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Market Talk - 2019 june
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Energy Complex Took A Breather
The energy complex took a breather yesterday with RBOB shedding almost 2.5 cents off of monthly highs and HO dropping almost 2 cents. WTI stayed positive, but only just, amid rumors of Iraq supporting intended OPEC production cuts. The cartel and friends are schedule to meet next week to discuss their plan moving forward.
Both American and European crude oil benchmarks has continued their climb this morning, both showing modest gains, despite Saudi Arabia’s announcement earlier this week that it is “ready for… disruption” regarding the recent tensions centered around the Strait of Hormuz. The press release is somewhat confounding coming from the Kingdom, whose GDP comes chiefly from its oil production and likewise favors higher prices, as most interpret the message as a means to stabilize the market. Traders will be interested to see if this is borne of genuine intention or just the latest move in a geopolitical chess match.
PES has confirmed Wednesday that it intends to shut down its refinery and put it up for sale amid the massive explosions that rocked Philadelphia last week. Aside from physical prices popping in the New York Harbor vs futures this morning, offsetting the difference between the expiring July contract and the newly-prompt August contract, price reaction to the 335,000 barrel per day production deficit have been limited to NYMEX prices and Colonial shipping premiums. Refined product suppliers are paying .0075 per gallon to ship gasoline up from Houston to New York, hoping to avoid or correct the expected strained regional economics.
Drop In Oil Stocks And A Major Refinery Closure
A large drop in oil stocks and confirmation of a major refinery closure sent the energy complex soaring on Wednesday, but those prices are coming back a bit this morning as a less bullish fundamental picture begins to take shape.
Yesterday’s DOE report – headlined by a huge 12 million barrel decline in crude stocks - came out around the same time as reports that city & company officials were confirming that the PES refinery would be closed down next month.
While futures reacted strongly to the news, with RBOB up a dime at some points during the day, cash markets took the news in stride as it appears the Atlantic basin has enough supply available to fill in the gaps. There is also a sense that the explosions & fire at the refinery only moved up the inevitable closure of that refinery which was already struggling after emerging from bankruptcy last year, handicapped by high operating costs and a lack of favorable crude-buying economics based on its location.
The 12 million barrel drop in crude stocks was the largest weekly decline in nearly 3 years. Domestic production dropped for a 3rd consecutive week, the first such stretch of declines since the last price collapse.
The large decrease can largely be explained by a sharp decline in oil imports along with a strong increase in exports – which reached a new record high of 3.77 million barrels/day last week - making it more likely that we’ll see a correction in the next couple of weeks.
It’s not just oil exports that had a big week, both gasoline and diesel exports saw large increases as refinery production ramped up. Those export figures can go a long way to explaining why the market reaction to the PES news hasn’t been more dramatic, since the US is already producing more refined products than it can consume, this situation becomes one of logistics (shifting Gulf Coast exports to the East Coast) rather than capacity.
Speaking of which, the first two charts below show the historical refinery run rates for PADD 1 (East Coast) and total US, before and after the PES closure. As you can see, there will be a dramatic impact on the East Coast run rates, but the US total hardly changes since the Gulf Coast already produced roughly 10X the products as the East. In addition, the US had added 220mb of refining capacity in the past year, which would cover most of the expected decrease from this plant being shuttered.
So, where to from here? With OPEC and G20 meetings coming in the next week, it seems like we’re due for some sideways trading as the market goes into a short-term “wait and see” mode.
Gasoline Futures Surging This Morning
A potentially permanent refinery closure and a large weekly draw in inventories have gasoline futures surging this morning. July RBOB is currently trading 6 cents higher on the day after reaching 10 cent gains overnight, which will push spot prices for gasoline across most US markets to their highest levels in a month, and with a long holiday weekend quickly approaching, there may be more room higher to run over the next week.
Reuters is reporting that PES is planning to permanently close its Philadelphia refinery that was hit by an explosion and fire last week and may begin laying off workers today.
Values for line-space on Colonial’s main gasoline line have gone positive for the first time since January following that fire as Gulf Coast supplies will be leaned on to replace that plant’s production, in addition to increased imports.
The API was reported to show US crude oil inventories dropped by 7.5 million barrels last week, while gasoline stocks declined by 3.2 million barrels and distillates rose by 160,000 barrels. That report had prices rallying late Tuesday afternoon, and that momentum has carried overnight, although the PES story seems to have clearly given gasoline prices an edge over the other contracts. The DOE’s weekly status report is due out at its normal time this morning.
Yesterday the DOE/EIA reported that Mexico’s refinery output has dropped 50% in the past 5 years, and most plants now operate at less than 40% of their capacity as Pemex has struggled with dropping crude output and a lack of sufficient maintenance. Here too, US Gulf Coast refiners are beneficiaries as Mexican imports of refined products are forced to increase.
Today the DOE/EIA is reporting that US electricity generation from renewables surpassed production from coal for the first time on record.
Prices Off To A Mixed Start
Prices are off to a mixed start today after catching a breather and posting light losses yesterday. Heating oil, American and European crude benchmarks are showing light losses early this morning while RBOB futures are fighting to stay positive.
It seems now that energy futures have priced in all conceivable precipitations resulting from the increased tensions between the US and Iran and that bullish pressure has helped ward demand worries. Decreased manufacturing data published by the Dallas branch of the Federal Reserve yesterday cites the tariff spat with China as the chief cause of demand concerns.
Aside from what could be accurately describe as the US vs World saga, there was still a refinery explosion last week. Philadelphia Energy Solutions’ 335mb per day refinery, one of the largest of its kind in the region, caught fire in a series of dramatic explosions early Friday morning. The fire, originating from a leak in the complex’s alkylation unit, has been controlled and contained but repair time estimates remain elusive. Aside from the massive fireball and pollution concerns, this latest setback is bringing the refinery owner’s looming insolvency back into question.
July 4th is coming up next week, a popular driving holiday, exacerbating supply worries in the Northeast. While it seems most attention is focused on short term price increases at the pump, traders’ concerns lie more with what the unexpected supply disruption will do to gasoline stocks in the area. We will get our first look at PADD 1 inventory levels this afternoon when the API publishes its estimates, and again tomorrow morning via the EIA’s weekly report. However, the full weight of the downtime won’t likely be seen until the following week.