Market Talk - 2021 april
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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.