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Market Talk - 2020 august

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Market TalkFriday, Aug 28 2020

Refineries Initiate Restart Efforts

We’ve reached the calm after the storm as the Gulf Coast refining industry is assessing the damage from Hurricane Laura, and most companies seem to be breathing a big sigh of relief.  Unfortunately, much of the country is still going to feel an impact from this storm, as flooding potential stretches through the mid-west and east coast through the weekend.

Three of the refineries that had initiated shutdowns ahead of the storm have already filed with the state that they were beginning restart efforts, and more are expected to follow suit today as reports suggest the plants outside of Lake Charles likely avoided major damage thanks to the eastward shift in the storm’s path prior to landfall.

We will probably not know the status of the two refineries that were operating in Lake Charles before the storm until next week, since damage assessment crews were not allowed into the area Thursday. A major fire in a nearby chemical factory, and the closing of the Interstate 10 bridge due to a runaway casino boat are just a couple of examples of issues that may be hampering those efforts. 

The one critical unknown in terms of regional supply is whether or not the Colonial station near Lake Charles suffered any damage. The pipeline continues to operate downstream, but if Lake Charles is blocked, the barrels originating in the Houston and Port Arthur hubs won’t be able to move through to the rest of the country. There are no reports that the facilities were damaged, they just don’t know since accessing the location may still take a couple more days. Explorer pipeline reported no damage to its facilities, but will still see slight delays in restart due to uncertainty from the local utilities on power supply.

The bad news for refiners that managed to avoid operational issues during the storm is that the boost in margins was short-lived as both gasoline and diesel prices have crumbled, and are now threatening a technical break to the downside that could drag many plants back to the cusp of break-even levels. 

Don’t relax just yet. As is often the case in active hurricane seasons, major hurricanes aren’t isolated events, (i.e. Harvey/Irma/Maria in 2017, Gustav and Ike in 2008, Katrina/Rita/Wilma in 2005). Already this morning, the National Hurricane Center is tracking two new potential systems crossing the Atlantic, both given 30 percent odds of development next week. 

D4 (Bio) RINs hit a fresh 2.5 year high Thursday, as surging soybean prices and falling diesel prices gives a poor outlook for incremental bio blending. Exports to China and weather damage from the Derecho earlier in the month are both getting credit for the rally in Soy prices. Corn and ethanol prices have also been rallying, but have not kept pace with bio, partially due to the fact that ethanol blending is less discretionary, which has kept D6 RINs from pushing through recent highs so far.

The EIA this morning took a closer look at how U.S. refineries have been forced to make drastic operational changes this year due to COVID demand impacts. Perhaps the most impressive piece is how the plants have been able to dramatically shift product yields in response to the wild swings in gasoline and jet fuel demand. That unprecedented shift towards diesel production also helps explain why diesel prices barely flinched this week even when it appeared that Laura might shut down 20 percent of the country’s refining capacity.

Click here to download a PDF of today's TACenergy Market Talk.

Market TalkThursday, Aug 27 2020

Hurricane Shifts From The Heart Of Refining Country

Energy futures continue to retreat this morning as the strongest hurricane to hit the Gulf Coast in decades appears to have shifted just enough to the east to avoid damaging the heart of refining country. Equity futures are also pointed lower this morning as another weekly jobless claim report north of one million gives a dose of reality to indices that have reached record highs, despite the damage done to the economy by the COVID fallout.

Hurricane Laura made landfall overnight as a Category 4 storm, the strongest to hit the Louisiana coast in 168 years. Another shift to the east prior to landfall meant many gulf coast facilities look like they dodged most of the storms wrath, and some Houston-area terminals are already loading trucks this morning. 

Unfortunately for the residents and refineries around Lake Charles, the storm did not appear to move far enough east for them to avoid a direct hit, although it’s too soon to say what damage may have been done to those facilities, but early reports from the city suggest substantial flooding and wind damage. One of three refineries around Lake Charles was already idled due to COVID-related demand destruction, and another was running well below normal rates, so it seems that in total we may only see roughly three percent of total U.S. refining capacity damaged by the storm, compared to estimates closer to 20 percent had the storm hit further west.

Although Lake Charles is an origin point along the Colonial pipeline, as long as the Houston/Pasadena and Port Arthur/Beaumont hubs weren’t damaged, we likely won’t see any major impact on pipeline deliveries. Explorer pipeline did shut down temporarily to allow the storm to pass, but it too may see limited impact thanks to the eastward shift of the storm since it originates from the Houston and Port Arthur hubs. 

Now that the storm has passed by the majority of petroleum supply infrastructure, it may become a demand killer as it spreads flooding rains among large parts of the U.S. until re-emerging off the East Coast this weekend.

Yesterday’s DOE report was largely ignored due to the focus on the storm, but it did have some good news as demand estimates reached their highest levels since the start of COVID shutdowns, and in some cases demand has returned to the low end of the five year seasonal range. 

Note the large declines in export volumes and refinery runs in September 2017 in the aftermath of Harvey (red line in the seasonal charts below) and you’ll get a good idea of what next week’s DOE report might look like due to the widespread shutdowns ahead of Laura’s landfall. The difference in the two storms so far is that more plants and ports shut ahead of the storm, which should mean a faster recovery when it moves past barring catastrophic damage.

Click here to download a PDF of today's TACenergy Market Talk.

Market TalkWednesday, Aug 26 2020

How Will The Election Impact Oil Production?

Despite large declines in inventories, RBOB futures are tumbling to start Wednesday’s session as the latest forecast track for Laura seems to have taken the worst case scenario off the table, even as the storm rapidly intensified overnight. 

Hurricane Laura is now a Category 3 hurricane, and could become a Category 4 before it hits the coast overnight tonight with over 120 mph winds. The models released at 1 a.m. shifted the storm’s path slightly east, closer to the Lake Charles, LA refineries, and further away from the Port Arthur/Beaumont plants. The latest track moves the Houston and Galveston refineries outside the forecast cone, which rules out a direct hit on that area, and may help explain the pullback in futures this morning.

While almost all of the refineries in the area, representing 20 percent of the country’s total capacity, are either shutting down or preparing to idle some units as a precaution, right now it looks like the Lake Charles area facilities are going to get the worst of Laura’s surge as they’re on the more dangerous side of the storm.

Why this storm won’t be the “next Hurricane Harvey” in terms of energy supply disruption: Harvey stayed on the Gulf Coast for a week, and dumped five feet of rain on some spots. Laura will make landfall Thursday morning and be into Central Arkansas by Friday. Although 10-15’ of storm surge and 15” of rain is nothing to take lightly, the recovery efforts from the damage that is certain to be done along the coast can begin much faster since this storm won’t stick around for long.

The API was said to show large declines in oil and gasoline stocks last week, of 4.5 and 6.4 million barrels respectively, while diesel inventories built by 2.3 million barrels. The DOE’s weekly report is due out at its normal time this morning, and will likely be ignored as the storm has made last weeks’ figures irrelevant. 

Wondering how the election may impact oil production? Take a look at this Rystad Energy study on oil output during the past 80 years by President and party. The study suggests that the potential restrictions imposed on oil drilling should a new president be elected may actually increase oil output as it will make onshore shale plays more profitable.

Click here to download a PDF of today's TACenergy Market Talk.

Market TalkTuesday, Aug 25 2020

Hurricane Laura Threatens U.S. Refineries

Gasoline prices are approaching six-month-highs as Hurricane Laura poses the biggest threat to U.S. refineries since Hurricane Harvey three years ago. Oil and diesel prices are moving higher as well, but are not keeping pace with gasoline – which is often the case in storm situations – and seem somewhat dubious about the long term impact this storm may have on an oversupplied market. 

The Nasdaq and S&P 500 reached new record highs as trade and virus optimism kept the trend lines pointing higher, while the DJIA is undergoing a major overhaul. In the latest sign of the COVID market fallout, ExxonMobil is being removed from the DJIA, while Salesforce (dot com) will now be included. 

While Marco fizzled out and spared Louisiana, Laura was upgraded to a Hurricane this morning, and 13 percent of the country’s refining capacity is in the direct path of the storm based on the latest models. The current forecasts have the storm coming on shore Thursday morning, as a category 3 “major” hurricane, just east of Port Arthur, TX. Plants in the Port Arthur/Beaumont hub have announced that they are reducing rates and/or idling units until the storm passes. The path of the storm could actually be just as troublesome, if not more, for plants around Lake Charles, LA, as they are on the more dangerous side of the storm, and could get a worse surge/flooding than the plants closer but on the west side. There is still a wide cone of uncertainty with this storm’s path, and even the Houston-area plants could still be impacted if the storm shifts further west.

Those plants that can continue operating are suddenly seeing their best margins in five months, a much needed relief for plants struggling to stay afloat financially. The economic hardship of refineries is one reason Laura’s impacts may not be as widespread as we might normally expect, since there’s at least one million barrels/day of capacity already idled due to weak demand, which should allow for some plants to increase rates and help offset the losses from others. In addition, many Gulf Coast refineries now rely on exports for nearly 20 percent of their production, so they will need to bring more product inland until ports can reopen.  

That said, if the major pipelines in the region have to close due to power or flooding issues, then the potential for supply issues becomes more widespread in short order. 

If Laura does make a significant impact, don’t be surprised to see states and the EPA ease RVP restrictions on gasoline, since we’re just weeks away from the annual transition anyway and pollution levels have already been at their lowest level in decades thanks to reduced consumption this year. You may notice that several spot markets aren’t keeping pace with the September futures contract this week, as they’ve already begun their fall transition to less-stringent gasoline specs.

Click here to download a PDF of today's TACenergy Market Talk.

Market TalkMonday, Aug 24 2020

Rally Following Reports Of COVID Treatment Option

Refined products are rallying to start the week, wiping out Friday’s losses as a pair of Tropical Storms head for the heart of U.S. refining operations, and U.S. stock indices are set to rally following reports of a new COVID treatment option.

Good news, Hurricane Marco has weakened back to tropical storm status prior to making landfall on the Louisiana coast. This means we will not see a record set this week with two hurricanes in the Gulf of Mexico at the same time. Bad news is that Marco is turning along the coast instead of moving inland, which should mean heavy rains for the next two to three days to saturate the ground in refinery country just in time for Laura to show up. Laura is expected to be around a Category 2 storm when it hits land late Wednesday or early Thursday, with all of the refineries from Houston, Galveston, Beaumont, Port Arthur and Lake Charles still in the forecast cone. 

Ports of New Orleans and Baton Rouge have been closed as the storms approach, and the Texas ports along the eastern part of the coast are expected to follow suit in the next couple of days. Corpus Christi’s port, meanwhile, is facing its own challenges after a dredging vessel apparently hit a propane pipeline, causing an explosion and fire that killed four people. Refinery operations in the area do not seem to be impacted, but it’s yet another disruption to import/export activities this week that are likely to cause challenges for plants trying to alleviate their excess inventory.

Baker Hughes reported an increase of 11 oil rigs drilling last week, the largest weekly gain since January, and only the second weekly increase since March. The Permian basin accounted for 10 of the added rigs, while the Eagle Ford and Williston (Bakken) plays continued to decline. Bulls will see this as confirmation that demand is returning, which is supported by some signs of diesel consumption ticking higher across West Texas, while bears will suggest the increase was driven by producers forced to drill to avoid losing their leases. 

Money managers are starting to act modestly bullish for refined products, but continue to be neutral on crude oil. RBOB net length held by the large speculative trader category rose to the highest level since March, which is a counter-seasonal bet on higher gasoline prices. ULSD meanwhile saw its net position held by money managers turn from short to long for the first time since January. Both WTI and Brent saw slight declines in their net length, with the ongoing lack of interest being more of a story than the weekly change in positions.

Click here to download a PDF of today's TACenergy Market Talk.