News & Views
Financial Markets Unimpressed By Debate Performance
The wheels came off the energy bus Tuesday, as a four day rally was largely wiped out in a single session. Gasoline prices are now leading the complex lower for a second day, after the leading the move higher during the run up.
This is the second cycle of the four-days-up, two-days-down pattern for RBOB futures in the back half of September, with a net result of prices increasing seven cents during that time. Nearly half of those gains will be wiped out when the November contract takes over the prompt position tomorrow, as we slide down the backwardation curve heading into winter. That roll will leave gasoline prices just one decent sell-off away from the lows of the summer trading range, with the seasonal demand drop looming and threatening another move below $1 - should that support finally break.
The API report seems to be driving the direction in the early going, as a build in gasoline stocks has RBOB under pressure while draws in distillate and crude inventories has those contracts holding steady. The DOE’s weekly report is due out at its normal time, 9:30 Central. October RBOB and ULSD contracts are expiring today, so watch the November contracts (RBX & HOX) for direction in the racks.
Financial markets were apparently not impressed by the debate performance last night, which foreshadows more volatility over the next month as the election looms and potentially even more price swings should the results be contested. While the correlation between equity and energy prices has been hit or miss this year, any major moves in stocks – particularly to the downside – have the ability to pull the energy complex (which is just a fraction of the size of equity markets in dollar terms) along for the ride.
As the momentum builds towards clean(er) energy options, it should be no surprise that Wall Street is being flooded with Green Energy acquisition companies (aka SPAC’s) seeking to capitalize on investor’s desire for new ideas, whether or not they’re proven. The movement certainly has a dot-com bubble feel about it, as the majority of the companies being purchased have no revenue stream, suggesting the move by PE groups to spin them off into the public markets has less to do with creating sustainable green energy platforms, and more with racing to put more green in their own pockets before the appetite for IPOs of unproven companies market dries up.
JP Morgan has reached a settlement with the CFTC and other agencies, and will pay a $920 million fine for trade spoofing in metal and treasury markets. There’s plenty of evidence that similar forms of manipulation have been happening in energy markets over the years as well, but it remains to be seen if any of those cases will come to light.
Marathon began implementing job cuts nationwide Tuesday, after announcing plans earlier this year to reduce workforce due to demand destruction. Shell is also announcing plans to cut 7,000-9,000 jobs over the next three years, but did not indicate where those cuts would take place.
Stop Smoking: The EIA published an interesting report on the negative impact California’s wildfires are having on solar electricity production, highlighting yet another challenge with the reliability of the state’s power grid.
Energy Complex Moves Back Into Neutral Territory
It’s another quiet start as September trading winds down, with refined products taking a small step back after four straight days of gains.
The September recovery bounce after testing the summer lows early in the month has moved the energy complex back into neutral territory on the daily and weekly charts, while the monthly charts still show more downside risk as winter approaches. Monday’s rally in gasoline highlights the complicated challenge for refiners as gasoline inventories have now returned to normal levels, while a glut of distillates remains.
The EIA Monday reported that despite the COVID-related slowdowns in gasoline, diesel and jet fuel exports, the U.S. still sent more petroleum products overseas in the first half of 2020 compared to 2019 thanks to continued growth in Propane and other HGL deliveries, primarily to Asia. While those various liquids – which are mainly a byproduct of oil and natural gas drilling – have numerous uses, the growth in demand from overseas is believed to be primarily driven by production of plastics and other industrial uses, rather than transportation fuels.
The American Trucking Association is forecasting a strong recovery in trucking activity after an unprecedented decline this year in its annual freight forecast. The report estimates a rebound of nearly five percent in trucking volumes next year, then an average growth of 3.2 percent for the following five years. If that report comes to fruition it will be welcome news to U.S. refiners struggling to find a home for their distillate streams.
As various green transition programs are becoming more mainstream in the oil industry, Rosneft is warning that the industry risks another supply and price shock on the back side of the pandemic due to lack of investment in traditional resources. The FT article notes: The 100m barrel a day pre-pandemic oil market required 3m-5m b/d of new supplies to be found each year just to keep up with depletion at existing fields.
While there’s been plenty of refinery closure and project cancellation announcements lately, the refinery formerly known as Hovensa initiated start-up of the plant in the past week, after years of delays. The company planning a new build refinery in North Dakota meanwhile is detailing some of its cutting edge technology, including using corn oil to back out some crude oil, that will make its facility the “greenest” in the U.S., which they believe will offset its limited scale.
In other non-traditional refinery news, Tesla is reportedly building a lithium hydroxide refinery in Texas, adjacent to the facility that will produce its electric-powered trucks. The move to control some of the upstream pieces of its battery production sheds light on just how complex the process of harnessing electricity on a commercial scale really is.
The EPA is challenging the idea California’s governor laid out to ban gasoline-powered-car sales in the state starting in 2035, suggesting the target (which still has to have implementation goals set by the CARB) may be illegal in addition to being impractical.
Presidential Debate Expected To Be Potential Market Mover
Refined products are ticking modestly higher for a fourth straight session to start the week, but have still not erased the heavy losses we saw last Monday. There is still little in the way of market moving news directly impacting energy prices – which seems to be why we’re seeing very small trading ranges in the past week. U.S. equity markets are pointed sharply higher after dropping for a fourth straight week last week, as bargain hunters appear to be betting that the September correction has now run its course.
The presidential debate on Tuesday is expected to be a potential market mover for stocks, which could trickle down to energy markets as well.
Already permitting in the Permian basin has surged in the past few months even as prices remain below break-even levels for new drilling projects, which many believe is to avoid a potential ban on hydraulic fracturing if Biden wins the election.
Baker Hughes reported four more oil rigs were put to work last week, two in the Permian and two in the Eagle Ford shale plays, marking just the fourth weekly increase since the start of COVID.
Money managers increased their net length in WTI, Brent and RBOB contracts last week, driven primarily by short covering, although WTI did see a healthy increase in new long positions as well. ULSD continues to be the least favored among the large speculative class of trader, with another increase in the net short position (betting on lower prices) last week.
The latest refining casualty in a rapidly growing list: PREEM announced it was scrapping a $1.6 billion expansion at the Sweden’s largest refinery as the fallout from COVID made the project unviable economically.
An IEA report this morning highlights the growing role of carbon capture technologies in the race for clean energy.
The Financial Times is reporting that Trafigura – one of the world’s largest oil traders – announced a $2 billion investment in renewable projects. The company is also planning to set targets to reduce emissions from its existing operations, saying “We are going to set targets that are achievable...but I am not going to commit to something in 2050 that I am not around to deliver,” he said. “We will commit to something we can deliver on.”
After a few days with no storm systems in the Atlantic, the NHC is giving low (30%) odds of development to a system off the Eastern coast of central America. While the peak of the season is in the rearview mirror, it’s still expected we’ll see a few more storms in this extremely busy season before it ends November 30. As a reminder, Sandy was a Halloween storm.
Stock Markets Poised For Another Weekly Loss
Energy prices are stumbling out of the gate to start another trading session without much going on to drive the action, keeping price movements to a minimum. U.S. stock markets are poised for a fourth straight weekly loss, which has added to the downward pressure on energy prices (at least in terms of a negative sentiment about demand growth). That said, equity indices are looking much weaker on a technical basis than energy futures, which still need to break the low end of the summer trading range before we can call for the next bear market.
The forward curve charts below show petroleum prices have dropped in almost equal increments throughout the next three years, keeping the contango curve in place as expectations for a gradual recovery in global demand haven’t changed much during the past month.
While petroleum prices are stagnating, there’s been more exciting action in the renewable space this week. Prices for ethanol, biodiesel and their RINs all have dropped sharply along with crop prices as the U.S. harvest is looking very COVID resistant. Export demand remains questionable.
The Dallas Fed’s Energy survey showed that activity in the sector has continued to contract in Q3, albeit at a much slower pace than the previous quarters. The majority of responding companies anticipate that drilling activity won’t pick up substantially until WTI gets north of the $50 mark, a less optimistic view than in previous months, and also a reflection of the overhand of DUC wells in the region.
A WSJ article this morning estimates that California will need to expand its electric grid by 25% in the next 15 years to power the fleet of electric cars the governor has been encouraging. For a state already unable to keep up with power demand, the task seems to be out of reach. That said, the EIA this morning highlighted the dramatic change in the country’s power production over the past decade as the U.S. moves away from Coal-fired power. The FERC’s recent move allows end users access to wholesale electricity markets, diversifying the grid, as electric vehicles will be able to send their unused power back into the grid.
Shaky Financial Markets Winning The War?
Weak equity markets squared off with some bullish inventory data for control of the energy market price action Wednesday, and while the good fundamental news won the day, a weak start to Thursday’s action suggests that shaky financial markets may end up winning the war this fall.
Inventory drawdowns and strengthening demand in the weekly DOE report helped the energy complex turn small losses into modest gains on the day. U.S. gasoline stocks fell below year-on-year levels for the first time since COVID shutdowns started pummeling demand six months ago, in what many see as a major victory for refiners. Naysayers will point to a large drop in gasoline imports due to Atlantic storm activity slowing the flow of gasoline from Europe, and the upcoming seasonal demand slowdown as reasons this relatively balanced supply won’t last.
Diesel demand shot up 30% last week according to the DOE’s estimate, which helped inventories pull back from the brink of an all-time high. Export activity for products and crude oil remained steady, suggesting the port disruptions from the multiple storms along the gulf coast has had minimal impact on flows so far.
California’s governor took a page straight out of Atlas Shrugged when he signed an executive order to phase out the sale of gasoline-powered vehicles in the state by 2035. The statement also encouraged drivers to switch to electric cars saying, “Our cars shouldn't make wildfires worse.”
Perhaps he forgot about the thousands of California wildfires caused by electric transmission lines, or how that electricity is generated in the first place.
This is the same person who less than a year ago called for an investigation into why the state’s gasoline was so much more expensive than the rest of the country, failing to recognize the impact of more than $1/gallon in state taxes and fees that set the state apart from most of the country, or the boutique fuel grades mandated by CARB and other policies that continue to force refiners in the state to shut down.
Total is the latest refiner to announce plans to convert one of its facilities from crude oil to biofuels over the next two years. The notice also highlights the growing interest in bio/renewable plastics, which will become a more mainstream idea as the momentum for carbon reduction builds. The refining industry was already expected to produce more plastics than transportation fuels in the coming decades, so the pressure to find renewable options on that side of the output will be strong.
U.S. Targets China For Role In Climate Change
A large draw in gasoline stocks has RBOB futures trying to pull the rest of the energy complex higher to start Wednesday’s trade. From a technical perspective, petroleum futures continue to look like they’re on shaky ground after two days of selling wiped out most of last week’s gains, with a test of June’s lows looking likely as we head into the seasonal demand slowdown in the U.S.
The API was reported to show a draw of 7.7 million barrels of gasoline last week, a drop in diesel inventories of 2.1 million barrels, while crude stocks had a small build of 691 thousand barrels. The DOE’s weekly report is due out at its normal time this morning. Those draws in refined products are welcome news to beleaguered refiners, but could be short term anomalies given the numerous storm disruptions of the past week, rather than a sign of improving demand based on other reports.
China is claiming that it will take a leadership role in climate change with a pledge to be carbon neutral by 2060. The announcement with no detail as to how that will work came just hours after the U.S. targeted China for its current role in climate change as the world’s largest polluter.
The FERC has issued an order opening up wholesale electricity markets to distributed energy resources, which will give individual homes (rooftop solar panel and garage EV chargers) more competitive options, and opens the door for aggregators to harness unused energy from those homes to sell back into the market, which is seen as a “game changer” for the expansion of these technologies.
A pair of interesting reads from the Financial Times and WSJ: Why Saudi Arabia’s threat to oil speculators is easier said than done (AKA, it’s hard to teach an algorithm a lesson). The latest example of the energy industry’s remarkable ability to over-heal itself: The new glut of pipeline capacity in the Permian.
Beta and Teddy are both dissipating after reaching land, with minimal impact on energy supply as ports are already reopening. There are no other threats being tracked by the NHC expected to develop in the next five days.
Week 38 - US DOE Inventory Recap
Energy Prices Struggle To Find A Bottom
Energy prices are struggling to find a bottom after an overnight bounce was erased in early trading Tuesday morning, adding to Monday’s heavy losses. The selling so far this week has wiped out roughly half of last week’s strong gains, and sets up more downside on the weekly charts if product prices can’t figure out a way to sustain a rally over the next few days. It’s a similar story for U.S. equity markets, after an afternoon bounce Monday limited the damage from a heavy morning sell-off, some overnight buying has given way to more selling, threatening a larger move lower in the coming weeks.
Tropical Storm Beta weakened as it made landfall, which meant Texas refiners could maintain operations through the storm. Flooding is still a likely possibility over a wide area as this system moves slowly and dumps large amounts of rain, but besides slowing recovery efforts for areas impacted by Hurricane Laura, it’s not expected to have much impact on energy supply infrastructure. Hurricane Teddy is staying offshore from the East Coast, but causing dangerous currents that could present some minor challenges for shipping traffic. With tanks stuffed full already, those limited challenges should not show up at the terminal level. After this, it looks like we’ll get a brief respite from storms as the system churning near Florida is given only 10% odds of developing this week, and so far nothing new is brewing off the African coast.
As the crack spread chart below shows, despite all of the refinery closures and port disruptions due to three storms in the past month, margins for plants along the U.S. Gulf Coast have barely moved, suggesting that healing for struggling refiners will have to come from the demand side of the economic equation.
The Dallas FED published a look at the looming fiscal budget shortfalls facing most states as tax revenues have plunged during COVID. The report notes that states dependent on income taxes are faring worse than those (like Texas) that rely on sales tax and don’t charge an income tax.
The EIA this morning took a look at how U.S. oil exports have been steadily dropping since reaching a record high in February.
New Restrictions Due To Rising COVID Counts
The fear trade is back on, pushing energy and equity markets sharply lower to start the week. New restrictions due to rising COVID counts are the headline of the day, spreading concerns that demand for fuels and other goods could plummet once again this fall.
RBOB gasoline futures are leading the energy complex, trading down by more than a nickel in the early going after a strong rally last week, as the heart of U.S. refining dodged another storm threat, and signs are growing that the seasonal demand slowdown is upon us.
We ran out of names for the 2020 hurricane season, and had to move to the Greek alphabet for just the second time ever as three new storms were named Friday. Tropical Storm Beta is expected to make landfall in Texas near Matagorda bay overnight, which keeps it far enough away from the Corpus Christi and Houston refining hubs that it should not be a major supply disrupter over the next day or two. The problem is that it’s expected to stick around for most of the week, and dump huge amounts of rain – more than a foot in some areas – that will cause flooding, some of which will be in areas still recovering from Hurricane Laura. The storm is also close enough to shore that it could move back out to sea where it can continue to gather strength and add to the rainfall totals.
Meanwhile, Hurricane Teddy is making its way towards the Eastern coast of Canada, but looks like it’s staying far enough to the east that it should miss the Irving refinery in St. John. There is another system near Florida being tracked by the NHC, but it’s given just 20% odds of developing this week.
Remember when we were worried that IMO 2020 specs would mean a shortage of diesel this year? A Bloomberg article notes that Refiners are having to blend kerosene into VLSFO bound for ships because weak demand for jet fuel has them scrambling to keep tanks from reaching capacity. This unusual blending pattern for distillates is expected to continue in the coming year, and keep pressure on ULSD prices as inventories hold near record highs.
Money managers continue to have mixed feelings about energy contracts, making small increases to net length in WTI, while slashing Brent positions last week. RBOB and ULSD contracts saw only minimal changes on the week.
Baker Hughes reported a reduction of one oil rig last week, as drilling activity remains near record lows in the U.S.
Saudi Arabia's Energy Minister Levels Criticism
Energy futures have had their strongest week since June, even as equity markets have struggled and the U.S. dollar has strengthened, following several signs that producers are up to the task of rebalancing the global supply/demand equation for oil.
Thursday saw a strong move higher after Saudi Arabia’s energy minister leveled harsh criticism of non-conforming OPEC members, and leveled threats at oil market speculators who had been shorting prices this year at an OPEC & Friend’s compliance meeting. The UAE, an apparent target of the criticism, already has indicated it would compensate for its overproduction. The cartel also indicated it would hold a special meeting in October if needed to help stabilize prices.
Reports that Libyan oil exports would resume are getting credit for the early round of selling, although some profit taking after the strongest week in three months – particularly given the weak action in stocks – also seems to be influencing the early action.
Hurricane Wilfred is expected to be named over the weekend as it spins in the South western gulf of Mexico. The current forecast has it weakening back to tropical storm status before reaching the Texas Coast, but you’ve seen how those predictions have been going, so don’t be surprised if it strengthens further. Corpus Christi area ports and refiners look to be the most likely at risk, but Houston is still in the threat cone as well.
Hurricane Teddy is expected to stay offshore as it moves north off the East Coast, but could become a threat to the Irving refinery in St. John if it follows the western half of its forecast cone.
FED Signals Interest Rates To Remain The Same
It’s a quiet start to trading a day after crude oil and gasoline contracts shrugged off weaker equity markets and a stronger dollar to post a 5% rally. Inventory draws in crude oil took much of the credit for the rally, although demand estimates showed there is still plenty of work to be done to get consumption back to pre-COVID levels. The FED signaled it wouldn’t raise interest rates for nearly three years in its FOMC announcement, which also earned some credit for the rally in energy prices. Whatever the cause, this week’s bounce has reduced the risk of a near-term technical collapse, with the low prices from June passing their first major test of their chart support capabilities. Longer term there is still plenty of downside risk on the charts unless prices can push through their August highs.
Hurricane Sally made landfall with winds over 100 miles an hour, but like Laura a few weeks ago, spared refiners in the path with a late eastward shift. The plants that had reduced rates ahead of the storm appear to have avoided major damage and terminals in the region quickly reopened even as the system continues to dump huge amounts of rain and create widespread flooding.
Although it doesn’t have a name yet, the largest current storm threat could be the disturbance over the Southwest Gulf of Mexico that’s being given 90% odds of forming over the next five days, and looks like it will head north and east, putting the refining centers once again in the threat zone. Speaking of names, there’s just one name left on the list for 2020, and since that will probably get used up in the next few days, we’ll then move on to the Greek names to finish out the record setting season.
The chorus of concern for diesel continues as the DOE’s weekly demand estimate dropped to its lowest level since May last week, and inventories are once again on the cusp of reaching a record high. Add to that the incremental supply from barrels normally destined for jet fuel production and it appears that diesel may remain the weak link in the refinery chain, after more than a decade of being the primary moneymaker for many.
D4 Bio RINs continue their rally, pushing to $.80/RIN for the first time since March 2018, on the heels of stronger Soybean prices that surpassed $10/bushel for the first time in nearly three years.
Refineries Operate Through The Storm
Sally made landfall as a Category 2 hurricane at around 7 a.m. CDT this morning. As its path shifted further eastward, both Chevron’s Pascagoula refinery and Shell’s Saraland refinery decided to continue operating through the storm. While Sally is expected to cause wind damage and flooding to areas that are directly hit, for now it seems the impact to energy infrastructure will be minimal.
There are two more new named storms churning out in the Atlantic: Hurricane Teddy and Tropical Storm Vicky both look to be content to exhaust themselves out at sea. However, a disturbance in the Gulf given a 40 percent chance of cyclonic formation will be watched over the next couple days.
Crude oil futures are leading the way this morning, up 2 percent so far on the day with prompt month gas and diesel contracts up around 1.25 percent. Big numbers from the American Petroleum Institute seem to be taking the credit for this morning’s rally. The API estimates a crude oil draw of 9.5 million barrels last week, likely due to Gulf Coast refinery restarts after Hurricane Laura passed through.
Prompt month RB and HO contracts have almost completely recovered the rout they suffered back on 9/8. With about three cents left to climb, both refined products benchmarks are within striking distance of invalidating a bearish chart pattern than has been forming for the past four to five months. A confirmation of the Institute’s estimated crude draw by the Department of Energy’s report (due out 9:30 a.m. CDT) could be enough to push gas and diesel over that last hurdle.
Week 37 - US DOE Inventory Recap
Chevron Shutters Pascagoula Refinery Ahead Of Storm
It’s a mixed bag again this morning with diesel hanging back while gas and crude oil futures enjoy moderate buying. Crude oil futures seem to be leading the way so far, showing gains of over one percent, prompt month RBOB is up only 0.4 percent while diesel sags -0.4 percent.
Hurricane warnings surrounding the New Orleans area have been relaxed to tropical storm warnings, as Sally shifts eastward, sparing the cluster of refineries on the Louisiana coast. Chevron has shuttered its 330,000 bbl/day Pascagoula refinery ahead of the storm’s projected landfall late Wednesday. No word yet from Shell’s Saraland refinery which also looks to be in Sally’s path.
The EPA has announced it will reject the majority of the remaining retroactive biofuel waivers that were pending review, leaving only those lucky few that received waivers in the past able to receive them going forward. Current year ethanol RIN prices were up around 2.5 cents after the ruling.
We are seeing some buying this morning despite the International Energy Agency’s revised demand estimates. The IEA slashed its anticipated global oil demand growth by 8.5 million barrels per day in its monthly report published yesterday. Despite marked improvements in the handling and control of the COVID-19 virus, some think we haven’t seen the entirety of its market impact.
Energy Futures Mixed This Morning
Energy futures prices are mixed this morning, much like they were Friday, as the complex attempted to avoid closing with a weekly loss. October RBOB futures are seeing the most buying so far today with gains of about a penny, almost 40 points more than it neighboring November contract. ULSD and both American and European crude benchmarks are all hanging on the negative side of unchanged.
Baker Hughes published their weekly oil rig activity report, showing a net decrease in two production platforms in the U.S. The single rig closure in Texas and the other in West Virginia brought last week’s total to 254 active plants, down over 600 from this time last year.
The Commitment of Trader’s report published last week shows a significant pullback in net length in WTI positions from the Managed Money category, bringing their long bets to a multi-month low. RBOB and HO saw likewise declines but to a lesser extent.
What is projected to be Hurricane Sally by early Tuesday morning is bearing down on the Eastern side of the Louisiana coast and will likely make landfall mid-day tomorrow. While New Orleans is no longer in the direct path of the storm, the Big Easy is still within the cone of uncertainty, along with five of the area’s petroleum refineries. As of now Phillips’ Alliance refinery is the only confirmed shut down in the area, taking 269,000 barrels per day of production offline.
Weekly Dose Of Energy Fundamentals
Our weekly dose of energy fundamentals showed an increase of two million barrels in crude oil stockpiles and a draw-down of ~3 million and 1.7 million barrels in gasoline and diesel stores. The drop in refinery runs, specifically in the Gulf Coast as refineries braced for Hurricane Laura, looks to be the main reason refined products dropped from the week prior, not an uptick in demand from Labor Day travel. We will likely see gas and diesel stores return just as the refineries returned to normal operations almost immediately following the storm’s passing.
The Rounding Top: the Big 3 American energy benchmarks are showing a bearish, reversal pattern on each of their respective charts. The panic selling seen on Monday seems to have kicked the complex out of its summer trading range and is leading futures lower. If the pattern holds, and is completed, we could see 20 percent or higher downside over the next few months.
Of the six notable areas of possible storm development in the Atlantic, one system looks like it could pose landfall threat in the Gulf Coast. The industry will keep an eye on it as it makes its way around the tip of Florida and turn northwards over the next five days. For now, it looks like the other systems will remain out at sea or curve south to douse the eastern coast of Mexico.
CFTC Releases Study On Climate Change
After a solid recovery bounce Wednesday, oil and diesel prices are back on the defensive this morning following some bearish inventory reports. Volatility has made a big comeback after an extended summer lull, and market activity suggests that more traders are betting that trend will continue.
RIN values spiked again during Wednesday’s trading, pushing D4 values to a new 2.5 year high, following a report Tuesday night that the White House was pushing the EPA to deny small refinery waivers, just days after two refiners made their case for those waivers to the Supreme Court.
The API was said to show builds in oil and distillate stocks of 2.9 and 2.3 million barrels respectively, while gasoline stocks saw a large decrease of 6.9 million barrels ahead of the holiday. Those moves help explain why RBOB prices are holding close to flat on the day while WTI and ULSD are down around 1.5 percent. The DOE’s weekly report is due out at 10 a.m. central.
The EIA’s monthly report (STEO) decreased its global demand outlook for fuels from the August report, putting most of the blame on a slowdown in activity in China. The report continues to paint a gloomy outlook for refiners with crack spreads holding around break-even levels.
The Atlantic ocean looks more like a game of battleship on the National Hurricane Center map, with seven tropical systems all being tracked today. Three of these are just off the U.S. Coast, but none of those three are given good odds of development. The two named storms still look to be staying out to sea, while two other systems could become threats next week.
The Commodities Futures Trading Commission (CFTC) released a study on climate change that was supported by numerous industry representatives such as the CME Group (NYMEX parent), ConocoPhillips and Cargill. The report highlights the economic risks of climate change and pushes for the U.S. to establish a price on carbon that’s consistent across industries and regions. What does that mean to you? Most likely, it means you’ll have to add another variable to your fuel price calculations in the next few years.
This report begins with a fundamental finding—financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions. A central finding of this report is that climate change could pose systemic risks to the U.S. financial system.
We recommend that: The United States should establish a price on carbon. It must be fair, economy-wide, and effective in reducing emissions consistent with the Paris Agreement. This is the single most important step to manage climate risk and drive the appropriate allocation of capital. (Recommendation 1).
Week 36 - US DOE Inventory Recap
Fear Trade Takes Over The Action
Energy prices are managing a modest recovery bounce after a heavy wave of selling pushed them to three month lows Tuesday. Futures continue to follow in close step with U.S. equity markets, as the fear trade seems to have taken back over the action after taking most of the summer off.
The June lows held up support throughout the heavy selling, keeping the summer trading range barely intact, which could prevent a sub $1 slide for refined products. The signs are building that we may be in the early stages of a harsh post-driving season demand drop, so today’s bounce may just be delaying the inevitable move lower this fall.
One troubling development for producers and refiners: the charts below show that the selling over the past week has impacted prices a year and more forward in almost equal increments to prompt values. This suggests the drop is not due to short term containment issues like we saw in the spring, but more due to long term demand fears that aren’t expected to go away any time soon.
Speaking of which, Enterprise announced it was cancelling a major pipeline project to run crude from Midland to Houston, which was previously labeled as “not cancelable”, the latest in a long string of project delays/cancellations due to the sharp drop in shipper demand. Those delays may slow the conversion of heavy to light refinery runs that the EIA highlights in its latest update this morning.
The weekly inventory reports are delayed a day due to the holiday so we’ll expect the APIs this afternoon and the DOE report tomorrow morning. We will get to see the DOE’s monthly short term energy outlook later this morning.
A new tropical wave is given 80 percent odds of developing into a storm in the next five days, even before it moves off the African coast into the Atlantic. That looks like the next potential threat for the U.S. late next week since Paulette and Rene are both expected to stay out to sea.
Energy Markets Limp Into Labor Day Weekend
Energy markets are limping into the Labor day weekend after surviving a trip to the brink of a technical breakdown in Thursday’s session. The recovery bounce – despite a big drop in equity markets - is keeping energy futures entrenched in their summer trading range, while retail gasoline prices enter the holiday weekend at their lowest level for this time of year since 2004.
NYMEX futures contracts will trade in an abbreviated session Monday. Spot markets will not be assessed, meaning most rack prices published tonight will carry through Tuesday. Liquidity typically dries up quickly on the day before a holiday, so unless there’s a big move early this morning, don’t expect the sideways range to be broken today.
Weekly charts are starting to favor a major move lower for gasoline and diesel prices as we head into fall, and fundamental factors are offering little in the way of a counter argument right now. Volatility indices for both equities and oil are also moving higher, which is a warning signal that fear could soon be driving the daily price action again after a quiet summer.
There are five storm systems being tracked by the NHC in the Atlantic today, with one given 70 percent odds of being named in the next five days. Three of the storms have the potential to head towards the U.S. next week, when we reach the peak of the hurricane season. We’ve already seen numerous records set for the number of named storms this year, and it appears this trend will continue through September.
The latest in the ongoing push to control carbon: tracking the carbon footprint of crops from farm to table…or farm to vehicle. If this program catches on, it will reward farmers for using more environmentally friendly methods, and would end up being a de facto extension of the scoring system implemented with California’s LCFS program.
Along with the growing chorus of carbon-reduction programs, a push for renewables to be officially part of the economic reset has become a popular news item of late. Read here why one economist thinks those plans are destined to fail.
Is A Collapse Imminent?
Just a few days after pushing six month highs, energy futures are hitting multi-month lows this morning, and threatening a technical breakdown that could bring product prices back below one dollar/gallon. A rising dollar, softer equities and concerns for fall demand all taking credit for the early selling. While the drop has been significant – gasoline prices in some markets are down more than 20 cents in a week - we have seen multiple similar moves this summer only to bounce each time technical support gets tested, so it’s still too soon to say a collapse is imminent.
The disruptions to the energy operations along the Gulf Coast from Hurricane Laura are easy to see in the DOE charts below, but you’ll also notice how most operational issues pale in comparison to what we saw from Harvey in 2017, which provides some insight into why the industry had a huge sigh of relief when the storm shifted east.
Oil imports reached their lowest level in 28 years as ships stayed out to sea to ride out the storm, crude oil output dropped by more than 10 percent to its lowest in three years, as Gulf of Mexico platforms were shuttered temporarily and refinery runs dropped by one million barrels per day. This all added up to substantial inventory draws. The fact that most of these operations are already returning to normal within one week after landfall helps explain why the market sold off following the report, as concerns quickly shifted to issues with demand rather than a threat to supply.
The exception to that rule is the refinery output number. Early reports suggest it could be several weeks before the two Lake Charles area facilities operating before the storm might be able to attempt a restart, and with the fall turnaround season about to kick off, we could see more declines in run rates over the next several weeks.
In addition to the storm-related issues, demand and margins aren’t encouraging a resurgence in refinery runs either. The weekly estimate from the DOE showed total U.S. petroleum demand dropping to a 13 week low, and the flush in product prices this week has crack spreads pushing multi-year lows. A WSJ article this morning suggests that European refiners are most likely to see the next wave of closures and conversions as the industry deals with a glut of refining capacity, while U.S. facilities will benefit from their outlets to central and south America.
Speaking of central America, Hurricane Nana made landfall in Belize overnight, while Omar continues tracking out to sea. There are three more potential systems being tracked by the NHC, one of which has 70 percent odds of further development, making it likely we’ll see Paulette named just in time to hit the peak of the season.
Week 35 - US DOE Inventory Recap
Inventory Draws And Positive Economic Reports
Inventory draws and some positive economic reports are getting credit for another modest push higher in energy and equity markets to start Tuesday’s trading, but petroleum futures remain stuck in the sideways range that’s held them for most of the summer.
The API’s weekly report was said to show crude oil stocks decreasing by 6.3 million barrels, gasoline down 5.7 million and distillates down 1.4 million. Last week’s data will be even harder than normal to estimate with most Gulf of Mexico oil production shut in, nearly 20 percent of the country’s refining capacity under some state of precautionary operational cut backs, and numerous port closures. The EIA’s weekly report is due out at its normal time this morning, and should give a more detailed view into Laura’s impacts, most of which appear to be short-lived.
Speaking of which, a lack of power continues to hamper restart efforts at a few plants in the Port Arthur hub, while damage assessments are still underway for the Lake Charles plants, leaving roughly one million barrels/day of capacity offline. While some allocations remain in place in downstream markets as a result of these outages, overall price action in both futures and cash markets has been muted and outages rare thanks to the excess inventory on hand in most areas.
Nana and Omar were both named as tropical storms in the past 24 hours, but neither system poses a threat to the U.S. coast. Nana is heading west into Central America, and Omar is heading east out to sea. Two more systems are moving off the coast of Africa, one of which is given 60 percent odds of developing that we’ll need to keep an eye on over the weekend.
The EIA this morning published a look at global jet fuel demand, which has taken the hardest hit of the petroleum products as commercial air travel became transporta-non-grata during the pandemic. The report notes that while demand remains well off pre-COVID levels, the U.S. is seeing a stronger recovery than most international markets.
Holly Frontier published an investor presentation this morning, which highlighted its push for Renewable Diesel production at the Artesia, NM and Cheyenne, WY refineries, currently expected to come online Q1 2022, and expected expansion of its HEP midstream business. The presentation also highlighted the company’s ability to capture increased returns in a handful of Western U.S. markets, vs their peers based in the U.S. Gulf Coast.
Battle For Energy Price Action
September trading kicks off with energy prices moving higher, but still locked in their sideways pattern that’s held trading in check for the past two months.
A weaker dollar and stronger economic data out of China are getting credit for the early push higher, overcoming weaker U.S. fuel demand expectations in the daily headline battle for energy price action. The S&P 500 is pointing towards record territory this morning, after capping its best August performance in more than 30 years.
While stocks are rallying, the U.S. Dollar index is trading at its lowest level in more than two years, in large part of the FED’s aggressive policies to try and prop up the economy, which makes dollar-denominated goods like oil, gasoline and diesel fuel less expensive to foreign buyers. Although the correlation between the asset classes has been lower the past few years compared to the “QE era,” following the 2008 financial crisis, we definitely have periods where the dollar can still heavily influence commodity prices. One word of caution, as this Reuters article points out, hedge funds now have the most bearish bets on the dollar in a decade, and extreme speculative positions are often a contrary indicator. As the saying goes, when everyone is on the same side of the boat, that’s when it tips over.
Good news on the hurricane front for one day, there are now only three storm systems given a chance of development in the Atlantic basin this week. TD 15 is moving off the Carolina coast and will stay out to sea, with only a small chance of being named. A system moving through the Caribbean is given 80 percent odds of developing, but looks to be a threat to central America and not the U.S. The third system is given 40 percent odds of developing as it crosses the Atlantic, and the early indication is it too may stay out to sea. We’re just over one week away from the typical peak of hurricane season.
Today is the first day for October futures to take the pole position for RBOB and HO contract, which creates some skew in the continuation charts due to the RVP transition in RBOB and the contango in ULSD. Cash markets for both products are currently up more than a penny for both.
LA CARBOB basis continued to rally Monday following a pair of refinery hiccups reported in the region. Although that buying pressure pushed LA spot gasoline prices to their highest levels since March – even as prices across the rest of the country were selling off - as the chart below shows, those diffs pale in comparison to what we’ve seen in prior years as the soft demand continues to act as a buffer against higher prices.