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Energy Futures Are Selling Off Tuesday
Energy futures are selling off Tuesday, pulling back from the multi-year highs set Sunday night in the wake of the Colonial shutdown chaos. Signs that the pipeline closure will likely be resolved later this week and a pullback in global equity markets both seem to be contributing to the selling, but don’t expect product prices to decline too much until more definitive proof of the pipeline restart is given.
Colonial said late Monday night that one of its smaller lines had restarted using manual operations, and that it continued to execute a plan that should allow most operations to resume by the end of the week. The statement also detailed that the scheduling systems shippers rely on
Read the official Colonial media statements here: https://www.colpipe.com/news/press-releases/media-statement-colonial-pipeline-system-disruption
Ripple effects of the Colonial shutdown:
Several Gulf Coast refiners were reported to cut back their run rates Monday to avoid containment issues since their main outlet is closed. Others were scrambling for ships to offload products, and seeking waivers to the Jones Act to bring that product to the East Coast.
Explorer pipeline froze nominations on its line as shippers scrambled to use that Gulf Coast-Midwest outlet as a plan B for their excess production.
RIN values spiked (again) in early trading as expectations for a surge in imported products (which require RINs be purchased to comply with the RFS) but pulled back later in the day following Colonial’s report that it should be operating again by the weekend. There’s a rounding top pattern potentially forming on the Corn charts that could end up popping the RIN bubble if those prices make a return to normal levels.
What’s next? Suddenly the country seems to view pipeline capacity in a whole new light, which could put pressure on the administration to re-think its ant-pipeline stance. The spike in RINs could also have some calling for an emergency waiver to the RFS, as the reality sets in that alternative energy sources aren’t yet a viable alternative.
The hackers seem to realize (or are pretending) they’ve bitten off more than they can chew, stating that they didn’t intend to create problems for society, they just wanted to hold people’s data hostage. How noble. Several US government agencies have pinned the blame on the DarkSide group, and said the attack originated in Russia but also said there’s no evidence of Russian government involvement.
Most Important Refined Fuel Pipeline In US Knocked Offline
The most important refined fuel pipeline in the US, and arguably the world, was knocked offline by a ransom ware attack Friday, and most of that system was still offline Monday morning causing supply allocations to be locked down across the East Coast, and double digit price increases by suppliers from Florida to New England.
Gasoline futures are up 8 cents since the news started to break Friday morning, which is only about half of the increase we saw when Colonial was forced to shut its mainline in 2016 due to a leak. One of the big differences this year is that the pipeline wasn’t operating at capacity prior to the event, so there’s a little more supply cushion available than there was in prior years. So far the relatively muted response in both futures and basis markets suggest that the big traders don’t believe this will be a long term event.
You can read plenty of guesses as to when operations will be restored on the numerous articles written about this situation over the weekend, but at this point, no one outside of the hackers probably can say for sure. The bad news about the widespread media coverage of this event is that it’s more likely to encourage people to fill up tanks with fuel they don’t need, which can create shortages even if the pipeline was operating at normal rates.
Here’s a good estimate for the likely scenarios of how this situation will play out https://www.cnbc.com/2021/05/10/largest-us-fuel-pipeline-colonial-still-mostly-shut-impact-and-reopening.html
To help minimize the shortage, Driver hour waivers have already been granted. RVP waivers and a Jones Act waiver will also be discussed this week, but have not yet been approved. No matter what measures are taken, it’s impossible to replace more than 100 million gallons of fuel delivery capacity in a short period of time, so these measures will just help ease the shortages if the downtime is extended, not eliminate them.
Closing the barn door after the horse has escaped? The White house has created a task force to deal with the hack.
Insider trading? Money managers increased their net length in refined products last week ahead of the pipeline shutdown. While it’s extremely unlikely that any hedge funds that make up the bulk of those positions knew this was coming, it’s possible the hackers would try to make money off of this situation, and could provide another avenue to tracking down the culprits. Given that the net length held by large speculators in both WTI and Brent was also up on the week, the positioning ahead of the shutdown was more likely due to optimism for economic recovery than anything sinister.
In other news that no one will care about until the Colonial situation is resolved: Baker Hughes reported an increase of 2 oil rigs last week, snapping a 2 week decline. Ethanol and RIN values continued their spike on Friday, but some early selling in grain markets this morning could mean a pull-back is in the cards.
A Volatile Week For Energy Prices
It’s been a volatile week for energy prices that reached new multi-year highs Wednesday, only to see prices pull back the past two days. Despite the selling since Wednesday morning, most contracts are still up for the week, keeping the bullish trends intact, even as the shorter term indicators are suggesting prices have topped out.
The April payroll report showed far fewer jobs added in April than many expected (+266k vs estimates north of 1 million) while the March estimate was revised lower. The official unemployment rate ticked up slightly to 6.1%, while the U6 rate ticked lower to 10.4%.
Stock futures jumped (and treasury yields dropped) following the report as the “bad-news is good-news” trade appears to be alive and well when free money is the drug of choice in the market. Concerns that an overheating economy and inflation of several varieties will force the FED to start raising rates (or stop other asset purchases) earlier than expected were soothed by the fact that fewer Americans found jobs last month. Energy prices did briefly follow stocks with some buying immediately after the report, but have since resumed their selling.
The national numbers seem to contradict a Dallas Fed study released earlier in the week that showed that economic activity (and hiring) is surging across the state, which is creating another layer of inflation as companies are already seeing wage inflation. (charts below)
The runaway RIN & ethanol markets continues to smash records this week. 6 months ago, D6 ethanol RINs reached a multi-year high at $.70/RIN, and then yesterday they set (another) all time high north of $1.70/RIN, while D4 RINs broke north of $1.80 for the first time ever. Gasoline prices are now trading 50 cents or more below spot ethanol prices, but after adjusting for the RIN value, there’s still more than a $1/gallon positive spread between gasoline and its alcoholic blending companion.
Here’s an interesting read on why rice prices haven’t followed other grains in the historic rally over the past few months. Cliff notes version: it’s because they don’t use rice to make fuel or feed pigs.
Another sign of economic recovery: The Association of American Railroads report showed a 3rd straight week of increased traffic, and a 3rd straight week of levels above those in the same week in 2019, and almost all categories have now returned to pre-COVID levels.
Read here for more details over the Clean Energy/Amazon partnership to use more renewable natural gas by the rapidly growing fleet of delivery vehicles.
Refined Product Prices Knocked Back From Multi-Year Highs
The DOE’s weekly status report threw some cold water on the energy price rally Wednesday, knocking refined product prices back from multi-year highs. Disappointing demand estimates seemed to be the driver behind the selling that took place following the report, while a large draw in crude oil stocks looks temporary due to a surge in exports (that reached a 13 month high) and a large drop in imports that accounted for more than 20 million barrels of crude not hitting US stockpiles last week.
Although the momentum may have been lost, the pullback in prices has been minor, which suggests that we’re just seeing a round of profit taking rather than a change in trend.
Ethanol prices in the Chicago trading hub broke above $2/gallon 3 weeks ago, and then broke $2.50 yesterday as the grain-fueled rally has gone parabolic, adding 20 cents in just 3 days so far this week. China continues to buy record amounts of US ethanol, which is adding to the bullish frenzy in the market that’s becoming akin to the run-up in prices in 2008 when supply for diesel and crude oil struggled to keep up with export demand. As this rapid run-up in prices makes its way beyond the limited scope of wholesale fuel prices and into your grocery store, expect the debate of food vs fuel to heat up again, along with concerns about inflation across all aspects of the global supply chain. Ethanol production ticked up last week, helping US ethanol inventories to rise for the first time in 6 weeks according to the DOE report.
RIN prices are following closely on the heels of ethanol prices, casually adding another 3-4 cents to their all-time highs Wednesday and bringing the weekly gains to 15 cents. At this point, there seems to be little standing in the way of prices continuing to run higher, but the extreme nature of these moves suggests that the drop will be spectacular whenever it finally happens. One warning sign for the bio-bulls: time spreads on crops are expanding their backwardation, suggesting this supply squeeze will end with the new crop.
The Marathon refinery in Texas City leaked hydrofluoric acid Tuesday, which sent two workers to the hospital, and is sure to drum up more debate about the use of controversial use of those dangerous chemicals in refinery operations. The plant, which is one of the largest in the country and has been struggling to return to normal operations since the polar plunge in February, is no stranger to controversy, as it faced one of the deadliest explosions in the history of the industry when it was known as the BP Texas City refinery back in 2005.
A power outage in the panhandle of TX knocked the P66 Borger refinery offline Wednesday, which promises to keep racks in the region tight, just as they’ve been for the past two months.
Week 18 - US DOE Inventory Recap
Big Deal For U.S. Refiners Announced Tuesday
The rally continues for energy prices as gasoline futures have reached their highest level since July 2018 overnight, and ULSD has broken above $2 for the first time since COVID started wreaking havoc on the world. With the breakout to the upside this week, charts suggest that ULSD should now make a run at the January 2020 highs of $2.1195, while RBOB may test the May 2018 highs of $2.2855.
The API report Tuesday added some fundamental support to an already bullish technical landscape, with large draws for oil and refined products estimated last week. The EIA’s weekly report is due out at its normal time this morning. Last week the government’s demand estimates for gasoline were lower than anecdotal evidence suggested it should be, so if there’s a correction to the upside in consumption estimates this week the stage is set for this rally to snowball later today.
If you ever needed some evidence that low interest rates are the biggest driver of stock prices (and occasionally energy prices) Tuesday’s price action could be exhibit A.
After a morning temper tantrum when the U.S. treasury secretary (and former FED Chair) Janet Yellen suggested the FED may need to raise rates to keep the U.S. economy from overheating, stock markets recovered later in the day when she walked those statements back. While energy prices were up throughout the day, they did pull back some with the early stock selling, and rallied later in the day as optimism for free money returned.
Ethanol and RIN prices continued their big rally on Tuesday, with both D6 and D4 RINs reaching new all-time highs. Unless there’s a pullback in grain prices, it seems there’s little standing in the way of further advances in the coming weeks until the Supreme Court makes its ruling on small refinery waivers.
A big deal for U.S. refiners was announced Tuesday.
HollyFrontier announced plans to purchase the Shell refinery in Anacortes Washington Tuesday afternoon, and published a slide deck this morning giving the rationale for the purchase. With a price of less than 2X EBITDA for the facility (not to mention the other refineries its closed or sold recently) Shell’s lack of confidence in refining is clear, while Holly makes the case that demand in the PNW region is growing, and the other refinery closures should make this asset attractive. One other benefit of this refinery: deep water port access. That’s something the other Holly facilities in New Mexico, Oklahoma, Kansas, Wyoming and Utah probably won’t have anytime soon.
Holly also reported first quarter earnings, showing another rough stretch for refinery operations which lost $66 million, but were offset by a write-up of $200 million in inventory values, and a $51 gain from a tariff settlement. The company’s CEO said, “A record earnings quarter in our Lubricants and Specialties business, as well as steady performance from HEP, helped offset the impacts of heavy planned maintenance and winter storm Uri on our refining segment during the quarter. As we enter the summer, our focus remains on safely completing the build-out of our Renewables business on schedule.”
Speaking of getting renewable businesses on schedule: CVR announced it was delaying the start of its renewable diesel plant at the Wynnewood refinery in Oklahoma due to the effects of February’s winter storm, and delays in equipment deliveries.