Demand for refined products grows in face of global correction

September 29, 2015 09:18 AM

The overall market sentiment has decidedly moved into the bear camp as prices slid substantially in yesterday’s session with the S&P 500 down over 50 handles at one point. This is really more of a lack of confidence move rather than a move firmly rooted in fundamentals. 

China slowing and European issues exacerbated most recently by the emissions fraud coming out of Volkswagen obviously have an effect on this price action.  

However, it does feel that the most likely culprit for this unwinding of the equity markets is the FOMC and the no confidence vote they cast some 10 or so days ago. The rhythm this drum keeps beating is starting to get monotonous to say the least, day after day, month after month, and frankly year after year, pegging the market action to a group of regional bankers thoughts on the market. 

Today the market is very modestly higher following a push lower to 1861 as market participants take a collective sigh and wait to see if this liquidation has any real legs to the downside. The low today represented a 12% decline off of the all time highs reached earlier in the summer. It has not surpassed the 14% decline reached on Aug. 24 with a low of 1823 in response to the worse than expected slowing out of China that really started this recent global concern.

The effect of all this on fuel pricing is interesting to say the least. Energy pricing really started this move many months before the equities started to take the global slow down into effect so for the most part, this is relatively priced into the current market levels. The drive lower in energies started as a supply side sell off that morphed into demand side concerns that have kept prices low. Consider that the S and P markets where in the 2100 handle while crude was on its low for the year at $37.75 and now the S&P 500 is in the midst of a major correction while the WTI is trading in the mid $40 per barrel range and it is easy to see the larger picture disconnect. 

In fact, this disconnect could continue as the crude is showing some signs of higher potential with fundamentally bullish developments starting to show up in the headlines. 

Jet fuel and gasoline are setting records for demand, mostly due to the relatively low price when compared to recent years, though low prices alone can’t account for this. There must also be some semblance of economic strength to support the price or the free fall would continue under crushing supply and little demand. So one can conclude that as demand continues to remain high in the refined products, the price most likely will continue to find support despite the weakness of the overall market. 

Furthermore, news on the U.S. shale credit crunch is proving to be overdone as well as we are seeing more banks renew credit terms with beleaguered shale producers who were thought to be in trouble when their current deals ran out. The stability of the price at these levels has probably been a bit of a vote of confidence to lenders. The reality is that in order for the dooms day credit crunch to truly hit the U.S. shale market the price would have to be much lower for a sustained period. 

About the Author

Tory Enerson is a senior market strategist with the Zaner Group in Chicago, an Independent Introducing Broker. He has been in the futures industry for over 20 years. Beginning his career at the CBOT in 1990, Enerson worked his way up through the industry when he became a member of the CBOT in 1998 and traded for over a decade before beginning to work with clients as a market strategist.