Most Energy Contracts Are Seeing Modest Gains To Start Thursday’s Session

Most energy contracts are seeing modest gains to start Thursday’s session after the FED and fundamentals both gave a big boost to buyers Wednesday. 

The only contract moving into the red this morning is June HO which is seeing its premium to outer months come back to something resembling sanity, while the majority of the complex moves higher.

While the FOMC announcement sent stocks on one of their biggest daily rallies on record, energy contracts were already staging a strong rally as the weekly inventory reports from the API and DOE remind buyers that there are no short term solutions to the supply crunch. 

A surge in gasoline imports helped PADD 1 inventories tick higher after reaching a multi-year low last week, while the rest of the US saw healthy declines. Diesel does not have the luxury of international length coming to the rescue, pushing total US inventories to a fresh 8 year low, while PADD 1 stocks fell to a new record low. The arbitrage window from just about anywhere in the US to the East Coast is wide open for those with a truck, train or boat, the people to drive them and the nerves to ship into a market that’s trading $1.30/gallon lower in September than it is today.  

The PADD 1 refiners that survived several bleak years are being rewarded for their perseverance with diesel margins that are being measured in dollars per gallon instead of dollars per barrel, and have increased run rates to their highest level since the start of the pandemic as a result. While other refiners have discussed delaying maintenance this summer to continue operating in this rare margin environment, run rates in each of the other 4 PADDs declined on the week which certainly isn’t helping the tight supply situations in most markets.

As expected, the FOMC announced a 50 point rate increase Wednesday, the first increase of that size in almost 22 years. What surprised just about everyone however was that the FED chair took the idea of a 75 point hike at the upcoming meetings off the table, which sparked a huge rally in equities that seemed to spill over into energy contracts as well. The CME’s Fedwatch tool shows that essentially no one is betting on a Fed Funds rate of 1.75% or higher in July, whereas yesterday before the announcement, 99% of the wagers were at or above that level.

While the FED probably can’t do anything to flatten the front end of the backwardated diesel curve, it is likely that the rally in equities could encourage more buying in the forward months for crude oil and diesel as a slower pace of interest rate hikes seems to reduce the likelihood of a recession.

Meanwhile, don’t expect politicians to sit back and not pretend to do nothing about high fuel prices in an election year. Congress is taking another run at making OPEC illegal as the mid-terms draw near. Read here to see what it would take to actually make this a law after numerous failed attempts in previous decades, and what the risks are if it happens.

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