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Coiled Spring Effect Propels Prices Sharply Higher
Energy prices broke out of their month-long trading range Wednesday, and as is often the case when this happens, there’s a coiled spring effect that helps propel prices sharply higher once that range finally breaks. Bullish demand estimates took much of the credit for the rally that picked up strength following the DOE’s weekly report, and was able to sustain itself in spite of a pull-back in equity markets.
This is no runaway rally however as prices have pulled back modestly overnight (once again moving in the opposite direction of U.S. equity markets) setting up a big test for prices to end the week. If we stay above the range, there’s room to run another 10-12 cents higher in the back half of the month, but if we see a selloff the next two days, then Wednesday’s action looks like a bull trap.
The DOE report also showed a 243,000 barrel/day decline in refining capacity as some of the plants that closed down or converted production last year started making their way into the official numbers. The total decline from this time last year is 831,000 barrels/day, or just under 4.4%, with more declines expected in the months to come, marking the biggest declines in 40 years for U.S. refining capacity.
Ethanol prices continue to reach multi-year highs this week, benefitting from both the rally in gasoline prices and in corn, which trading north of $6/bushel overnight for the first time since 2013.
Today’s interesting read: Why a century-old technology is making a big comeback to improve power storage. For Texans wondering what might come next with the state’s energy grid, just think of what could be done with the thousands of man-made “lakes” scattered across the state.
Speaking of century old ideas: Read the WSJ’s take on the new Presidential tax plan that will remove incentives for oil and gas exploration that date back 100 years, and why one study suggests it won’t have a major impact on output.
A shortage of truck drivers that had been impacting many industries for years has grown to crisis levels in some areas as the economy picks back up. Yesterday, industry groups sent a letter to the House & Senate transportation committees urging them to act to help alleviate this shortage, with a first step of allowing drivers younger than 21 to operate vehicles across state lines.
Week 15 - US DOE Inventory Recap
Lack Of Enthusiasm From Gasoline And Crude Oil Prices
If at first you don’t succeed…Diesel prices are trying to lead the energy complex higher this morning, after rally attempts stalled out Monday and Tuesday. This time could be different, however, as ULSD futures have broken the top side of their month old sideways trading range in the early going, which could spark some buying from trading programs and bandwagon jumpers. If diesel futures can hold above the $1.84 mark today, there’s a good chance we will see them push into the mid $1.90s in the next week, but if they fail, it seems like we’ll be stuck back in the sideways range for a while longer.
A lack of enthusiasm from gasoline and crude oil prices seems to be a limiting factor in the diesel rally so far. RBOB futures have managed to move higher in the past five sessions, and yet the combined gains during that stretch are less than three cents, suggesting a lack of conviction from buyers after prices doubled from November to March.
The IEA’s monthly oil market report followed the lead of the EIA and OPEC monthly reports, increasing global fuel demand estimates as vaccine & stimulus package rollouts are getting people moving again. The IEA’s report did highlight concerns that rising case counts in Europe, Brazil and India could slow the demand recovery, and noted that excess supply capacity from OPEC and the U.S. should help keep prices from getting too high. The IEA also highlighted that Iran’s oil production has reached a two year high as the country is finding ways to get around U.S. sanctions, which could bring more downward pressure to prices if that trend continues.
The EIA this morning highlighted several new oil projects in the Gulf of Mexico that could bring 200mb/day of production online by the end of next year, which is a completely different outlook than a year ago when many projects were shutting down. The report also highlights the threat hurricanes create to GOM production, as early forecasts call for another above-average season for storm activity, after we just lived through the most active season on record.
Chicago-area refineries are making news this week. The DOJ announced a settlement deal with ExxonMobil and the state of Illinois that requires Exxon to pay $1.5 million in fines, and spend $10 million in upgrades to its Joliet facility. The headline writers are touting this as the new administration’s tough stance on the energy industry, but in reality this settlement stems from an agreement made 12 years ago. Meanwhile, BP is reportedly selling off a major stake in its U.S. pipeline assets, as it continues to shed assets to pay down debt, cover severance payments from their annual reorganizations and continue paying their $1.2 annual settlement the 2010 Gulf of Mexico oil spill.
Meanwhile, two midcontinent refining companies still aren’t getting along taking with the war of words and shareholder votes between Carl Icahn backed CVR and Delek being taken to the court of public opinion, proving that there’s apparently more money to be made through financial engineering of refining-related companies than there is in engineering those refineries to make more product.
Stock Futures Pull Back Following Vaccine News
The sideways action continues in energy markets after an attempted rally Monday morning failed to build any momentum and most gains were wiped out in the afternoon. This morning it’s the RBOB gasoline contract trying to lead the rest of the complex higher, with penny gains while ULSD moves back and forth across the breakeven line. Charts continue to give a neutral outlook, suggesting more back and forth trading in the near future.
There are lots of headlines about the U.S. looking to pause use of the J&J COVID vaccine, and while stock futures did pull back overnight following that news, the moves have been minor and don’t seem to be having any trickle-down effect on energy markets at this point.
OPEC increased its global demand estimates in the latest monthly oil market report saying, “Gasoline is projected to be the key driver for oil demand recovery beginning with the onset of the summer driving season. Diesel will also provide support, mostly based on economic improvements stemming from the implementation of fiscal stimulus programmes.” The report also highlighted the recovery in U.S. refinery margins over the past two months, while European and Asian refiners have not seen the same improvement. The cartel’s oil production was up 200mb/day in March, driven primarily by an increase in Iranian output as they’ve found new ways to circumvent U.S. sanctions.
Speaking of Iranian production, there was another mysterious outage at an Iranian nuclear site over the weekend, with multiple sources suggesting another cyber-attack from Israel is to blame, just as the U.S. reopened negotiations with Iran over its nuclear program. This latest development might mean a deal is less likely and could delay the return of more Iranian oil to the market.
The beleaguered Suncor refinery outside Denver looks to have passed a big emissions test with an investigation finding the facility met its environmental permits. While that’s certainly good news, the plant is still facing lawsuits over water contamination in the community, just as it seeks extensions of its operating permits from the state. Refiners in the Midwest will be watching this story closely as the Denver metro area has become a popular home for the excess supply coming from Group 3 refineries, and removing the only refinery left in Colorado off-line would mean big opportunities for those plants.
Add another renewable diesel production facility to the growing list. Unlike most of the others that have been announced in the past couple of years however, this facility may not be sending the majority of its fuel to California, as that country’s clean fuel standard is set to start next year and will offer its own incentives for renewables.
Diesel Futures Try To Lead The Energy Complex Higher
Diesel futures are trying to lead the energy complex higher to start the week, testing the upper end of their sideways trading range, after chart support held up to several attempted sell-offs last week. There’s little in the way of news to drive the action so far, and it seems that we’re still stuck in the back and forth pattern until the range breaks.
While gasoline and diesel prices continue to move sideways, ethanol prices are holding at multi-year highs north of $2/gallon in most U.S. markets, thanks to elevated corn prices and RIN Values holding near all-time highs. Several ethanol producers that shut down operations when prices were in the $.70-$.80 cent range this time last year are coming back online to take advantage of these lofty prices, which will only increase pressure on feedstock producers to supply the parade of new renewable diesel projects racing to take advantage of the subsidies provided to turn food into fuel.
Baker Hughes reported no change in the total U.S. count of active oil rigs last week. The Eagle Ford basin in TX did increase its count by one rig, while the “other” category made up of smaller basins declined by one. A Rystad energy report released Friday suggested that fracking activities across the U.S. are approaching pre-pandemic levels, and that output should continue to increase in the second quarter, which is not surprising given current prices. What is more surprising is that flaring from those wells is down substantially as producers are beginning to catch up with the infrastructure needed to deal with the excess natural gas produced in those operations.
Money managers continue to display mixed feelings for energy contracts, which isn’t too hard to understand given the yo-yo price action we’ve seen in recent weeks. The large speculative category of trader decreased their net long position in WTI, Brent and Gasoil last week by relatively small amounts, but added to their bets on higher priced for RBOB and ULSD.
Houthi rebels launched more attacks on Saud Arabia overnight, this time targeting an area with several refineries. It’s not immediately clear what if any damage was done to those facilities, but given the limited impact of several recent attacks, the market does not appear too concerned.
Today’s interesting read: Why closing a nuclear power plant in New York will increase natural gas consumption, and may cause more diesel demand spikes when electricity demand peaks.
Too Many Imports?
Energy prices appear to be calming after a spike in volatility over the past few weeks, and are starting off Friday’s session with modest losses. Prices remain in their sideways trading range, which means we’re likely to continue seeing back and forth action until a new trend develops.
U.S. equity markets meanwhile are having no problem finding direction, hitting fresh record highs this week, cheered on by signs that the economy continues to reopen even as pockets of the country deal with new COVID outbreaks, and in no small part to the $6 trillion or so in monetary and fiscal stimulus provided by the FED and Congress over the past year.
Too many imports? While most cash markets for gasoline have held relatively steady this week, basis values for NYH RBOB have dropped eight cents this week as it appears there’s too much higher RVP gasoline in the region just one week before trading switches over to the summer-grade products. There was a record surge in gasoline imports following the great refinery shutdown in February, and the Buckeye pipeline disruption in March, and this selloff suggests perhaps some suppliers are worried they brought in too much fuel from overseas and won’t be able to turn their tanks in time.
The EIA this morning is highlighting its STEO gasoline demand forecast that suggests consumption will be notably better than last summer, but still behind 2019.
It’s hard to read anything about the energy markets without a renewable component being factored in. A Reuters article this morning highlights the looming shortage of feedstocks for bio-based fuels as producers rush to take advantage of the lofty incentives available from the various federal and state programs that provide more than $5/gallon for some products depending on where they’re sold.
Another refinery casualty? Exxon announced Thursday it was considering shutting down its plant in Norway due to the overcapacity of refining in Europe.