterday and this morning. Diesel prices lost a full 3.06 (-1.9%) cents yesterday, along with a 1.93 cent (-1.23%) loss this morning, totaling a five-cent loss over two days. Gasoline performed slightly better than crude or diesel, but still gave up 2 cents (-1.3%) yesterday and another 2 cents this morning. Building in refined product inventories dragged the market significantly lower yesterday.
On Tuesday, we wrote that fundamentals are becoming worse and worse predictors of price; yesterday’s losses are a good example of this occurring. Crude prices were drawn down by 8.9 MMbbls, the largest draw of the year. Refinery runs were the leading cause of the drop, turning crude into refined products for consumption, explaining the light gains in gasoline and diesel inventories. Markets instead focused on U.S. production, which rose to its highest point since July 2015, and is just 108 kbpd below its peak. Given the EIA’s prediction earlier this week that U.S. production will grow by 117 kbpd in September, it looks like we’re on set new record production levels.
The fact that markets could not muster a rally in response to the large crude draw is surprising. Market participants point to producer hedging (ie, selling to the market) as a leading cause for the market remaining low, as well as net speculative length that is already high. If all the bullish traders have already bought the market, there are few left to help push prices higher. Markets are also being weighed down by the impending release of 14 MMbbls from the Strategic Petroleum Reserve. Additionally, while OPEC committed to cutting exports to the U.S. in August, imports from Saudi Arabia, Kuwait, and Iraq rose by 500 kbpd, a significant increase.