Energy Futures Drift Higher Ahead Of Fed Announcement

After two days of large back and forth swings to start the week, energy futures are quietly ticking higher this morning as markets around the world await the FED’s latest announcement later today. Refined products had been bouncing back and forth across the break -even line in the early going but are holding gains of 2-3 cents around 8am central, adding to Tuesday’s recovery rally.   

Gasoline prices remain near the middle of their recent trading range, with a neutral technical outlook after the annual spring “driving season” rally seems to have run its course. ULSD prices meanwhile are creeping towards the top end of the trading range that’s held prices for the past 2 months. If we see prices move above $2.45 that would open door for a run at $2.60 short term, even though longer-term charts suggest this sideways pattern may just be a temporary consolidation of the bear market that’s already seen prices drop by more than $2.50/gallon in the past 9 months.

Just about everyone expects the FOMC to hold rates steady in its announcement due out at 1pm central today. The CME’s FedWatch tool shows a 94% probability that the target rate will be left alone today, a big increase from the 74% odds given prior to yesterday’s CPI report that showed inflation holding in most categories besides fuel prices.  More people are betting on at least 1 more rate increase to combat that less “transitory” inflation, with odds of at least a 25 point increase now set at 40% up from 24% prior to the CPI report.

The API reported inventory builds across the board last week with gasoline stocks up 2 million barrels on the week, diesel up 1.4 million and crude oil up 1 million thanks to another release from the SPR of 1.9 million barrels on the week. The DOE’s weekly report is due out at its normal time, and may be largely shrugged off due to the other news of the day, not to mention that several of the more meaningful data points are admittedly inaccurate.

OPEC’s monthly report showed the cartel making good on earlier promises to cut production, with output for the month down 464,000 barrels/day, despite healthy output increases from Nigeria and Iran, who are exempt from the output cuts. The report highlighted stronger than expected economic activity in the first quarter of 2023, and suggested China’s reopening will continue to keep fuel demand on an upward trajectory, despite signs of slowing in developed nations. The OPEC report also highlighted an increase in refinery runs and decrease in margins as facilities ramp up operations to full run rates after a busy spring maintenance season and Chinese export quotas are expected to continue bringing more supply to the global market. Margins for US operators remain above those in Europe and Asia, although this report does not normalize spreads for the costs of various environmental programs. 

Speaking of which, the EPA announced it was delaying its RFS volume targets – again – on Tuesday. The timing and method of delay are even more suspect than normal (keep in mind we’re already 19 months past the law’s deadline) as the EPA had to convince biofuel trade association Growth Energy to go along with the plan, which seems to imply a favorable outcome for renewable fuel proponents. The RIN market disagreed with that theory however, with a flurry of afternoon trades done after the announcement that pushed 2023 levels down 4 cents from levels done in the morning.

While OPEC thinks China’s economic recovery is continuing, China doesn’t seem to think so as the country prepares to provide new economic stimulus and perhaps cut its interest rates tomorrow, in an effort to prop up stalling growth. 

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