Outlook: Heavy volatility continues in the energy markets with the complex trading in the red this morning. Traders have focused their attention back on China’s negative economic news and a sharp reduction in crude processing rates due to reduced fuel demand. Diesel consumption in China totaled 3.9 million bpd in June, an 11% reduction year-over-year, the largest decrease since 2021. There are two main drivers for the decreased demand; slowing economic activity and the substitution of liquified natural gas for diesel fuel in heavy-duty trucks, which now make up roughly 20% of new truck sales in the country (EIA). I would expect lead month crude prices to bounce between the $75-$80 range in the near term barring any heightened escalation in the Middle East or Ukraine driving more geopolitical risk premium back to the market.
Talks between Canada’s two largest railway companies, Canadian National Railway and Canadian Pacific Kansas City, and the Teamsters Union remain deadlocked. The rail companies say they will start locking out working on August 22 if they cannot reach a labor deal, while the union says it is ready to call a strike for that date. A stoppage would impact the United States as Canada sends around 75% of its exports to the U.S. and networks of the two Canadian rail operators connect with several key U.S. rail hubs in Chicago, New Orleans, Minneapolis, and Memphis (Reuters). The rail strike will directly impact the energy markets, specifically crude, products, and propane. According to TD Cowen, oil sands operators with excess storage have been aggressively stockpiling diesel in anticipation of the strike while refiners in the Alberta region could have diesel temporarily backed up into the Edmonton region, negatively impacting refinery utilization rates. Propane could see the largest impact as Canada exports 132,000 bpd of propane daily, and 76% of that is via rail.
Crude
- Russian fuel oil and vacuum gasoil seaborne exports rose 7% last month from June to 4.05 million metric tons, boosted by completion of seasonal maintenance. (Reuters)
- Russia’s offline primary oil refining capacity for July at 2.5 million tons was 44% below June levels. (Reuters)
- India state refiners diesel sales declined by 15% month-over-month in the first half of August, after sales slumped over 9% in July due to slow construction during a heavy monsoon season. (Reuters)
- Open interest in Brent fell to 2.3 million lots this week, the lowest level since May.
- Odds of a 25 bps rate cut at the September Fed meeting now sit at 66%, with odds of a 50 bps cut at 33%.
- As of 9:15 am CST: Brent crude oil down $1.35 to $79.69, US dollar index down $0.243 to 102.565 while the nearby e-mini S&P 500 futures contract is down 4.00 at 5563.50.
Diesel
- Diesel futures are trading below all major moving averages and are currently being capped by the 9-day moving average.
- Diesel futures in contango through the January contract and 12-month calendar spread is backwardated only one cent.
- Four-week average distillate exports at the highest level since October 2022. (Chart below)
Gasoline
- Gasoline futures trading below all major moving averages.
- Gasoline futures remain backwardated over 12 cents for the 12-month calendar spread.
- October gasoline contract currently trading at 17 cent discount to September due to winter blend change.
Propane
- Conway is trading at .7300 while Belvieu is trading at .7600.
- Conway Swap Oct24-Mar25 strip indicative midpoint ~.7816.
- Conway propane is trading at 40% to WTI.
Natural Gas
- Total working natural gas inventories decreased last week to 3,264 Bcf, which is 209 Bcf higher than last year and 375 Bcf higher than the five-year average.
- U.S. shale gas drillers announced declines in production costs in Haynesville and Appalachia in Q2Q24 which is expected to last through 2025. The cost reductions and higher efficiency allow the region to produce slightly less natural gas while spending significantly less money. (Platts)
- The 10 largest shale gas producers spent a reported 21% less year-over-year on service expenses. (Platts)
