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Seasonal Divergence In Demand For Refined Products
Gasoline prices are moving modestly lower for a 2nd straight day, while diesel contracts are holding near multi-year highs as the seasonal divergence in demand for the refined products seems to be influencing prices again.
RINs have been the big mover this week with D6 ethanol values dropping to a 6 month low after reports that the blending quotas may have been leaked. Insert your own Trading Places joke here.
Nicholas has stalled out over Louisiana, dumping heavy rains on areas of the Gulf Coast still trying to recover from Ida, 3 new potential storms are lurking in the Atlantic. The first is given 70% odds of developing over the next 5 days, and may brush the coast of North Carolina as it moves North East, and should avoid a direct landfall. The 2nd is also given high odds of developing and could be a threat to the East Coast next week. The third has low odds of formation as we move through the halfway point of another busy hurricane season.
Today’s interesting reads: Why Chevron’s CEO sees tight supplies and higher prices for petroleum products persisting, and why a spike in natural gas prices is having widespread effects on various supply chains, particularly across Europe. The EIA this morning reported that the US barely held on to its status as a net exporter of petroleum products in the first half of 2021. With Europe scrambling to find new power supply options, and natural gas suddenly a hot commodity again, US producers are faced with an increasingly unpopular but increasingly profitable decision to boost production levels.
Speaking of unpopular: The President suggested that “Bad Actors” are behind the rise in gasoline prices this year, a claim the AP (along with just about everyone in the industry) finds to be baseless.
Tropical Depression Nicholas Hovering Over Heel Of Louisiana
A handful of bullish numbers published by the DOE yesterday morning pushed energy futures to multi-month highs. The prompt month diesel contract was the most noteworthy reaching levels not seen since 2019. The drop in refined product inventories (despite cratering exports), the 7.5% decline in gasoline demand, and the decreased output of gas and diesel fueled yesterday’s rally.
Tropical depression Nicholas is still hovering over the heel of Louisiana. While repairs have been halted due to the downpours, it doesn’t sound like and new damage has cropped up with the latest storm. The EIA published a note this morning highlighting the damage caused by Ida last month and the breadth of energy infrastructure shutdowns.
Colonial restarted its main Line 2 yesterday after shutting it preemptively due to flooding from the storm. The refined product artery taking product from Houston all the way up and through the Atlantic seaboard has returned to normal operations.
A system crossing the Atlantic looks to be heading towards the Lesser Antilles next week with an 80% chance of developing into an organized storm. Another looks to be forming off the Atlantic coast next week as well, projections keep it out to sea for now.
Prices are drifting lower this morning, taking a breather from this week’s rally. American crude oil, gasoline, and diesel benchmarks are shedding ~.7% so far today while the three are poised to end the week with gains. Tomorrow’s price action could be pivotal in deciding if this 18 month-long rally will push energy prices to multi-year highs or if we will finally see a sizable pullback as the US gets back to (some form of) normalcy.
Week 46 - US DOE Inventory Recap
Inventory Data Taking Credit For Rise In Prices Today
The American Petroleum Institute estimated and across the board draw in petroleum inventories for last week. The report published yesterday afternoon showed national crude oil stocks down nearly 5 ½ million barrels with gasoline and diesel down ~2.8 million barrels. The Department of Energy is set to release the official totals at its regular time this morning (9:30 Central).
The inventory data is taking credit for the rise in prices today. After a flippant day yesterday, energy futures are climbing, with confidence, higher this morning. Prompt month gasoline and diesel futures are both up around 1.5%. West Texas Intermediate futures are up nearly 2% setting a new 6-week high.
Power outages remain the main issue in areas affected by the landfalls of Hurricane Nicholas. Now downgraded to a tropical depression, the storm has stalled out and seems content to hover over a waterlogged Louisiana. Although it may not be causing any new infrastructure damage itself, Nicholas is hampering Ida recover efforts in the Pelican State. The EIA estimates nearly 1.2 million people lost power during the late August storm.
As one dissipates another appears: the five-day outlook from the NOAA shows yet another area of interest with an estimated 20% chance of development over the next week. In the short term eyes will be on the storm brewing just off the Atlantic coast which should stay out to sea. In the long term however, the system forming off the West coast of Africa is doing so in a manner commonly seen this time of year and often results in a major hurricane.
The current outlook falls below.
Green Futures Markets Are The Theme This Week
Green futures markets seem to be the theme this week with past and present weather impacts in the driver seat. American crude oil, gasoline, and diesel benchmarks are adding .5%-1% gains so far this morning as the market intently watches for headlines on flooding and power outages along the Gulf Coast.
Tropical storm Nicholas has made landfall in southern Texas and is heading towards Houston, the center of the storm set to arrive early this afternoon. There hasn’t been any reports of refinery closures as of yet but word from the major players is they will take action as necessary to safely maintain operations if possible.
Unfortunately it seems the Houston refinery cluster isn’t the only concern for this iteration of storm activity. Plants in Port Arthur, Lake Charles, and Baton Rouge are also within Nicholas’s forecast error cone putting over a third of the nation’s refining capacity at risk. Moreover refineries in New Orleans could be especially susceptible to flooding and power outages should Nicholas shift east over the next couple of days, with 20+ inches of rainfall estimated.
Oil technicals are flashing buy signals this week with the prompt month contract poised to test the $75 level. The recovery rally we’ve experienced for the past year and a half has more than made up for the COVID crash that took place in early 2020. Should the upward momentum seen this week sustain past some resistance levels set last month, the energy complex could look to test waters not seen since 2015.
Oil Demand To Exceed Pre-COVID Levels Next Calendar Year
The energy complex is trading higher this morning on news that OPEC expects oil demand to exceed pre-COVID levels next calendar year. Despite the inherent conflict of interest in setting a price based on the word of someone who would like to see prices higher, the bulls have added 1-1.5% gains to the big three American petroleum benchmarks.
Traders are also noting lingering supply concerns adding to the buying pressure this morning, however tempered by Baker Hughes reporting an addition of six operating oil production platforms last week. Four of the rigs returning to service were located offshore that were shut down from Hurricane Ida. Nearly a third of the eleven closed late last month have started up again, just in time for the next summer storm.
Tropical storm Nicholas popped up in the Gulf of Mexico over the weekend, heading towards Houston with gale-force winds later tonight. While the storm isn’t likely to develop into a hurricane before marking landfall, it’s slow speed will cause widespread flooding, possibly as far as the already-soaked cities of south Louisiana.
Even after Nicholas comes and goes this week (hopefully without making mischief), the Atlantic storm procession will continue. Two areas of interest are active now with the more troubling of the pair taking aim at the Atlantic seaboard. Currently it’s a coin flip if the system will organize in the next 5 days, but the tropical wave coming off the western coast of Africa has an 80% chance to form over the next week.