News & Views
Calm Between Storms For Energy Markets
The calm between storms has set in on energy markets to start Friday’s trading with only fractional moves so far, after a week of mostly heavy selling. The dark cloud of rapidly rising COVID counts continues to hang over markets around the globe, while next week’s election is expected to create even more volatility.
November RBOB and HO contracts expire today, so watch the December contracts (RBZ/HOZ) for price direction today. RBOB futures reached their lowest levels since May during Thursday’s selloff, but held support just above the $1 mark, holding off a technical collapse for now. WTI and ULSD finally found a bid just a few ticks above their June lows meaning the sideways pattern is still hanging on by a thread. If the range finally breaks down, it looks like we’ll see another 10-20 cent drop for products in short order.
Gulf Coast gasoline prices joined the Group 3 market in the under $1 club Thursday. Chicago and NYH prices are just about a nickel away, while West Coast values still have more than a dime to fall before reaching that level. Ethanol prices saw their bubble burst as both corn and gasoline prices have plummeted this week. The upward momentum in RIN values also appears to have stalled out temporarily, with the weaker commodity values and the announcement that there will be one less obligated refinery requiring RINs next year managing to push both D4 and D6 prices back down from multi-year highs.
Big Oil earnings reports for Q3 being released this week are shedding more light on the challenging environment that’s forcing more job cuts, even with oil prices trading north of $40 for most of the quarter. Q4 is looking even worse with the drop in prices the past couple of weeks, and demand forecasts continuing to decline. While most OPEC members don’t release earnings reports like public corporations due, it’s fairly easy to extrapolate that they’re facing similar challenges, which makes the need to extend production cuts clear, although the will to do so from some members is less so.
The parade of hurricanes in the Gulf Coast isn’t helping oil producers as several noted in their earnings reports the reduced output and additional costs of having to shut in and restart production (not to mention shuttling employees to and from the rigs) have happened at the worst possible time.
As the Atlantic Coast dries out from the remnants of Hurricane Zeta today, the NHC is already giving a high probability of another named storm forming over the weekend. The disturbance has 80% odds of becoming the next named storm as it moves into the Caribbean over the next five days, but so far the NHC isn’t publishing a potential path for after it develops. This is close to where both hurricanes Delta and Zeta formed, so another hit to the Gulf Coast is still possible even as we move into the last few weeks of the season.
Another one bites the dust: BP announced it would shut Australia’s largest refinery, converting it to an import terminal, as operating the plant was no longer “economically viable." At 150mb/day, the plant is not large by U.S. refining standards, and won’t be missed in the current environment, but is the latest in a long string of rationalizations globally that’s expected to continue as long as demand is weak.
Technical Trapdoor Opens
The technical trapdoor has opened and energy prices fell right through with refined products dropping more than a dime since Tuesday’s close. Fear continues to be in the driver seat across multiple asset classes as U.S. equities had their biggest one-day selloff since June, while energy futures were reaching multi-month lows.
Yesterday’s DOE report was actually more bullish than the API report that got credit for an early wave of selling, with gasoline and diesel stocks declining and demand increasing across the board, but it did little to slow the downward momentum. Now that support is broken on the charts, and traders appearing to fixate more on where demand is headed instead of where it is, it looks like the next stop is $34 for WTI and $.96 for RBOB unless the bargain hunters start stepping in soon. ULSD prices still have not broken their September lows, but if they do break $1.06, it looks like they’ll make a push towards the $1 mark as well.
How 2020 is this? A hurricane made a direct hit on one of the country’s largest refinery clusters Wednesday, and that wasn’t even the biggest refining news of the day.
PBF announced it was halting fuel production at its Paulsboro, NJ facility due to the ongoing demand destruction and weak economic outlook for refining in the region. The facility may reopen in a limited capacity when demand recovers, but will be focused on providing feedstocks to PBF’s other east coast refinery in Delaware City. 18 months ago, the east coast (PADD 1) had 1.2 million barrels/day of refining capacity, when PES shut down that dropped to 889,000 barrels/day, and with Paulsboro offline will fall to roughly 723,000 barrels/day. That 40% decline in less than two years is certainly a big deal, but should not have an immediate impact on supply as actual run rates in the region are currently below 600,000 barrels/day. There is capacity on pipelines from the Gulf Coast and from waterborne vessels to cover this drop in production – particularly at current demand levels – but that loss of production will create the potential for supply bottlenecks, particularly in the Philadelphia market when summer demand is at its peak and VOC restrictions on RBOB limit supply.
Zeta made landfall as a strong Category 2 hurricane Wednesday night, with winds around 110 miles an hour (just 1 mph below Category 3 status). The storm passed within about five miles of the Valero/Meraux and PBF/Chalmette refineries as it moved through New Orleans. Earlier reports suggested that the NOLA-area refineries planned to operate through the storm, but now it appears that power outages have taken several of them offline temporarily while damage assessments are underway.
Make no mistake, in any other year, having five tropical systems hitting refining country and knocking multiple refineries offline in one season would be cause for sharply higher prices, and potential shortages throughout the region. This year, Gulf Coast cash markets have barely flinched and futures are tumbling due to the lack of demand that means there’s plenty of capacity to offset the storm-induced outages.
An EIA report Wednesday showed how tanker rates that spiked into the spring due to the super-contango forward curve have now reached their lowest levels in nearly two decades and are expected to remain at low levels until global demand recovers.
Volatility Creeps Higher
It’s a risk off type of day as another heavy wave of selling grips energy and equity markets around the world, pushing oil and gasoline prices to fresh three week lows after a solid recovery bounce in Tuesday’s session. Volatility is creeping higher after staying relatively subdued throughout most of the summer and fall, and many are suggesting that political turmoil could keep contributing to larger daily swings over the next couple of weeks.
Large builds in crude oil and gasoline inventories (4.6 million and 2.3 million barrels respectively) reported by the API are taking credit for the early wave of selling that’s wiping out Tuesday’s gains, while an even larger decline in diesel inventories of 5.3 million barrels appears to be largely ignored. Even more telling of the pessimism early on, nearly 9% of the country’s refining capacity looks to be within 50 miles of a Category 2 hurricane as it hits land this evening, and yet refined products are down 3-4%.
Hurricane Zeta now appears that it will likely reach Category 2 status with winds approaching 100 mph before hitting the coast this evening, but it is moving forward at a high rate of speed, so the rainfall totals are looking less impressive than what we see from slower moving storms, which will hopefully keep flooding in the region to lower levels.
It looks like New Orleans luck may have finally run out during this record-setting hurricane season as Zeta has stayed on course to pass near the city this evening. That puts the P66 Alliance refinery, Valero Meraux and PBF Chalmette facilities less than 10 miles from the eye of the storm as it moves over what passes for land along the Mississippi River Delta. Meanwhile, the Norco and Garyville refineries will be within 20-50 miles based on the current path. Alliance was reported to stay closed after Sally for maintenance and due to weak economics, and the other facilities are all running below capacity due to weak demand. A Reuters report Tuesday suggested the facilities will continue to operate through the storm, and so far no contrary reports have been released. Roughly half of Gulf of Mexico oil production has been shut in as a precaution.
The Colonial and Plantation pipeline operations are north and west of where the storm is projected to make landfall, so it seems like a low risk that supply further upstream will be directly impacted, which means markets along the southeast aren’t likely to see any disruption in fuel supplies. The other good news from the fast forward movement of this storm is it will only take a day to move through the Southeastern U.S., minimizing its negative impacts on fuel demand as well.
Spot gasoline prices in the group 3 market are now flirting with the $1/gallon mark, and based on the way the charts and seasonal demand patterns are setting up, it’s starting to seem inevitable that we’ll see that level broken in the near future, and that other regions may soon follow suit if RBOB futures can break below the June lows near $1.07, which is just a couple cents away from current levels.
Choppy Futures Remain The Theme
Choppy futures action seems to remain the theme of the week as we see energy futures bounce back this morning from yesterday’s losses. Prompt month gas and diesel contracts are up about 1.5 cents per gallon, while American and European crude oil benchmarks tack on about 30 cents per barrel.
Tropical Storm Zeta is expected to break from the Yucatan Peninsula this morning and develop into a hurricane on the warm waters of the Gulf. Its current projected path takes it right over New Orleans with seven of the area’s refineries inside the storm’s error cone. The good news is the system is picking up speed and will pose minimal threat if it can carry on without developing into a major hurricane nor stick around to dump rain behind the Big Easy’s levies.
The EIA published an interesting article about a nearly 30% drop in heating oil prices from 2019 to 2020, the largest YOY drop since 2014-2015. The price collapse earlier this year will lead to 10% decreased expenditure on home heating in the Northeast.
Futures have stemmed off a technical breakdown so far this morning as they attempt to make up for yesterday’s drop. The deck seems stacked against the energy complex with rising coronavirus cases, stimulus uncertainty, and overseas oil production coming back online. Daily charts warn of a six cent, short-term regression if refined product futures can’t retain some buying strength while the weekly charts offer room for a much more devastating 50 cent drop, returning to prices not seen since April.
New Lockdowns Have Markets On Edge
Fear is in the driver’s seat to start the week as energy and equity markets face an early wave of selling. Rising COVID case counts and new lockdowns have markets on edge, and a lack of stimulus plan progress has many concerned that this could be a long and painful winter, and so far are keeping attention away from the fact that there’s yet another hurricane heading towards refining country.
Remember that system in the Caribbean that was given 20% odds of developing last week? It’s now Tropical Storm Zeta, and is expected to become a hurricane heading towards (you guessed it) Louisiana later this week. The storm is on an eerily similar path to Delta’s earlier forecasts two weeks ago with the models taking it over the Yucatan, then on towards New Orleans with a landfall on the U.S. coast late Wednesday or early Thursday.
Will Zeta be the storm that ends New Orleans lucky streak? Already a handful of storms including Marco, Laura, Sally, and Delta were forecast to hit the big easy at some point, only to shift and make landfall on other parts of the Gulf Coast. The Lake Charles region has had the opposite luck, and although it’s currently out of the forecast cone, will no doubt keep a wary eye on this storm as well. There’s been a pattern that the early models underestimate how strong these storms will become as they move over open water. At this point Zeta is only predicted to reach Category 1 status, but is currently traversing the warm waters that saw Delta spike to Category 4 status in one day. Expect Gulf of Mexico rigs to be shut as a precaution, and if the storm stays on its current path, there’s a good chance the NOLA are refiners may start idling units as well to minimize potential damage.
So far the storm threat seems to have had little impact on energy futures, although RBOB gasoline is showing some resistance to the early sell-off that could be thanks to the storm risk. Most contracts are trading at three week lows, and threatening a technical breakdown that could finally end the sideways trading pattern that’s held since June and push products back below the $1 mark. West Coast cash markets are bucking the weak trend in futures however, with reported refinery issues spurring diesel basis values to six month highs.
The latest big deal: Cenovus agreed to acquire Husky Energy as the two Canadian oil producers and refiners sought a merger to survive the COVID Crisis. You may not recognize Cenovus as a U.S. refiner, as they’re a JV partner with P66 in the Wood River, IL and Borger, TX plants, and will now also be involved with Husky’s Lima, OH and Toledo (JV w/ BP) operations. No word yet on how Husky’s marketing and supply office in Columbus, OH will be impacted, although job cuts at some level are expected to be part of the deal based on the dreaded term “Synergies” used in the announcement.
Baker Hughes reported six more oil rigs were put to work last week, marking the fifth straight week of increases in the U.S. drilling rig count. Although the uptick in activity is certainly a small amount of much needed good news for the beleaguered industry, keep in mind the total rig count is still less than 25% of where it was one year ago.
Aimless Action In Energy Markets
The back and forth and ultimately aimless action in energy markets continues, with another mixed bag for the futures complex to start Friday’s trading. While a Thursday bounce kept the risk of a technical breakdown at bay, if prices settle near current levels today we’ll have another weekly loss with a lower-high and lower-low than the previous week, which suggests that when prices do finally break out of this sideways range, it will be to the downside.
The price action has not helped the industry, as companies large and small still seem to be struggling with a challenging demand environment that looks like it could get worse over the winter.
Exxon was reportedly close to making job cuts in the U.S., after going through similar rationalizations around the world. While the large oil companies are all following a similar playbook on cutting expenses to survive the COVID crisis, a Rystad energy report suggests that many more smaller producers will not make it. The report forecasts more than $100 billion in debt that will need to be restructured via bankruptcy this year, and predicts bankruptcy filings will remain high over the next two years.
The outlook isn’t much better for refiners. The charts below show current crack spreads are near break-even levels, and the forward curve suggests those margins may not return to healthier levels for more than a year.
The plea to the EPA by senators in refining states to give those plants a break from unreachable renewable volume obligations didn’t seem to stir traders much Thursday with RIN values holding near multi-year highs, while ethanol prices continued to rally on the heels of surging corn prices.
Signs of a bottom? Trafigura was reported to take a stake in Italian refiner Saras, which (like most refiners) has seen its share price tumble this year. At current prices, that facility could be seen as more of a terminal asset than a production asset for the trading house, and the relatively small (3%) stake suggests they aren’t exactly jumping in with both feet.
Looking (far) ahead? Shell hired a leader for its Global Renewable Solutions department, who won’t start until August of 2021, in what is another sign of the tide change for refiners and perhaps of the cash flow challenges they face.
Libya’s warring factions are expected to sign a truce today, which should allow another 300,000 - 500,000 barrels/day of oil to reach the world market, which will put more pressure on the rest of the OPEC alliance to agree to extend production cuts as demand isn’t strong enough to soak up any incremental supply.
The storm system that’s been churning in the Caribbean for the better part of a week looks like it went from nothing to maybe something overnight. The odds of development jumped to 60%, and instead of heading north and east over Cuba and the southern tip of Florida, it’s now looking like it might move further north into the Gulf of Mexico before making a hard right turn, so we’ll need to keep an eye on it over the weekend. Hurricane Epsilon is still churning through the Atlantic, but beyond some dangerous rip currents, should not impact the U.S. or Canadian coast lines as it is staying out to sea.
If you’re having trouble sleeping, take a look at the study the EIA commissioned on the energy efficiency gap in food processing.
Two conclusions were drawn from the study:
1. If the least efficient processing plants adopt basic upgrades, they’ll consume less energy.
2. We probably did not need the EIA to hire a company to perform a stochastic frontier regression analysis applied to pooled cross sections using plant level data from the quinquennial Census of Manufacturing to figure that out.
Shockwave Sent Through Energy Arena
Weak demand estimates reported by the DOE sent a shockwave through the energy arena Wednesday, pushing refined product futures to their lowest levels in two weeks, and some cash prices to their lowest levels in five months. All talk and no action from Washington on a stimulus bill to try and prop up the economy, which does not seem to be helping the sentiment for either energy or equity markets, as an attempt at a recovery bounce overnight has already fallen flat.
U.S. gasoline demand reached an 18 week low according to the DOE’s weekly estimate, and gasoline prices in many markets followed suit, reaching their lowest levels in about the same time-frame.
Gasoline prices in the NYH, LA and Group 3 spot markets all reached their lowest levels since early May during Wednesday’s sell-off, and are threatening further losses after the overnight bounce has fizzled in the early going. It’s starting to feel like a move back below $1 for gasoline is inevitable as the seasonal demand slowdown is just beginning, with more run cuts seeming to be the only option for many refiners that might prevent that next move lower.
Diesel demand also saw a large decrease on the week, but unlike gasoline, that figure started from a much higher level and remains above what we saw for most of the summer. Diesel prices were also hit hard during Wednesday’s sell-off, but still have more room to fall before threatening the low end of their sideways range.
Refinery runs were reduced across all 5 PADDs last week, as the lingering effects from Hurricane Delta and fall maintenance were both in play. In normal years we’d expect to see fall maintenance peak around this time, and then see refinery runs climb steadily through the end of the year. With this year being anything but normal, the next few weeks will bring an interesting showdown between the seasonal patterns and a weak margin environment.
Q3 earnings reports are highlighting just how challenging the operating environment is for refiners, and why more run cuts may be likely over the next several months. This morning, Valero and Neste both reported operating losses in their traditional refining segments for the quarter, while their renewable divisions continued to see increasing profits.
The plight of refiners led a group of Senators to ask the EPA to waive the planned increase in renewable volume obligations for 2021, to help those companies deal with the pandemic, and avoid excessive costs for unreachable targets caused by the weak demand environment. RIN prices have surged to multi-year highs in recent days thanks to stronger crop prices and last month’s ruling on restricting refinery waivers. We’ll see today if the request sparks a pullback, or is shrugged off given the bigger fish that need frying in Washington these days.
Hurricane Epsilon blew up into a major Hurricane in the past 24 hours – far exceeding earlier forecasts – but is expected to stay out to sea and not threaten land. The system being tracked in the Caribbean is given 30% odds of developing by the NHC, but should not impact the U.S. other than perhaps dumping some rain on south Florida.
Teeter-Totter Trading Continues
The teeter totter trading continues as the petroleum complex slips back into the red Wednesday after an optimism-fueled rally in Tuesday’s session. The modest sell-off in gasoline and diesel, despite healthy inventory declines on the week, suggest the market continues to care more about the potential for stimulus than short term fundamentals.
The API reported a large decline in diesel stocks of six million barrels last week, while gasoline inventories dropped 1.6 million barrels. Oil inventories showed a modest build of 584,000 barrels as refinery runs dipped once again. The DOE’s weekly estimates will be out at their normal time this morning.
New peace agreements between Israel and the UAE are already shaking up the oil trade as a new pipeline agreement is in the works that would bring oil to Europe without having to transit the Suez canal. While tensions seem to be easing in the Middle East, they’re apparently rising in Europe as the U.S. moved to prevent construction of Russia’s natural gas pipeline to Germany by placing sanctions on companies involved in the project.
Total reported a unit upset that caused a containment issue at its Pt Arthur, TX refinery overnight. So far U.S. Gulf Coast basis markets don’t appear to be worried about this unplanned event, as values are little changed amidst the transition to November pipeline cycles.
While petroleum prices continue to chop back and forth, ethanol and D6 RIN prices are staging a strong rally, trying to keep pace with surging corn prices benefitting from strong exports and an early blizzard that may disrupt harvest activity across the northern parts of the country. RIN values are also heavily influenced by the winds in Washington D.C. and are likely to see more volatility in the next two weeks as we learn whether or not there will be a changing of the guard in the White House and EPA.
Consolidation continues: A new acquisition in the oil patch, the third largest deal in as many weeks, may be a sign that the larger producers are feeling more optimistic about the future and are ready to start bargain hunting.
Gasoline Prices Cling To Small Gains
It’s another quiet start to trading for energy markets, with crude and diesel prices trading modestly lower for a fourth day. Gasoline prices are attempting to cling to small gains amidst fundamental and technical warning signs that suggest that we could see sub $1 product prices in the near future.
In addition to the ubiquitous COVID worries, stimulus package negotiations continue to be a major short term theme. Early optimism for a deal faded Monday, which pushed equity markets from strong early gains to heavy afternoon losses, and carried over to knock energy prices (particularly diesel) down a peg. There’s another round of negotiations reportedly underway today, which is likely contributing to the wait-and-see approach to early trading.
The OPEC & Friends technical meeting seemed to be a non-event, although the chatter is that the cartel will need to push to change plans to start ramping up production in January in order to avoid another price collapse.
West Coast spot markets have seen some strength in over the past several days as reported refiner buying helped basis values recover losses they had earlier in October. Refinery runs remain well below normal due to the sluggish demand and weak margins, and there were reports that the P66 refinery in Rodeo had unplanned maintenance that seemed to lend additional strength to Bay-area values. As the chart below shows, the recent strength is barely noticeable compared to the large swings we’ve been accustomed to in years past. Similar to the muted reaction in Gulf Coast values as multiple hurricanes made landfall, the COVID demand slump seems to be acting as a buffer to any supply disruptions in the region.
The EIA is expecting the fall harvest and a colder than average winter to help alleviate some of the diesel inventory glut that the U.S. has been dealing with since COVID hampered demand, and forced more distillates that would normally be made into Jet fuel into other diesel products. Unfortunately for refiners that desperately need a break, the chart of Midwestern diesel demand below shows that the peak of harvest demand may have already happened last week.
Tropical storm Epsilon has been named, the 26th named storm of this record setting season. The storm is expected to reach hurricane strength as it approaches Bermuda by the end of the week, but should not directly threaten the U.S. or Canadian coastline. The other system being tracked by the NHC in the Caribbean is given just 10% odds of development.
Chances Of Stimulus Package Points Equity Markets Higher
It’s a quiet start to the week, with most energy markets moving slightly lower on the day. The sideways trading patterns are still intact for most petroleum futures, with longer term charts favoring more downside this winter. Equity markets are pointed higher to start the week, with credit being given to increasing chances of a stimulus package being forced through congress this week.
China’s refinery runs dipped in September, but remained higher than a year ago and are close to the all-time highs set this summer. That sounds bullish on its own, but inventories are also rising, suggesting that supply is outkicking its coverage from the demand recovery, and will put downward pressure on product prices in the months to come. European refiners are getting squeezed by the increase in Asian refinery capacity, and their own climate laws that are forcing more plants out of business. Something to watch near term is if Brexit negotiations mean more gasoline from the UK will be forced to go to the U.S. to avoid tariffs from the EU.
Money managers trimmed their net length in WTI and RBOB contracts last week, but while adding some small positions in Brent and ULSD. Enthusiasm continues to be lacking in the money flows to energy contracts, as the outstanding positions for most categories of trader are much smaller than they’ve been in years past.
After 10 years, the CFTC finally passed a rule (which was required as part of the Dodd Frank regulations passed after the financial crisis) placing position limits on speculative positions in a variety of contracts in the energy, agriculture and metal markets. It’s no surprise that something that took a decade to agree on would be controversial, and reading the dissenting opinions of CFTC commissioners sheds light on the potential loopholes in the rule. With open interest already on the decline as the funds who tried to convince retail investors that oil futures were a safe investment are now limping towards the exits, it looks unlikely that we’ll notice anything different following the passing of the new rule.
Baker Hughes reported 12 more oil rigs were put to work last week, a fourth straight weekly increase, and the largest since January. The interesting part of the increase this week is that Utah and Wyoming – which had just one active oil rig between them last week – saw five new rigs put to work. It’s much less surprising that Texas had seven rigs added, although none of them were in the Permian.
Epsilon is expected to be named as a storm in the next day or two, with the NHC giving the system 100% odds of further development today. The storm is expected to stay offshore as it heads north past Bermuda, and should not approach the U.S. Coast, although some delays for vessel traffic along the East Coast could occur due to strong winds and some coastal flooding potential. The system in the Caribbean is still given just 20% odds of development.
A federal court ruled Friday that a default had occurred on PDVSA’s long-contested bonds, which were deemed valid and enforceable by the decision. That decision could ultimately force a sale of Citgo, which was used as collateral for the bonds, but the U.S. refinery is still protected by the U.S. treasury sanctions on Venezuela, at least through January.
Large Inventory Draws Under Pressure
Large inventory draws helped energy prices recover from a heavy wave of early selling Wednesday, but they’re under pressure again to start Thursday’s session as doubts linger about the sustainability of those improving fundamentals.
There’s no doubt that hurricane Delta had a large impact on last week’s numbers reported by the DOE as nearly 20% of refining capacity and essentially all of the oil production in the Gulf of Mexico were in the storm’s path. Now that Delta has passed and damage appears to be minimal (P66 confirmed restart of its Lake Charles facility yesterday) there seems to be much more to worry about with demand than there is with supply.
Diesel inventories saw their biggest weekly decline in 17 years as refiners made sharp cuts in output thanks to both weak margins and a major hurricane, while consumption held steady thanks in large part to harvest demand peaking across the Midwest. That was some good news for refiners, and helped ULSD prices erase the heavy selling from earlier in the morning. The bad news is inventories are still closer to record highs than to average levels, and the cuts in distillate yield aren’t easily sustainable.
U.S. diesel production reached its lowest level since the aftermath of Hurricane Harvey three years ago. While some of the decline is due to shutdowns ahead of Delta, there is also a real concern that the glut of distillates will continue to weigh on refiners for some time. As the charts below show, refiners are already stretching their product mix to levels we haven’t seen in 20 years as gasoline demand and margins have rebounded, while distillates languish, and there’s not much else they’ll be able to do besides cut run rates completely.
Gasoline inventories are back in a normal pattern, holding below 2019 levels and their five year seasonal average for a second week, even though demand pulled estimates dipped and remain nearly one million barrels/day below where they should be this time of year. Refiners are stretching to maximize gasoline yields just in time for the seasonal demand slowdown, which might make for a sloppy market this winter.
The refinery formerly known as Hovensa, which used to have a strong influence on NYH prices before being shuttered in 2012 due to weak economics, has been struggling to restart for a variety of reasons after new owners took over. A Reuters report this morning suggests that those new owners are now stuck between needing to start the facility this year to avoid losing its crude supplier, and an oversupplied market that would mean operating at a loss.
One of the two storm systems being watched by the NHC is slightly better organized today and is given 40% odds of developing, but is in a location that suggests it will stay offshore and not threaten the U.S. coastline. The other system is in a more dangerous position in the Caribbean that could move north into the Gulf of Mexico, but it’s still only given 20% odds of developing.
New COVID Fears Grip Markets Worldwide
There’s a wave of risk-off selling gripping markets around the world Thursday as fears of a second-wave of COVID – and the shutdowns it’s bringing - seem to be driving the action. Energy futures appear to be caught up in the demand fear, with most dropping by more than three percent so far today, despite supplies getting tighter in the U.S. last week.
The Dallas FED’s Mobility and Engagement index is showing that the upward trend in movement around the U.S. may have topped out in the latest report. You might also notice similarities in that chart, with the WTI price charts below, which makes sense given transportation fuel being such a major piece of energy demand, and helps explain the negative reaction in prices now that it looks like we’ll see substantial parts of the world start enforcing lockdowns once again.
The API was reported to show inventory draws of 5.4 million barrels for crude oil, 3.9 million barrels of distillates, and 1.5 million barrels for gasoline. Those numbers seem to have been discounted heavily (or perhaps ignored completely based on the price action) due to the impact of Hurricane Delta, which temporarily closed most Gulf of Mexico oil production and numerous refineries. Since the storm did not appear to do major damage that would impact supply long term, it’s expected we’ll see a quick recovery for the production that was shut in. The DOE’s weekly status report is due out at 10 a.m. Central.
Bullish for oil, bearish for refiners: the new Chinese refineries coming online are soaking up the excess oil supply that’s been floating on ships for months. This should help oil producers, but is more bad news for beleaguered refiners around the world, as refining output may well become a new weapon in the trade wars.
Two new potential storm threats have popped up on the NHC’s radar today, but both are given just 20% odds of developing, while the system they’ve been watching this week is now given 0% odds.
Energy Markets Digest Monthly Data Deluge
The back and forth action continues as energy markets try to digest the monthly data deluge of inventory reports from the alphabet soup of global energy agencies. Prices were moving lower overnight, wiping out Tuesday’s modest gains, but have recovered in the past hour and most contracts are now clinging to small gains on the day.
While futures continue to chop back and forth in their sideways range, cash markets are flashing warning signals as basis values – particularly for gasoline – are sliding now that the latest hurricane threat is behind us and most refineries appear to have escaped once again with minimal impact. Those weaker basis values have spot gasoline prices threatening the lower end of their trading range, and suggest it’s likely we’ll see some spot markets below $1/gallon in the near future. Diesel basis values have also been slipping lately, even as Midwestern states reach peak harvest demand, but diesel prices will still have more room to drop before threatening the bottom end of their range.
OPEC’s monthly oil market report was highlighted by a drop in production from the cartel, as the UAE finally came around to making up for its overproduction earlier in the year and slashed its output. The ¼ million barrel/day reduction was enough to offset gains from Libya, Iran, Iraq and Angola. The report painted a cautious outlook on demand as COVID cases are rising rapidly around the world as cooler weather forces people indoors, and highlights numerous challenges for refiners in the months ahead.
The IEA’s monthly oil market report was headlined “a moving target” as the spike in case counts threatens the global economic recovery. While the official projections remained relatively the same as last month, the report also suggests that refiners are in for more tough times ahead as the rapid increase in run rates this summer outkicked its coverage, forcing margins sharply lower in the fall, and the winter looking like it could be worse.
The EIA’s monthly drilling productivity report forecasts a drop in oil output from the major U.S. shale plays in November, following several months of recovery. The report also highlighted that there are still more than 7,500 drilled but uncompleted (DUC) wells across the major shale basins, which will take years to work through at the current rate, and provide a cushion to the U.S. supply network if demand picks up faster than drillers can keep up, which seems to be a quaint idea at this point in time.
The EIA also published a look at international electricity markets this morning, projecting the growth in demand driven by developing nations in the next 30 years, while renewable options like wind/solar and hydropower will be the driver of growth in supply.
The weekly inventory reports are delayed a day by the partial holiday formerly known as Columbus Day, so the API’s will be out this afternoon and the DOE’s tomorrow.
The lone disturbance in the Atlantic being tracked by the NHC has been reduced to just 10% odd of development over the next five days.
Unplanned Outages Of Crude Oil Globally
There is more back and forth action for energy markets this week, leaving most contracts stuck in the sideways pattern that’s held them since June. Yesterday, easing supply concerns had energy futures moving lower, and today it appears to be demand optimism that has them trying to rally.
A surge in Chinese trade activity reported for September is giving markets around the world a boost as it sheds an optimistic light on the economic recovery from COVID, even as equity markets are taking a breather after a major vaccine trial hit a speed bump.
Early reports from Lake Charles suggest that both the Citgo and P66 refineries avoided major damage from Delta, and will restart operations within the next couple of weeks. Colonial pipeline confirmed its mainlines were both back in service as of Sunday night, which means we should not see any major supply issues from this storm.
The relative lack of movement in both futures and basis prices compared to previous years when multiple hurricanes hit refining country demonstrates how COVID-related demand destruction has created a substantial buffer for domestic fuel supply.
The IEA published its long term World Energy Outlook, highlighting several scenarios for both COVID recovery and environmental policies and how they’ll impact the supply & demand balance globally. The general theme, as with many IEA reports, is that countries around the world need to do much more to reduce emissions.
An EIA note this morning demonstrates how much worse the global glut of oil supply would be if Iran, Libya and Venezuela weren’t facing huge declines in output. Unplanned outages for crude oil production globally are at their highest level in nearly a decade, primarily due to those three countries, and combined with voluntary run cuts in, are succeeding in rebalancing the world market.
A few notes from the IEA’s World Energy Outlook:
There is a disparity in many countries between the spending required for smart, digital and flexible electricity networks and the revenues available to grid operators, creating a risk to the adequacy of investment under today’s regulatory structures.
Rising incomes in emerging market and developing economies create strong underlying demand for mobility, offsetting reductions in oil use elsewhere. But transport fuels are no longer a reliable engine for growth. Upward pressure on oil demand increasingly depends on its rising use as a feedstock in the petrochemical sector.
Not all the shifts in consumer behavior disadvantage oil. It benefits from a near-term aversion to public transport, the continued popularity of SUVs and the delayed replacement of older, inefficient vehicles.
The U.S. shale industry has met nearly 60% of the increase in global oil and gas demand over the last ten years, but this rise was fueled by easy credit that has now dried up. So far in 2020, leading oil and gas companies have reduced the reported worth of their assets by more than $50 billion.
Over the next ten years, lower emissions from urban power plants, residential heating units and industrial facilities in the SDS lead to falls of 45-65% in concentrations of fine particulate matter in cities, and cleaner transportation also brings down other street-level pollutants.
Trio Of Supply Concerns Dissipate
Energy prices are under pressure for a second straight session following strong weekly gains as a trio of supply concerns are dissipating, which seems to be outweighing the stimulus optimism fueling another rally in equity markets.
Hurricane Delta made landfall as a Category 2 storm Friday evening, just 13 miles from where Hurricane Laura hit six weeks ago. While Delta didn’t pack the punch that Laura did, and didn’t stick around long enough to dump the huge amounts of rain parts of the gulf coast saw from Hurricane Sally, it did produce wide spread power outages that are hampering the supply network. Most of the refiners in the Pt Arthur area had to shut units down due to storm-related issues, and Colonial pipeline’s main diesel line is still shut down as they await power to be restored near the Lake Charles area.
No word yet on the status of the Lake Charles refineries, but based on the storm’s path, and the damage we’ve already seen further away in Pt. Arthur, it appears likely both facilities will have to go through another round of repairs to resume operations. Just like with Laura, it will likely be a few days until the damage can be assessed at the facilities that were just resuming operations after Laura and will now start over again. It appears that the plants around Baton Rouge and New Orleans, which were originally in Delta’s crosshairs, have dodged yet another bullet in the busiest hurricane season on record.
There are roughly seven weeks left in the 2020 Atlantic hurricane season, and the NHC is giving 30% probability that a system churning east of the Windward islands will develop in the next five days. Those are relatively low odds, and wind conditions don’t appear favorable at the moment, but in this record setting year, it seems like a mistake to ignore any potential storm.
Good news for Libya, bad news for OPEC? The beleaguered country’s oil output is coming back online, complicating OPEC’s output plans as Libya has been exempted from previous production cuts.
The Norwegian oil strike came to an end after successful mediation last week, which will keep more than 300mb/day of oil production online, adding to the downward pressure on prices.
Baker Hughes reported four more oil rigs were put to work last week, the third weekly increase in a row. Texas and New Mexico accounted for the build with Permian and Eagle Ford basins each adding one rig on the week, and two more were added in smaller unclassified areas.
Money managers continue to be unimpressed with oil contracts, making small reductions in net length in WTI and Brent for a second week, while making small increases to bullish wagers on refined products. RBOB gasoline continues to see a counter-seasonal bet on higher prices from the large speculators, while ULSD contracts remain in a net short position as the big funds bet diesel prices will lag.
New cleaner energy options continue to be a major story that’s getting even more attention given the polarity of the Presidential candidates on the issue. An unintended consequence in the surge of “green” stimulus packages is that they’re driving up costs for these projects, similar to what we saw with the spike in home remodeling & pool installation projects this summer. A Rystad energy report last week highlighted how those rising costs may hamper the development of one of the more promising alternatives, Green Hydrogen.
The Question Roiling Equity Markets
It’s a weak start to end a strong week for energy prices that have had plenty of back and forth action from the storms swirling around Louisiana and Washington D.C.
Delta looks like it should have relatively minor impacts on supply infrastructure along the gulf coast. Potentially, there should be no noticeable impact on the adjacent markets, as it’s taking a favorable track while it heads towards landfall tonight.
Stimulus or not continues to be the question roiling equity markets this week with a flurry of mixed signals from both the legislative and executive branches of government, and many are expecting more volatility due to uncertainty surrounding the election.
After all the choppiness in the past few weeks, refined product prices find themselves essentially in the middle of the sideways trading range that’s held them since June, leaving the technical outlook neutral near term, while longer term charts still hint at a larger move lower if prices can’t sustain a rally soon.
Delta is currently a Category 3 storm with winds around 120 miles an hour, and is expected to make landfall east of Lake Charles later tonight with winds around 100 miles an hour. It looks like Delta will hit less than 20 miles from where Laura made landfall, with numerous homes and businesses still not repaired from that storm. The good news is Delta is not nearly as powerful as Laura (100 mph vs. 150 mph for Laura) and Lake Charles looks like it will stay on the west side of the storm instead of taking a direct hit like it did six weeks ago. However Delta is a very large storm, so storm surge, tornados and power outages are expected to threaten almost all of the entire Louisiana coast line.
The current path of the storm would essentially thread the needle by hitting right in the middle of a 350 mile stretch of coastline. This is home to 27 refineries, which accounts for 40% of total U.S. capacity. The eye of the storm would not come within 30 miles of any one of those plants. Most of the facilities in Lake Charles and Pt. Arthur aren’t betting that will mean no impact on operations however, with many shutting units until the storm passes, as power outages are still a major concern and have the potential to be much more widespread than the storm itself.
OPEC’s World Oil Outlook highlighted the numerous challenges faced by the industry in the coming years due to COVID and the accelerated push towards renewables in many areas, but still estimates that oil will continue to be the largest piece of the global energy puzzle through 2045. The report also suggests that global oil consumption will continue to grow during the next 25 year stretch, although developed countries like the U.S. may have already seen their peak oil demand, and that a wave of oil refinery consolidation is required to balance the market.
A handful of other highlights from the WOO:
Oil demand growth is expected to recover during the medium-term, linked to demand ‘catching up,' especially in the sectors affected the most by restrictions during the COVID-19 crisis. These include the aviation, road transport and industry sectors.
U.S. tight oil will grow until around 2030, but not as much as previously expected
Crude distillation capacity is expected to increase by 15.6 mb/d until 2045, with a significant slowdown in the rate of required additions
Natural gas will be the fastest-growing fossil fuel between 2019 and 2045
‘Other renewables’ [Solar, Wind, Geothermal] retain the position of fastest growing source of energy in both relative and absolute terms
This article on the concerns over cooking and heating fuel shortages due to the closure of Newfoundland’s only refinery offers a glimpse of the numerous logistical headaches that will come from the rash of closures taking place around the world. In short, there’s still ample supply around the world, but the distribution network will take years to adjust.
One of the more popular of the numerous “clean” energy sources that are making their way through the news lately is Hydrogen. A WSJ article Thursday noted that the biggest challenge facing this alternative fuel is it requires lots of fossil fuels to produce.
The Latest COVID Refining Casualty
After a one-day selloff, energy prices have resumed their rally with WTI back north of the $40 mark, and refined products testing the top end of their recent trading ranges. Unlike earlier in the week, this move does not feel like it’s storm related, as Hurricane Delta’s path and intensity both made slightly favorable moves overnight. U.S. equities had their best day in three months Wednesday and are pointed higher again this morning, which seems to be carrying over to help energy contracts find a bid.
Delta’s path shifted further to the west in past 24 hours, moving the New Orleans and Baton Rouge area refineries further away from the expected landfall, but coming closer to the plants around Lake Charles and Pt Arthur. The current path has it making landfall Friday afternoon around 30 miles east of Lake Charles, which could be close to the best case scenario for refiners - if the area is going to be hit by a hurricane - as there will be no plants that will take a direct hit, or be within 100 miles of the more dangerous eastern side of the storm as it makes landfall. If the westward shifts continue however, the plants in Lake Charles that are just coming back online after Laura look like they’ll take another direct hit. As long as Pt Arthur and Houston stay on the western side of the storm, as they are currently, the odds of major pipeline disruptions to Colonial, Magellan and Explorer are low.
Another bit of good news is that the most recent projections estimate winds will top out at around 115 mph (Category 3) when yesterday, they were expected to be north of 130 (Category 4). We’ll see if those predictions hold true as it moves further over open water today.
The DOE’s weekly report didn’t do much to move prices Wednesday, as inventory changes were minimal, and demand estimates held steady. We should see more big moves next week as the industry prepares for Delta, and it’s likely we could see refinery runs dip even lower than we did then as we’re in the midst of fall maintenance. The EIA this morning detailed the impact on LNG exports from Hurricane Laura’s landfall, and with the paths so close, we should expect similar impacts from this storm.
The latest COVID refining casualty: Australia’s Ampol is planning on closing one of the country’s four refineries – in spite of government incentives to keep it operating for national security purposes - due to the ongoing demand destruction and subsequently weak margins.
A strike by Norwegian oil workers looks like it will move forward next week, which could take more than 300,000 barrels/day of production offline. That story has been getting credit for some of the strength in crude prices this week, but it may have little impact on total global supplies as Libya’s output has recently increased by nearly the exact same amount.
Equity Prices Whipsawed By Stimulus Package Rumors
Energy prices are pulling back after a strong two-day rally as Hurricane Delta’s path has made a favorable shift away from most NOLA area refineries, and after the EIA painted a bleak outlook for fuel consumption. Equity prices are getting whipsawed around by stimulus package rumors which is having some trickle-down effect on energy prices as well.
Hurricane Delta blew up to a Category 4 storm Tuesday, and made landfall on the Yucatan peninsula near Cancun this morning. Forecasts expect the storm will regain Category 4 strength as it moves over the Gulf of Mexico, but its latest tracks have it hitting further west along the Louisiana coast. That shift in path puts more land between the storm and most numerous refineries in its path, and may mean New Orleans will dodge yet another bullet this year, which seems to be contributing to the early pullback in product prices.
The API reported draws in refined products of one million barrels/distillates and 867k barrels for gasoline, while crude stocks built by nearly one million gallons. The DOE’s weekly report is due out at its normal time this morning.
The EIA’s monthly Short Term Energy Outlook predicts increased heating demand across the U.S. this year as a colder winter and work-from-home policies will combine to increase heating consumption. Thanks to ample supplies of natural gas, propane and diesel however, the average cost of heating homes is expected to remain similar to last year. The forecast once again reduced global fuel consumption estimates, largely due to the lingering effects of COVID-19. The report also highlights the challenges faced by refiners, particularly on the distillate side of the barrel, which helps to explain the drastic changes in the industry over the past six months.
One of the first refining casualties of the COVID fallout, the Come By Chance plant in Newfoundland, is once again feeling the pain of this low-margin environment as Irving Oil terminated its deal to purchase the facility this week. That announcement won’t have an immediate impact on supply as the plant has been idled for some time.
While refinery shut downs and conversions have become the norm across much of the world, with more expected in the coming months, China apparently hasn’t received the memo as they’re reportedly plowing ahead with construction of four new major plants, with nearly 1.5 million barrels/day of combined capacity, just in time for the world not to need them.
Biggest Storm Threat To New Orleans Since Hurricane Katrina Emerges
Energy prices are seeing a strong rally for a second day as a major hurricane targets refining country, which could be the biggest storm threat to New Orleans since Hurricane Katrina. Hurricane Delta is the 25th named storm of the season, and will be the 10th named storm to make landfall in the U.S. in a single season, both of which are breaking records set in 2005, the year Katrina, Rita and Wilma devastated parts of the country.
RBOB gasoline futures are leading the charge higher, already up more than 10 cents so far this week, as nearly four million barrels/day of refining capacity - more than 20% of the country’s total - is in the forecast cone for this storm, and essentially all of the NOLA area refineries clustered along the Mississippi River look like they’ll be on the more dangerous east side of its path. See the table below for the refineries at risk. If RBOB can break technical resistance around $1.25 this week, there’s room on the charts for a run at the Hurricane Laura highs of $1.40. Considering we’re already in winter-RVP grades of fuel and expecting the seasonal demand slowdown however, it seems like a long shot for gas prices to sustain that type of rally.
The outlook for Delta is much more dangerous as it rapidly intensified from a disorganized storm to a hurricane yesterday, and is now expected to become a major Category 4 storm in the next couple of days with winds expected to exceed 130 mph before weakening as it approaches land on Saturday. We’ve already seen numerous examples of forecast models underestimating the strength of these systems (including with this storm just yesterday) so don’t be surprised if it reaches Category 5 – the highest level on the scale - as it makes its way across the Gulf of Mexico. For consumers, the good news is that roughly ¼ of the refinery capacity in the path of the storm has already been shut in or is running at reduced rates, either due to COVID-related demand destruction, or the impacts of Hurricanes Laura or Sally earlier in the year, which should mean less potential impact on prices. In addition, as long as the Houston and Port Arthur hubs aren’t impacted directly, there’s less risk of any shutdowns of the major pipeline systems feeding the East Coast and mid-continent markets.
You’ll see plenty of reports that Gulf of Mexico oil rigs are being shut in ahead of this storm, but with ample inventories and sluggish demand, it’s unlikely those precautionary shut downs will have a long term impact on oil prices.
Diesel prices are lagging the run-up in gasoline prices as distillate inventories remain near record-highs while gasoline stocks have returned to normal seasonal levels. Outside of the annual harvest demand spike happening across the Midwest, the outlook for diesel demand remains sluggish with mass transit and trucking activity looking like it will take years to recover. From a technical perspective, ULSD futures are facing short term resistance at the $1.17 mark this week, and if they break through that level, look like they’ll make a run at $1.25.
Energy Futures Sent Sharply Higher
Improving outlooks for both the President’s health and a congressional stimulus package, and yet another hurricane threat staring down refining country are combining to send energy futures sharply higher to start the week with several contracts up around five percent in the early going.
RBOB gasoline futures are once again leading the action, up nearly six cents so far today, wiping out the bulk of last week’s losses. The big bounce is another victory for the sideways trading range as technical support held yet again, and suggests we’ll see more sideways action in October when last week it was looking like we could see a price collapse.
The break in storm activity is officially over. Tropical Storms Gamma and Delta were both named, and Delta appears like it could be a hurricane pointing for Louisiana this weekend. The current forecast cone keeps Houston out of the possible range, but Pt. Arthur and Lake Charles are still possibilities, and the current path has this system heading directly over New Orleans, which has already narrowly avoided a couple direct hits earlier in the season. The P66 Alliance refinery chose to move up maintenance after shutting ahead of Sally, so it is already closed, and we’re likely to see other precautionary closures later this week if this path holds.
Baker Hughes reported six more oil rigs came online last week, five in the Permian and one in the Bakken, which puts the total U.S. count at 189, its highest level since mid-June. While that’s a bit of positive news for the struggling industry, keep in mind the count is exactly 600 rigs less than it was this same week a year ago.
Money managers are looking more bearish for oil prices this week, cutting back long positions in WTI and Brent, and adding new shorts to WTI to drive down the net length held by the large speculative category of trader. Net length in RBOB continues to tick up in a counter-seasonal fashion, as it appears funds are currently willing to bet that COVID recovery factors will be enough to offset the typical winter slump in driving demand.
A Reuters article over the weekend notes that the rush to convert traditional petroleum refineries to renewable diesel facilities in the U.S. may mean more product exports to Canada, as facilities north of the border won’t be able to meet the country’s new fuel standards for several more years.
Remember a year ago when trade talks were the big story? A WSJ article notes how the U.S./China trade deal is driving more oil exports and eating into the Saudi’s market share.
U.S. President Tests Positive For COVID-19
Big red numbers are flashing across energy and equity markets after the U.S. President and first lady announced they’d tested positive for COVID-19 late Thursday night. Financial markets were already jittery this week over the potential negative economic impacts of climbing case counts and an ugly election season, and this news just creates more uncertainty in both areas.
The early wave of selling in petroleum futures sets up a test of the mid-September lows around $1.06-$1.07 for RBOB and ULSD. If prices can hold support, this is likely to be remembered as nothing more than the latest crazy news story in the craziest year any of us can remember. If prices break through that support however, we might look back at this as the catalyst that finally broke the complex out of its four-month-old sideways trading pattern and sent product prices on another extended trip below $1/gallon.
September’s payroll report showed another month of strong job growth in the U.S. as the COVID economic recovery continues. 661,000 jobs were estimated to be added during the month, which took the headline unemployment rate down ½ % to 7.9% while the U-6 rate dropped by 1.4% to 12.8%. Those numbers are good, but still highlight the long road to recovery for the U.S. economy that lays ahead, and were largely ignored based on the lack of price reaction as traders seem preoccupied with the other news of the day.
That storm system that had been churning in the Caribbean for the past week is now given 90% odds of developing into Tropical Storm Gamma by the weekend according to the NHC. It’s still too soon to say where it will go from there, but it’s likely to enter the Gulf of Mexico next week and yet another Gulf Coast hit is a possibility at this point. An EIA note this morning highlights how Hurricane Laura impacted crude production in the Gulf more than any storm since 2008. The Lake Charles refineries are still trying to recover from Laura’s direct hit, and the last thing they need right now is yet another storm system to complicate those efforts.
Today’s interesting read: A Bloomberg article detailing how JP Morgan manipulated metals and treasury markets, and how they got caught. While this was the big fish caught by the CFTC recently, numerous other announcements in the past week show that the agency has its hands full dealing with other bad actors across numerous markets.
Real-World Impact Of Refinery Shutdowns
The fourth quarter is starting on a soft note for energy markets with the big 4 petroleum contracts all trading modestly lower to start the day, after staging a healthy recovery bounce to finish off September. This time yesterday it was looking like we may be setting the stage for a substantial move lower in product prices, but the selling pressure didn’t last long after 8 a.m., leaving the complex stuck in its sideways pattern.
After a rough September, U.S. equity markets are pointed higher to start October trading, but so far that strength has not carried over to energy prices.
Yesterday’s DOE report did little to sway price action as inventory and demand estimates had relatively minor moves. Total refinery runs in the U.S. remain lower now than they were after Hurricane Harvey knocked nearly 1/4th of the country’s capacity offline three years ago, and yet this time there are no supply shortages to speak of as demand continues to lag.
With the seasonal demand slowdown looming for gasoline, and diesel inventories still near record highs, we may see refinery run rates continue to decline over the next month, with more outright closures still a distinct possibility. This article highlights the real-world impact of the refinery shutdowns that have already happened this year.
The CFTC ordered Sunoco LP to pay a $450,000 fine for spoofing crude oil, gasoline and diesel contracts in 2014. The statement says the trader involved used 50-100 lot increments (50,000-100,000 barrels or roughly 2-4 million gallons of notional volume) to push the market towards smaller positions they actually planned to execute, and once done would cancel the larger orders. This is just a day after JP Morgan agreed to pay $920 million for spoofing metals and treasury markets. Based on the size of the fines, you can get a feel for just how huge the banks’ manipulative trading practices were in comparison.
A Rystad energy report released yesterday suggests that U.S. onshore crude production likely peaked in August and will decline over the next year as prices are unlikely to recover enough to spur more drilling activity.