Market Talk - 2020 october
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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.