News & Views
Energy Prices Stumbling To Start Friday’s Session
Energy prices are stumbling to start Friday’s session, pulling back from the six week highs set Thursday, in what looks like a round of profit taking after a strong rally this week. Reports that Eurozone economies are now in a double-dip recession are taking some of the blame for the early wave of selling, even as signs continue to suggest that the U.S. recovery is picking up steam. Unless prices drop another nickel from current levels, there’s still a technical argument that we should see the 2021 highs tested in the coming weeks.
As the forward curve charts below show, the run up in prices over the past week has been fairly steady across the next 36 months, suggesting the move isn’t related to any near-term supply situations, but perhaps broader expectations for demand recovery.
There’s been a theme in Q1 earnings reports this week: major oil producers are largely surpassing expectations as prices have recovered, while oil refiners are still struggling as rising RIN prices offset improving crack spreads, although most refiners are now seeing large non-cash income gains as their inventory valuations increase with rising prices, offsetting the record write downs we saw a year ago when prices collapsed. RIN prices continued to trade near all-time highs Thursday, but the upward momentum slowed as the big rally in grain prices seems to be taking a breather.
There have been numerous articles written this week about 13 refineries that exceeded their EPA limits for Benzene pollution in 2020 (despite most plants running well below capacity) but so far it doesn’t appear those emissions will cause the plants to reduce runs. The Suncor refinery outside of Denver meanwhile is facing public challenges this week on the renewal of the 80-year old facilities air permits, which could threaten the state’s last refinery.
Expectations For Driving Demand Surge
The rally continues in energy markets, with petroleum futures looking like they are going to test the high trades of the year now that buyers are stepping back into the market in earnest. ULSD prices are now less than two cents from their 2021 highs as their winning streak stretches to six straight days, while RBOB is about seven cents away and oil prices need to add about $3 to set new highs. Fundamentally and technically, diesel contracts are looking the strongest, although expectations for a surge in driving demand this summer seem to be underpinning gasoline prices as well.
The DOE’s weekly diesel demand estimates remain above average, and are holding above “pre-COVID” levels, even as trucking, rail, and mass transit demand have not fully recovered. A surge in planting activity (thanks in large part to grain prices reaching eight-year-highs) is getting some of the credit for the strong distillate demand, as is the surge in online ordering in the past year by U.S. consumers that’s created a huge increase in small truck delivery activity.
The EIA’s gasoline demand estimate pulled back on the week, even as signs on the ground suggest that motor fuel consumption may be reaching six months highs. Another sign that the weekly estimate might be light: Look at the large amount of gasoline imports on the week, and yet stockpiles barely increased, suggesting fundamentals may be better than this report suggests. As it stands, the official estimate has gasoline consumption roughly 4% below 2019 levels for this time of year, keeping expectations for a full recovery this summer intact.
Even as demand is getting back towards normal and stockpiles are holding near average levels, refiners are still processing roughly 8% less than their five year average, 1.4 million barrels/day. Some of that reduction comes from the rash of closures that happened in the past 12 months, others due to lingering maintenance issues left over from February’s storms, and some could be that plants still aren’t profitable – even as gross margins have recovered – due to the spike in RIN values this year, that’s pushed renewable obligations costs north of $7/barrel.
RIN prices set new record highs again on Wednesday, even as corn and soybean prices dipped from the high trades we saw on Tuesday. The new EPA administrator testified in front of congress, and was non-committal on the over-due RFS obligation levels (they’ll wait for the supreme court ruling) and on the future of traditional ethanol, attempting to walk the tight rope between the pressure from big-Ag states, and the push to move towards truly advanced fuels.
Week 17 - US DOE Inventory Recap
Supreme Court Hears Arguments Surrounding Small Refinery Exemptions
Energy prices are back on the move higher after a late-day surge Tuesday and continued gains overnight. ULSD prices have reached a new six-week high during this latest buying spree, while RBOB and WTI contracts are still trading below the levels set early last week, leaving the technical outlook murky near term.
OPEC & Friends decided they didn’t need an official meeting today, and decided they could stick with their current output cut plans through July. Their next meeting to review output is scheduled for June 1.
RIN prices set new all-time highs Tuesday as the surge in grain prices continued, at the same time the Supreme Court heard arguments for and against small refinery exemptions to the Renewable Fuel Standard. The case hinges on the meaning of the word “extension” and if the circuit court rulings are overturned, could knock the wind out of the RIN rally, although the new EPA administration (which supports the lower court rulings) could counter by increasing the RVO that have still not been finalized.
The API was reported to show draws in refined product inventories last week of 1.3 million barrels of gasoline and 2.4 million barrels of diesel, while crude stocks increased by 4.3 million barrels. The DOE’s weekly report is due out at its normal time this morning. There are signs on the ground that demand is picking up again for gasoline and distillates, so we “should” see more draws in that report.
There’s plenty of geopolitical news to keep the bulls engaged in energy prices this week. Saudi Arabia foiled another attempted attack one of its ports, the Iranian Navy is trying to make waves again, and new Russian sanctions may force a refinery to seek new oil supply sources.
Today’s interesting read: Why the shortage of truckers may mean shortages of retail gasoline in some markets this summer.
April’s Spring Break-Out Rally Proved Short Lived
We are back in the back and forth trading pattern for petroleum futures after April’s Spring Break-out rally proved short lived and most contracts have returned to their sideways trading range.
OPEC & Friends are holding their monthly committee meeting today to review their output cut agreement, which is set to taper off over the next several months. The Joint monitoring committee, which monitors global demand and cartel compliance with the agreed upon output cuts, was reported to hold its consumption estimates steady, despite expectations for lower demand in India, Japan and Brazil due to new lockdowns. It’s still not clear if OPEC will hold a full meeting tomorrow or postpone until next month.
While petroleum products return to their yo-yo trading action, ethanol and RIN values continue to press record highs this week. Grain prices have gone parabolic, reaching limit up in Monday’s session and prompting the exchange to increase daily trading limits, and are starting Tuesday’s trade with more large gains. Ethanol and RIN trading hasn’t really started moving yet today, but based on the grain markets, we are likely to see new record highs set later in the day.
The EIA this morning highlighted the big drop in U.S. energy imports last year, while exports held steady despite the impacts of COVID shutdowns around the globe, reinforcing the country’s place as a key supplier of petroleum to the rest of the world.
The Dallas FED’s Texas manufacturing outlook showed another strong month of growth in April, and the survey projects that stronger than normal activity will continue for the next six months. A lack of freight capacity with truckers continues to be a theme that will create logistical bottlenecks for many industries, and several respondents noted they’re still dealing with the after-effects of February’s polar plunge.
Mid-April Price Breakout Looking Like A Trap For The Bulls
Gasoline futures are leading the energy complex lower this morning, pulling values back into the trading range that held prices for nearly a month, which makes the mid-April price breakout look like a trap for the bulls. Surging COVID case counts in India and other countries around the globe continue to get credit for any pullbacks, as those lockdowns could well offset the positive impacts on demand as the U.S. continues to reopen.
Ethanol prices and the RINs they come with continue to push near record high levels, thanks in large part to a surge in grain prices last week. That surge in ethanol pricing while gasoline prices are stumbling dropped the spread between the two fuel components to a six month low.
Bio-mass-based diesels and their RINs saw a similar surge on the back of soybean and soybean oil prices, and yet more stories that show the feedstocks to produce those fuels continue to be in short supply, raising questions about how all the new production facilities slated to come online in the next 18 months are planning to operate.
Baker Hughes reported that the total U.S. oil rig count dropped by one last week, as the slow and steady recovery in production now that prices have returned to profitable levels took a pause for the week.
Money managers continue to have mixed feelings on petroleum prices, making small increased to their net length in RBOB, HO and Brent positions last week, while reducing those in WTI and Gasoil.
The refinery formerly known as Hovensa, which was formerly known to have an outsized impact on refined product futures given its location and status as a key importer to the U.S., continues to make news for all the wrong reasons. Another emissions event caused schools and a COVID vaccine site near the plant to close on Friday, which has already caught the eye of regulators and could be another nail in that facility’s coffin.
Complex Poised To Take A Loss On The Week
Energy prices are stepping timidly into the green this morning as the complex is poised to take a loss on the week. Japan becomes the latest country to sound the alarm on a sudden surge in COVID infections, only this time with the addition of confirmed double mutant cases. Of the world’s top five consumers of oil, four are now reporting an increase in positive cases while the other might not be telling the whole truth.
Corn futures settled limit up yesterday as what seems to be panic buying extends into Thursday. Ethanol prices continue to climb in suit reaching levels not seen since before the 2015 meltdown in energy prices but the unprecedented long positions in corn futures seem to be affecting more than just biofuel prices. Grain and oilseed prices are taking a breather and easing off multi-year highs this morning.
Biden has announced his intent to almost double the capital gains tax for those making $1M per year or higher. While equities moved lower yesterday on the news, futures seem to be pointing up ahead of the open, despite some expecting to see a wave of selling.
The EIA has published an interesting note on how the combination of rising oil prices, low interest rates, and low corporate bond yields have coaxed out debt and equity from crude oil exploration and production companies.
Energy Futures Stand On Green Side Of Flat
Energy futures seem content to stand on the green side of flat this morning with diesel and heating oil adding .4% while gasoline lags with a muted .05% gain to start the day. Uncertainty surrounding the pandemic and the lack of news on nuclear talks with Iran have left energy prices drifting, not to mention most traders snoozing yesterday’s inventory report.
The Department of Energy published a ~600k barrel build in total U.S. crude oil inventories, a slight, sub-100k build in gasoline stocks, and, the big mover of the day, a draw of one million barrels of ULSD. Given the current landscape, demand estimates for both refined products are likely studied more thoroughly than the headline values: diesel demand was off 6.6% on the week while gasoline saw an increase of 1.8%.
Ethanol inventories take another step below their seasonal five-year low as a combination of increased blending and rocketing corn prices take credit for the drawdown. We could see this low-supply and high-price worsen in the short term as vaccine rollouts across the nation have people driving again.
The POTUS has committed the nation to cutting our carbon footprint by 50% more than our initial 2005 goal. The ambitious, if a bit lofty, objective sounds great in headlines but similar statements have been made in the past only to be undone by a future administration.
Week 16 - US DOE Inventory Recap
Lackadaisical Buying Action Sees Quick Reversal
Yesterday’s somewhat lackadaisical buying action saw a quick reversal on news that India is going through a fresh round of lockdowns. New Delhi was shut down for the week following the highest daily death toll the country has seen, and even that might be an understatement. If the situation doesn’t improve we could see a big shock to oil demand from the world’s third largest consumer.
Weak equities markets and the API’s estimate of a slight build in crude oil inventories seem to be taking the credit for the continuation of yesterday’s selloff. American crude oil futures are leading the way lower this morning, showing a 2.5% loss in the prompt month; gas and diesel contracts are both down around 1.9%. The Department of Energy’s version of the inventory report is due out at its regular time today (10:30 EDT).
Discussions between the U.S. and Iran are reportedly progressing towards a resolution as President Rouhani claims talks are 60% complete. While some argue a successful return of Iran’s sanctioned oil could destabilize global energy markets, some hold that their barrels never really left.
Soybean oil and corn futures (one of the main price drivers behind biofuel and ethanol RINs respectively) hit new eight-year highs yesterday, touching levels not seen since 2013. While the RIN credit prices tracked strongly with their underlying commodity for the last couple of years, we might see a separation as international trading takes futures on a wild ride.
First Anniversary Of Colossal Selloff
Crude oil futures are leading energy prices higher this morning, on the first anniversary of the colossal selloff that plunged the benchmark under -$40. Taking the majority of the credit this morning is Libya’s National Oil Corp. declaring force majeure on crude oil exports out of its eastern port. The state-run corporation estimates we could see 280 thousand barrels per day come off the global market. A weaker U.S. dollar and, you guessed it, COVID concerns are also in the conversation this morning as to why WTI is up 0.5%.
Predictions for an unseasonably cooler April has got money managers buying corn futures at a rate not seen since 2011, pushing prompt month futures to pre-pandemic levels. Anyone keeping an eye out for news regarding the EPA’s Renewable Fuel Standard would probably note this as a main reason for the furious rally in ethanol RINs, along with the establishment of an environment-friendly administration.
Milder temperatures seems to be touching several markets, even though that was likely the last thing on our minds during the cold snap a couple months ago. The Energy Information Administration published a note highlighting the expected decrease in natural gas consumption due to lower heating demand.
Energy futures pushed past last week’s highs in overnight trading and have since pulled back. If this rally can be sustained, peg $68 as the short term price target for WTI futures before running into some resistance. Likewise, RB and HO could easily add a dime in the next couple weeks before the charts would protest.
Diesel Futures Hold On To Overnight Weakness
The energy complex is mixed today with diesel futures the only member holding on to overnight weakness, trading 15 points under Friday’s settlement. The prompt month gasoline contract is up around half a cent a gallon while the American crude oil benchmark adds 11 cents per barrel so far this morning.
Demand concerns surrounding the continued rise in COVID cases outside the U.S. seem to have put a damper on last week’s breakout rally in energy prices. Each of the big three U.S. energy contracts broke through multiple resistance levels and appeared to bring price action out of the sideways pattern they’ve been in since March. The ‘we aren’t out of the woods yet’ sentiment seems to be keeping a lid on momentum traders looking to continue the five month rally that started last November.
Money managers seemed content with their WTI and HO positions last week, adding a skosh of net length while speculative positions in RBOB took an 11% haircut. While it would make sense there was some profit-taking with last week’s rally, it’s curious that did not place among all three contracts.
Baker Hughes reported a net increase in active oil production rigs last week, bringing the total active rig count within one platform of the five-year average. The weekly addition of active rigs which started last fall will likely continue as producers look to capitalize on higher oil prices.
Traders Taking Cues From Chart Dynamics
Energy futures continue to test the upper limits of their trading ranges today. The May heating oil and gasoline contracts have burst through their 5 and 10 week moving averages over the past couple days and are eyeing a run at $2.00 and $2.20 respectively. The crude oil chart looks similar, making $70 per barrel seem like a reasonable short-term price target.
This week’s rally in energy prices seem to be technically driven, with most traders taking cues from chart dynamics, while fundamental headlines seem to tug in opposite directions. Iran oil exports reach two-year highs just in time for China’s bump in demand recovery, leaving futures prices drifting higher to end the week.
The EIA published an article this morning on the surprise draw in the nation’s natural gas inventories last winter, despite the cold season being on the warmer side. The 5-year average natural gas inventory level dropped by more than 10% due to cold snaps in January and more notably mid-February and record NGL exports. Due to the unique circumstances of the past year heating oil stocks seemed unaffected.
Corn and soy oil futures prices continue their trek upward this week as ‘renewable energy’ headlines seem to permeate industry news. RIN prices for biofuel (D4) and ethanol (D6) remain elevated as their aforementioned underlying commodities press towards highs not seen since 2012.
Coiled Spring Effect Propels Prices Sharply Higher
Energy prices broke out of their month-long trading range Wednesday, and as is often the case when this happens, there’s a coiled spring effect that helps propel prices sharply higher once that range finally breaks. Bullish demand estimates took much of the credit for the rally that picked up strength following the DOE’s weekly report, and was able to sustain itself in spite of a pull-back in equity markets.
This is no runaway rally however as prices have pulled back modestly overnight (once again moving in the opposite direction of U.S. equity markets) setting up a big test for prices to end the week. If we stay above the range, there’s room to run another 10-12 cents higher in the back half of the month, but if we see a selloff the next two days, then Wednesday’s action looks like a bull trap.
The DOE report also showed a 243,000 barrel/day decline in refining capacity as some of the plants that closed down or converted production last year started making their way into the official numbers. The total decline from this time last year is 831,000 barrels/day, or just under 4.4%, with more declines expected in the months to come, marking the biggest declines in 40 years for U.S. refining capacity.
Ethanol prices continue to reach multi-year highs this week, benefitting from both the rally in gasoline prices and in corn, which trading north of $6/bushel overnight for the first time since 2013.
Today’s interesting read: Why a century-old technology is making a big comeback to improve power storage. For Texans wondering what might come next with the state’s energy grid, just think of what could be done with the thousands of man-made “lakes” scattered across the state.
Speaking of century old ideas: Read the WSJ’s take on the new Presidential tax plan that will remove incentives for oil and gas exploration that date back 100 years, and why one study suggests it won’t have a major impact on output.
A shortage of truck drivers that had been impacting many industries for years has grown to crisis levels in some areas as the economy picks back up. Yesterday, industry groups sent a letter to the House & Senate transportation committees urging them to act to help alleviate this shortage, with a first step of allowing drivers younger than 21 to operate vehicles across state lines.
Week 15 - US DOE Inventory Recap
Lack Of Enthusiasm From Gasoline And Crude Oil Prices
If at first you don’t succeed…Diesel prices are trying to lead the energy complex higher this morning, after rally attempts stalled out Monday and Tuesday. This time could be different, however, as ULSD futures have broken the top side of their month old sideways trading range in the early going, which could spark some buying from trading programs and bandwagon jumpers. If diesel futures can hold above the $1.84 mark today, there’s a good chance we will see them push into the mid $1.90s in the next week, but if they fail, it seems like we’ll be stuck back in the sideways range for a while longer.
A lack of enthusiasm from gasoline and crude oil prices seems to be a limiting factor in the diesel rally so far. RBOB futures have managed to move higher in the past five sessions, and yet the combined gains during that stretch are less than three cents, suggesting a lack of conviction from buyers after prices doubled from November to March.
The IEA’s monthly oil market report followed the lead of the EIA and OPEC monthly reports, increasing global fuel demand estimates as vaccine & stimulus package rollouts are getting people moving again. The IEA’s report did highlight concerns that rising case counts in Europe, Brazil and India could slow the demand recovery, and noted that excess supply capacity from OPEC and the U.S. should help keep prices from getting too high. The IEA also highlighted that Iran’s oil production has reached a two year high as the country is finding ways to get around U.S. sanctions, which could bring more downward pressure to prices if that trend continues.
The EIA this morning highlighted several new oil projects in the Gulf of Mexico that could bring 200mb/day of production online by the end of next year, which is a completely different outlook than a year ago when many projects were shutting down. The report also highlights the threat hurricanes create to GOM production, as early forecasts call for another above-average season for storm activity, after we just lived through the most active season on record.
Chicago-area refineries are making news this week. The DOJ announced a settlement deal with ExxonMobil and the state of Illinois that requires Exxon to pay $1.5 million in fines, and spend $10 million in upgrades to its Joliet facility. The headline writers are touting this as the new administration’s tough stance on the energy industry, but in reality this settlement stems from an agreement made 12 years ago. Meanwhile, BP is reportedly selling off a major stake in its U.S. pipeline assets, as it continues to shed assets to pay down debt, cover severance payments from their annual reorganizations and continue paying their $1.2 annual settlement the 2010 Gulf of Mexico oil spill.
Meanwhile, two midcontinent refining companies still aren’t getting along taking with the war of words and shareholder votes between Carl Icahn backed CVR and Delek being taken to the court of public opinion, proving that there’s apparently more money to be made through financial engineering of refining-related companies than there is in engineering those refineries to make more product.
Stock Futures Pull Back Following Vaccine News
The sideways action continues in energy markets after an attempted rally Monday morning failed to build any momentum and most gains were wiped out in the afternoon. This morning it’s the RBOB gasoline contract trying to lead the rest of the complex higher, with penny gains while ULSD moves back and forth across the breakeven line. Charts continue to give a neutral outlook, suggesting more back and forth trading in the near future.
There are lots of headlines about the U.S. looking to pause use of the J&J COVID vaccine, and while stock futures did pull back overnight following that news, the moves have been minor and don’t seem to be having any trickle-down effect on energy markets at this point.
OPEC increased its global demand estimates in the latest monthly oil market report saying, “Gasoline is projected to be the key driver for oil demand recovery beginning with the onset of the summer driving season. Diesel will also provide support, mostly based on economic improvements stemming from the implementation of fiscal stimulus programmes.” The report also highlighted the recovery in U.S. refinery margins over the past two months, while European and Asian refiners have not seen the same improvement. The cartel’s oil production was up 200mb/day in March, driven primarily by an increase in Iranian output as they’ve found new ways to circumvent U.S. sanctions.
Speaking of Iranian production, there was another mysterious outage at an Iranian nuclear site over the weekend, with multiple sources suggesting another cyber-attack from Israel is to blame, just as the U.S. reopened negotiations with Iran over its nuclear program. This latest development might mean a deal is less likely and could delay the return of more Iranian oil to the market.
The beleaguered Suncor refinery outside Denver looks to have passed a big emissions test with an investigation finding the facility met its environmental permits. While that’s certainly good news, the plant is still facing lawsuits over water contamination in the community, just as it seeks extensions of its operating permits from the state. Refiners in the Midwest will be watching this story closely as the Denver metro area has become a popular home for the excess supply coming from Group 3 refineries, and removing the only refinery left in Colorado off-line would mean big opportunities for those plants.
Add another renewable diesel production facility to the growing list. Unlike most of the others that have been announced in the past couple of years however, this facility may not be sending the majority of its fuel to California, as that country’s clean fuel standard is set to start next year and will offer its own incentives for renewables.
Diesel Futures Try To Lead The Energy Complex Higher
Diesel futures are trying to lead the energy complex higher to start the week, testing the upper end of their sideways trading range, after chart support held up to several attempted sell-offs last week. There’s little in the way of news to drive the action so far, and it seems that we’re still stuck in the back and forth pattern until the range breaks.
While gasoline and diesel prices continue to move sideways, ethanol prices are holding at multi-year highs north of $2/gallon in most U.S. markets, thanks to elevated corn prices and RIN Values holding near all-time highs. Several ethanol producers that shut down operations when prices were in the $.70-$.80 cent range this time last year are coming back online to take advantage of these lofty prices, which will only increase pressure on feedstock producers to supply the parade of new renewable diesel projects racing to take advantage of the subsidies provided to turn food into fuel.
Baker Hughes reported no change in the total U.S. count of active oil rigs last week. The Eagle Ford basin in TX did increase its count by one rig, while the “other” category made up of smaller basins declined by one. A Rystad energy report released Friday suggested that fracking activities across the U.S. are approaching pre-pandemic levels, and that output should continue to increase in the second quarter, which is not surprising given current prices. What is more surprising is that flaring from those wells is down substantially as producers are beginning to catch up with the infrastructure needed to deal with the excess natural gas produced in those operations.
Money managers continue to display mixed feelings for energy contracts, which isn’t too hard to understand given the yo-yo price action we’ve seen in recent weeks. The large speculative category of trader decreased their net long position in WTI, Brent and Gasoil last week by relatively small amounts, but added to their bets on higher priced for RBOB and ULSD.
Houthi rebels launched more attacks on Saud Arabia overnight, this time targeting an area with several refineries. It’s not immediately clear what if any damage was done to those facilities, but given the limited impact of several recent attacks, the market does not appear too concerned.
Today’s interesting read: Why closing a nuclear power plant in New York will increase natural gas consumption, and may cause more diesel demand spikes when electricity demand peaks.
Too Many Imports?
Energy prices appear to be calming after a spike in volatility over the past few weeks, and are starting off Friday’s session with modest losses. Prices remain in their sideways trading range, which means we’re likely to continue seeing back and forth action until a new trend develops.
U.S. equity markets meanwhile are having no problem finding direction, hitting fresh record highs this week, cheered on by signs that the economy continues to reopen even as pockets of the country deal with new COVID outbreaks, and in no small part to the $6 trillion or so in monetary and fiscal stimulus provided by the FED and Congress over the past year.
Too many imports? While most cash markets for gasoline have held relatively steady this week, basis values for NYH RBOB have dropped eight cents this week as it appears there’s too much higher RVP gasoline in the region just one week before trading switches over to the summer-grade products. There was a record surge in gasoline imports following the great refinery shutdown in February, and the Buckeye pipeline disruption in March, and this selloff suggests perhaps some suppliers are worried they brought in too much fuel from overseas and won’t be able to turn their tanks in time.
The EIA this morning is highlighting its STEO gasoline demand forecast that suggests consumption will be notably better than last summer, but still behind 2019.
It’s hard to read anything about the energy markets without a renewable component being factored in. A Reuters article this morning highlights the looming shortage of feedstocks for bio-based fuels as producers rush to take advantage of the lofty incentives available from the various federal and state programs that provide more than $5/gallon for some products depending on where they’re sold.
Another refinery casualty? Exxon announced Thursday it was considering shutting down its plant in Norway due to the overcapacity of refining in Europe.
Gas Prices Survive Trip To Low End Of Trading Range
The back and forth pattern continues after gasoline prices survived a trip to the low end of their trading range Wednesday. Large builds in refined products and a pullback in demand sparked a wave of selling following yesterday’s DOE report, but as has been the case for the past three weeks, buyers stepped in as prices approached chart support levels and ended the trading session on a strong note.
It’s a mixed bag so far today with crude and diesel prices showing small losses, while gasoline has small gains. Reports of an unplanned shutdown of a refinery in Louisiana this morning seem to be helping RBOB prices go from small losses to modest gains on the day, and helping push gasoline time and crack spreads higher just as you’d expect when there’s a supply disruption. No details yet on the cause or duration of that shutdown.
Want a reason why yesterday’s gasoline inventory build isn’t something refiners need to worry about? Take a look at the gasoline import chart below, which shows an increase of 4.7 million barrels in total last week, which suggests the four million barrels build in total inventories isn’t a trend that will continue.
More bad news for the beleaguered refinery formerly known as Hovensa. Several executives are reportedly stepping down after the plant was forced to shut last week, and lost an expansion permit previously granted by the EPA. That may be good news for other refiners around the Atlantic basin if it’s a sign that the plant won’t operate, but could also just be a sign that the company is in the process of finding more capable operators.
The new U.S. corporate tax overhaul proposed Wednesday will (not surprisingly) look to increase incentives for renewable energy producers, and pay for it by removing incentives for energy produced from fossil fuels. With
Meanwhile, the ports of Vancouver, Seattle and Tacoma laid out their plan to jump on the zero emission by 2050 bandwagon, focusing specifically on pushing ships to run on electricity while docked rather than idling their diesel engines to produce power. It does not appear that plan has detailed where that extra electricity will come from, or how it will be emissions free.
Week 14 - US DOE Inventory Recap
Choppy Back And Forth Action Continues
Choppy back and forth action continues to be the theme for energy prices, but a late Tuesday sell-off after a strong morning has put the complex in danger of a breakdown that could push prices another 10% (or more) lower should chart support finally break. That said, we’ve seen prices test the bottom end of the trading range four times in the past three weeks and bounce each time, just as they seem to be doing so far this morning.
The weak close for refined products Tuesday that largely wiped out nickel+ gains earlier in the session looked prophetic two hours later in the afternoon when the API was reported to show large builds for gasoline and diesel inventories last week. The DOE’s weekly report is due out at its normal time this morning, with refinery runs still and gasoline demand estimates still must read data points.
The EIA released its short term energy outlook Tuesday, predicting that gasoline consumption will continue to rise through the summer driving season, but will fail to approach levels we saw in 2019. The report also predicts that U.S. crude oil output will steadily increase through 2022, but will remain nearly a million barrels/day below where we saw it prior to the pandemic.
After an extremely volatile couple of weeks, RINs have been relatively quiet so far this week, with both D4 and D6 values moving up “only” 2.5-3 cents the past two days. Meanwhile, there’s a new diva in the credit markets as California’s LCFS credits took a nosedive Tuesday, dropping $14/MT for some delivery timings before buyers stepped in, making the trading range for the day wider than it had been so far for the year. There was not any regulatory-type news to spark the move that pushed those credits to their lowest levels since last year’s lockdown first hit, but the selling was widespread across time frames, suggesting it may not be isolated to one large position being unwound, and there could be more downside ahead.
The spot/rack charts for ULSD below show the divergence in markets across the southwest following the extremely tight physical market in the region for most of the past two months. El Paso and Phoenix markets are now back hovering around break-even levels for shipping economics, while chronically constrained Las Vegas and Albuquerque are still seeing wide spreads as the pipelines that supply those locations just aren’t able to keep up.
The Daily Price Tug-Of-War
The yo-yo action continues as energy futures are bouncing Tuesday, after another round of heavy selling on Monday. Part of the daily price tug of war seems to be driven by COVID divergence with the U.S. opening up for business just as Europe is shutting down. Depending on which side of the pond you’re on, that gives a very different outlook for fuel demand.
From a technical perspective, petroleum contracts have been stuck in a sideways trading range ever since the bull market trend broke mid-March and this type of back and forth action should be expected until a breakout occurs. That sideways pattern is fairly well defined for WTI and ULSD ($57-$62 and $1.73-$1.84 respectively) but RBOB is more broad between $1.86 and $2.04 setting the boundaries we’ll need to see broken down before the next trend can begin.
U.S. stocks are not as conflicted as energy markets, reaching new records this week. The rapid recovery in the U.S. will not come without pain however, as supply networks face challenges keeping up with the rapid change in demand, just as we’re seeing with the growing backlog of ships at major U.S. ports.
While fuel supplies are getting back to more normal levels across the south, there are still a few refineries struggling to return units to service six weeks after the Polar Plunge.
Today’s interesting read: Why tax incentives won’t help the real problem expanding the electric grid. No one wants giant transmission lines in their backyard.
Pre-Holiday Gains Wiped Out After Post-Holiday Trading
The rollercoaster ride continues for energy markets as big pre-holiday gains were wiped out in the first few hours of post-holiday trading, only to see refined product prices bounce three cents in the past hour.
While energy markets continue to swing back and forth, equity markets are pointed sharply higher with the DJIA and S&P 500 both pointing to record highs this morning, celebrating a strong March jobs report, which wasn’t too strong as to encourage the FED to think about raising rates.
OPEC and its allies agreed to a gradual increase in production last week, predicting stronger demand this summer while trying to avoid flooding the market too soon. That announcement was seen as bullish since the cartel was showing restraint and not returning more of its idle capacity to the market even with prices back to pre-COVID highs.
The U.S. and Iran are returning to the negotiating table, via intermediaries, for the first time in three years. That slight bit of progress is getting some credit for the early wave of selling since it could eventually lead to more Iranian crude hitting the market that’s trapped by sanctions today.
Baker Hughes reported an increase of 13 drilling rigs last week as the industry continues its slow and steady recovery. Unlike most weeks where the Permian basin accounts for the majority of the drilling activity, last week the gains were spread out across numerous states like Colorado, Utah, Oklahoma, Pennsylvania, and offshore in Louisiana. Even though we’ve seen more than 150 rigs put back to work since the count bottomed out last summer, we’re still roughly 300 rigs shy of where we were pre-COVID, and just over the lowest levels from the previous oil price crash.
Money managers look like they weren’t enjoying the rollercoaster ride for energy prices, reducing their long and short positions across the board last week. There was more short covering in most contracts causing the net length held by the large speculators to increase slightly on the week for WTI and Brent.
There will be plenty of debate in the weeks ahead on the $2 trillion spending bill proposed, particularly around the renewable energy components included. Most of the funds so far seem focused on expanding capacity for renewable electricity generation and transmission, but expect transportation fuels to become part of the debate. The White House has already reportedly instructed the EPA to review whether fuels used to power EVs could qualify to generate RINs under the RFS, which will no doubt be hotly contested.
Yo-Yo Action Continues In Energy Markets
The yo-yo action continues in energy markets this week after March trading ended with heavy selling, only to see those losses erased in the first few hours of April.
The OPEC policy meeting is today, which will often add to volatility as rumors and speculation run rampant ahead of the official announcement, if they decide to make one. We’re also heading into a rare holiday weekend that will include the March jobs report when markets are closed, which could create some more swings when trading resumes Sunday night.
Yesterday’s DOE report offered good news for both demand and supply in the U.S., as gasoline consumption hit a six month high, and supplies look like they’re almost back to normal levels.
Total U.S. refinery runs have finally returned to the levels we saw six weeks ago before Texas froze over. PADD 3 (Gulf Coast) run rates are still slightly below where they were prior to the storm as several units are still being repaired, but total runs in the region did increase by more than 550mb/day last week.
Those increased run rates can be felt from West Texas to Philadelphia as allocations begin to ease and outages become more rare this week. Colonial pipeline reported earlier in the week that supplies along its system were increasing, alleviating some of the pressure on markets across the South East, but would still need more product input along the Gulf Coast to get back to normal run rates.
Speaking of pressure on Colonial, the PHMSA released a proposed safety order warning Colonial that it must take measures to reduce potential risk along its system after a study of last year’s gasoline leak that ended up being a much bigger deal than originally thought. This report may be much ado about nothing as Colonial has already implemented safety measures, and was using the recent slowdown in operating rates to perform more maintenance, but it will be important to keep an eye on given its outsized influence on supply across a huge part of the country, not to mention the growing list of disruptions over the past five years.
Another sign that things are getting back to normal on the supply side of the economic equation, imports of petroleum products dropped back closer to their seasonal average after hitting their highest levels in a decade following the polar plunge.
RIN prices also continued their rollercoaster ride Wednesday, taking back 6-8 cents of the losses they faced earlier in the week, as lower than forecast planting estimates in the quarterly crop report had grains and soybean oil trading limit up on the day. No word yet if Mr. Beeks had been consulted on the crop report since those products were selling off sharply ahead of the report which certainly has several traders wishing for a do over.