Most Petroleum Contracts Are Seeing Modest Selling For A 2nd Straight Session As October Trading Winds Down

Most petroleum contracts are seeing modest selling for a 2nd straight session as October trading winds down, with the latest round of COVID lockdowns in China getting much of the credit for the pullback in prices in an otherwise very strong month of oil and refined product prices.

On October 4th we wrote that “IF diesel prices are able to break through that resistance [200 day MA] there’s an argument to be made that a “W” pattern is forming on the charts that could end up meaning prices rally back to $4.50 this winter.” Of course, we were completely wrong in that claim as prompt values surged to a high of $4.68 on Friday, without even waiting for winter to start.  

It’s the last day of October, aka expiration day for the November RBOB and ULSD contracts, which can often bring big price swings and bad jokes about spooky markets on Halloween.  Calendar spreads remain incredibly strong with ULSD set to see a 90 cent decline when futures roll to December and RBOB will see a 40 cent drop from the roll tomorrow. Those price drops won’t translate to the cash markets, most of which have already begun trading off of December and seeing large basis swings to adjust to the wild moves in spreads. The silver lining is that only the NYH spot market is still trading at a premium to November futures, with most other spot markets $1 or more cheaper than prompt values in New York, so most of the country isn’t feeling the pain of this latest price spike.

Once bitten, twice shy: Money managers were bailing out of ULSD contracts last week, reducing long contracts by 10% and adding new shorts, despite that surge in prices, perhaps remembering the huge price drops that followed similar surges last spring. In fact, there have been 5 different $1/gallon or more drops in diesel prices since March, which makes it easier to understand why large speculators are renting the diesel contract rather than owning it. Money managers did make healthy increases to net length (bets on higher prices) in Brent, RBOB and WTI contracts last week, but open interest remains low as extreme volatility appears to be keeping many traders on the sidelines.

There’s about to be a hurricane in the Caribbean, but models keep that storm pointed towards Central America and far from being a threat to the US Gulf Coast refining center.

Baker Hughes reported a drop of 2 oil rigs and 1 natural gas rig actively drilling in the US last week. The Permian basin, which makes up the majority of the US rig count, did see 2 more rigs added, but reaching pre-pandemic levels before year-end looks like a long shot as the rate of growth has stalled for a few months. 

Something to keep an eye on in the coming weeks: If Russia backs out of the Black Sea grain Initiative, grain and oilseed markets may be thrown into chaos once again, which in turn may up the stakes in the feedstock wars between producers of Renewable diesel, Biodiesel, SAF, and those just trying to feed their families.

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