News & Views
Muted Reaction In Both Futures And Cash Markets
Energy futures are pulling back as August trading wraps up, with damage assessments along the Gulf Coast ongoing while the East Coast braces for another round of flooding rains as Ida moves north. While it will still take days to figure out the extent of the damage to one of the country’s largest oil hubs, the muted reaction in both futures and cash markets suggests the impact of this storm will not be widespread.
What a difference a decade makes: 2011 was the year the US became a net exporter of refined products for the first time since WWII. Prior to that, storms that made a direct hit on the country’s largest oil port, and 2nd largest refinery hub, would be expected to bring price spikes of $1/gallon or more. This time, gulf coast basis values barely flinched at one of the strongest storms to ever hit the Gulf Coast, even though it temporarily shuttered more than 10% of the country’s refining capacity and its largest pipeline, as the capacity to recover simply by not sending barrels to other countries has grown by millions of barrels/day.
Colonial pipeline did report that it was planning on restarting its 2 mainlines Monday night after a precautionary shutdown Sunday. The pipeline formerly known as Plantation, is still operating, but like most in the Baton Rouge area, is struggling with power outages that could end up forcing the need for the line to slow or shut. Exxon’s Baton Rouge refinery, a key origin point for the FKA Plantation pipeline, reported that it was forced to shut multiple units due to a lack of steady power and refinery inputs. Most of the other refineries that shut ahead of the storm have not yet made full damage assessments due to the widespread flooding and power issues. Early estimates are that most avoided major damage, but power supply will be the bottleneck determining how fast restarts can begin.
The EPA granted waiver requests allowing the sale of winter-grade gasoline (11.5lb rvp) 2 weeks earlier than normal in Mississippi and Louisiana to try and help alleviate any potential supply shortages. Pipelines were already just days away from starting to schedule winter grades, and the scope of the waiver is limited to just the 2 states so far, so it shouldn’t put downward pressure on prices elsewhere in the region.
While all eyes were focused on Ida, Tropical storm Julian came and went over the open Atlantic, and Tropical Storm Kate has also formed but looks like it will stay out to sea. Next up in the list for the year is Larry, and the NHC is giving 90% odds of a system moving off the coast of Africa getting that name later this week. That system is a good reminder that we’re now into the “Cabo Verde” portion of the Hurricane season where the systems moving off the African coast become more frequent, and form some of the most powerful storms we see each year, which is scary considering what we just saw from Ida that didn’t have nearly as much time to develop.
In non-storm news:
US equity indices reached fresh record highs (again) Monday, and are on pace for a 7th consecutive month of gains, just in time for the seasonal tick up in volatility.
Following up on a White House request, the FTC said that it is looking into whether or not retail station mergers and acquisitions is creating illegal activity in the way gasoline prices are set. It’s hard to say what, if any, changes this may bring about in the industry, but it certainly seems like it could slow down the rapid consolidation of retail station owners we’ve seen over the past several years.
The Dallas FED’s Texas Manufacturing Survey showed another month of expansion, but continued to highlight labor shortages and supply chain delays as major hurdles to continued growth.
Speaking of which, Bloomberg provides today’s interesting read: The race to recruit women to help fill the labor gap in the trucking industry.
Damage Assessments Begin After Hurricane Hits Louisiana
September gasoline futures are up more than a nickel this morning, but most other contracts are lagging far behind as damage assessments begin after what could end up being the strongest hurricane ever recorded to hit Louisiana over the weekend. So far the market reaction suggests that traders acknowledge this was a huge, dangerous Hurricane but they don’t believe it will have a long-lasting impact on supply.
The storm was worse than most forecasts going home Friday, reaching category 4 strength, and staying that way for more than 6 hours after making landfall Sunday afternoon. It will take a couple of days at least to assess damage and figure out what disruptions there may be to the supply network beyond the normal precautionary shutdowns and vessel delays.
Essentially all oil production in the Gulf of Mexico was shut down ahead of the storm, and so far this morning it looks like more than 2 million barrels/day of refinery capacity (just over 10% of the country’s total) has been shut down at least temporarily. Colonial pipeline shut its main lines 1 & 2 as a precaution while the storm passed, while the rest of its lines operate normally. Since none of Colonial’s origin points were directly in the path of the storm, it seems unlikely that the main lines will be down for long.
Now that Ida is passing the refineries, it’s also worth considering the impact this storm could have demand as it’s expected to bring heavy rains to a huge part of the country as it makes its way north and east this week. Assuming Colonial comes back online later today, and none of the refineries sustained major damage, we could see a heavy selloff in prices as we being September trading.
Unfortunately Ida may not be the last of the storm activity for a while. The National Hurricane center is tracking 3 new potential systems in the Atlantic, 2 of which are given high odds of developing.
In non-hurricane news, US Equities pushed to new record highs Friday after the FED chair calmed the nerves of investors worried that interest rates may be raised anytime soon. The message seemed to be that yes, the asset purchases (aka money printing) will start to end this year, but interest rates aren’t going up for a while.
Money managers continue to seem to have a hard time pegging petroleum futures, reducing net length across the board as of last Tuesday, and missing out on most of the big rally. RBOB and ULSD contracts saw large reductions in both long bets and short bets last week, suggesting that the big speculators are growing tired of the whipsaw action. Those funds seem more comfortable betting on higher prices for environmental credits, with both CCA and RGGI contracts seeing more length added from money manager trade category last week. CCA’s saw a huge jump in prices to end the week after results from the August credit auction showed strong demand at lofty prices.
Baker Hughes reported 5 more oil rigs were put to work last week, spread out across the country as producers continue their slow and steady recovery.
A Wild Week For Energy Markets
It’s been a wild week for energy markets, with multiple hurricanes and the Washington DC rumor mill all roiling markets. Thursday’s session was once again highlighted by volatility in the RBOB contract that dropped 4 cents early in the session, saw those losses erased mid-day, only to drop 4 cents again before settlement.
Those big swings were at least partially to blame on a wild day for RINs. D6 ethanol RINs traded up a nickel early in the morning, surpassing $1.50 / RIN, only to crash back to $1.30 later in the day after reports that the EPA was recommending retroactively lowering the 2020 RFS requirement on refiners. The official recommendations from the EPA for 2020, 2021, and 2022 still have not been released, but it does appear that the current administration is attempting to offer a lifeline to struggling refiners without totally scrapping the RFS program.
Tropical Storm Ida was named overnight and looks like it will hit Louisiana Sunday night as a major hurricane with winds of 115 mph. The maps below show the current projected path relative to the refineries in the region.
If the storm’s current path holds, that would be a relatively good outcome for the fuel supply network as the major hubs of Houston, Pt Arthur, and Lake Charles, would avoid a direct hit. The 2 refineries around Baton Rouge, look like they’ll be within 20 miles of the current path, but the storm would have to pass over 100 miles or so of swamp land prior to passing those facilities, which should limit the damage compared to a direct hit on a coastal facility. It’s also worth noting that Shell’s Convent refinery would be the closest plant to this storm, only it was shut last year due to weak economics.
Oil production facilities are scrambling to shut operations ahead of the storm, and it’s likely we’ll see several refineries follow suit as storm surge looks to be a concern for the plants along the Mississippi river near New Orleans, even without the storm passing directly overhead. One challenge with this storm is it’s moving fast, which will give operators less time to react once the storm turns Sunday, but that should also help limit the total rainfall amounts that fall on an area that’s already been saturated with above average moisture this year.
Tough time to sell? P66 just announced 2 days ago that it was putting its Belle Chase LA refinery (the closest plant to the mouth of the Mississippi) up for sale and now that plant looks like it will have the most risk of storm surge over the next few days.
Shift In Storm’s Path Reduces Threat Of Widespread Supply Disruption
RBOB gasoline futures rallied almost 30 cents in 3 days to start the week, first finding a bid when chart support at the $2 mark held, building momentum as equities rallied, then taking flight Wednesday as the potential for a major hurricane to strike the heart of refining country became a reality. We’re seeing a modest pullback this morning as a shift east in the Storm’s path reduces the threat of widespread supply disruption, but the market will no doubt stay on edge for the rest of the week given the severe nature of this threat.
The national hurricane center is giving 90% odds that the storm in the Caribbean (likely to be named Ida) will form in the next 2 days. Conditions are ripe for rapid development over the warm waters of the Caribbean and then the Gulf of Mexico, with some models suggesting this will become a category 3 hurricane as it heads towards the US Gulf Coast early next week.
The latest models have shifted the projected path east to Louisiana, but the error cone is still high with the entire Texas coast still possibly in range depending on how steering currents shape up this weekend. To try and put it another way, it looks like the US refining zone is about to take a big punch, the only question is if it will be to the head, the midsection, or will it deflect harmlessly off a shoulder?
Worst case scenario is a strike in the Houston area that can disrupt not only numerous refineries, but also multiple pipeline origin points, the country’s busiest shipping lanes, not to mention corporate headquarters. The 2nd worst spot is a strike on the Beaumont/Pt Arthur area due to its concentration of large refineries and pipeline origins, and then the potential impact to supplies in the rest of the country diminish as the forecast moves east. This morning’s pullback in futures seems to be reflective of the storm’s projected shift east, although the overall supply/demand balance is tighter than it’s been in years, so we won’t have a buffer to offset lost production like we did during last year’s hurricane parade, so don’t be surprised to see prices move with each new data release from the NHC this week.
One other potential fallout from the storm: RIN Prices saw a big jump Wednesday, and so far there’s not a story out of Washington DC to blame it on. Since Gulf Coast refiners export roughly 20% of their production, and those export flows are likely to be disrupted from this storm, it’s possible those refiners were forced to cover RINs for product that would otherwise go overseas and not incur an RFS obligation. There’s also the potential that the East Coast will need more gasoline imports if Gulf Coast production is curtailed, another bullish factor for RINs, and then again it’s just as likely someone is betting last week’s rumors on lower RFS targets that sent prices tumbling may not pan out.
WTI and ULSD futures lagged the spike in RBOB, which is common any time there’s a disruption since the lines of cars around the street are filling up gasoline, not diesel or crude oil. ULSD did manage to erase the full amount of its 7 day selloff, which leaves the door open for a push towards the year’s highs around $2.20. One other factor spurring extra volatility in the RBOB contracts is that the prompt September contract (which expires Tuesday) is the last summer-grade spec of the year. Most Gulf Coast, West Coast and Chicago-area physical trades are already transitioned to the October futures reference, so a lack of liquidity in September could make that U/V spread even more dangerous than normal.
Charts from the DOE weekly report are included in the link below. Note how much lower inventory levels are compared to this time last year, and you’ll better understand why this storm has the market on edge whereas we largely shrugged off 6 landfalls in 2020.
Week 43 - US DOE Inventory Recap
Cocktail Of Bullish Headlines Push Markets Higher
Optimism abounds this week as a cocktail of bullish headlines push energy and equity markets higher for a third day. Markets around the world cheer improving COVID stats, the official approval of a vaccine, the reopening of the world’s 3rd largest port, and energy markets are getting an added boost from inventory declines and another hurricane threat.
While this 3 day rally, that’s added 20 cents or more from Friday’s lows, has taken the chance of a technical collapse off the table near term, there’s still work to be done to eliminate the longer threat of a lower trend. Peg the starting levels of the 7 day selloff as the targets we’ll need to see broken if the bulls want to take back control longer term. RBOB futures will transition to the winter grade spec next week, which will knock 13 cents off of prompt values. If you’re wondering why gasoline basis values in your local market suddenly jumped in the past couple of days, odds are physical trades in your region are now referencing the October RBOB contract.
It looks like there’s a good chance we could see a hurricane heading towards the US Gulf Coast next week. The storm system in the Caribbean that was given just 20% odds of development a few days ago, now has 80% odds of developing and early models have it pointed anywhere from Northern Mexico to Corpus Christi, Houston, or perhaps even Louisiana as we mark the 4 year anniversary of Hurricane Harvey. The name of this storm, assuming it develops, will likely be Ida, but could be Julian if one of the other 2 storms churning over the Atlantic is named first. Neither of those appears to be a threat to the US at this point.
It’s another week of small changes from the API report, which was said to show inventory drawdowns across the board last week. Crude oil inventory dropped by 1.6 million barrels, gasoline was down almost 1 million barrels, and distillates dropped by 245,000 barrels. The DOE’s weekly report is due out at its normal time today.
Add another renewable diesel project to the pile: Exxon’s subsidiary Imperial oil announced a new plan to co-produce renewable diesel at its refinery in Edmonton, expanding the company’s strategy of co-producing rather than converting its existing facilities as we’ve seen other refiners do. Canada’s Clean Fuel Standard takes effect next year, giving more financial incentive for this type of investment, and adding to the competition for feedstocks and renewable products that’s pulling traditional biodiesel away from the US markets that don’t have a credit program to offset the higher costs of those fuels.
Speaking of which, after RINs got hammered last week when reports suggested the EPA was going to lower its RFS target for 2021, and raise it for 2022, we’re seeing values gap higher this morning, with trades already 18 cents above Monday’s lows. With this type of move, odds are we’ll see another update on the EPA’s plans (or lack of) later this morning.
Markets Celebrate China's COVID Case-Count Collapse
Energy futures have taken back half of the losses they suffered during their 7 day selloff. Equity and commodity markets all seemed to be celebrating China’s COVID case count collapse Monday, and the US dollar was moving lower ahead of the FED’s virtual summit that may or may not signal the end to the latest round of money printing.
Adding to the bullish fervor Monday were a slew of refinery and oil production mishaps, all unrelated to the Hurricane that took much of the focus over the previous few days.
Two of the largest refineries in the country, both on the TX Gulf Coast, had units knocked offline over the past few days, with power loss at least partially to blame for the unexpected shutdowns. Speaking of power loss, LA Spot markets saw big spikes in both gasoline and diesel basis values Monday after a local refinery was reportedly forced to shut again due to lack of power.
At least 5 people have died and 2 are still missing after a fire on an offshore oil platform in the Bay of Campeche. Efforts to stop that fire, which include shutting off natural gas supplies to surrounding wells, have cut oil output by nearly 450,000 barrels/day, and could be a contributor to the big rally in oil prices this week. Initial reports suggest the fire was caused by a lightning strike, just a day after Hurricane Grace passed through the area last week.
It looks like the NHC knew what it was talking about when it predicted an above average year for storm activity. As Henri moves back offshore, 3 more potential storms are being tracked this morning, and the 2 given low odds of development yesterday are now given a 60% chance of being named this week. None of the 3 potential storms looks particularly ominous for refining country, but as we just saw with Henri, the early model runs can be way off, so we’ll need to keep watching their progress. The system furthest to the east looks like it will develop in the Caribbean in a similar spot where we saw 2 storms that ended up hitting Louisiana last year.
Energy Futures Get A Bounce After 7 Days of Selling
Energy futures are getting a bounce after 7 consecutive days of selling, giving the bulls a temporary reprieve, and delaying a push towards the March lows.
The remnants of Henri continue to dump heavy rain across parts of the North East, and while inland flooding will be a very real threat for the next couple of days, many areas are breathing a sigh of relief that the storm damage appears to be minimal. Power outages are relatively minor, and most of the fuel terminals in CT and RI that closed ahead of the storm were already reopened Sunday night. There’s still a lot of rain yet to come before this storm moves offshore tomorrow morning – and parts of NJ and NY that weren’t directly in the storm’s path seem to have taken the worst of it - but at this point, it appears we’ve dodged any major supply disruptions from this event, and now it’s a question of how much it will hit demand as drivers stay off the roads.
The National Hurricane Center is tracking 2 new storm systems this week, but both have low odds of development, and early models suggest neither one will be a threat to refining country.
After RINs saw heavy selling on Thursday pushing prices down by roughly a dime, they dropped another 20 cents on Friday after multiple reports were released that the EPA was recommending reducing blending obligations for 2021, but increasing them for 2022. Based on the market reaction, many didn’t care about the “increase in 2022” part. While those recommendations still have to go through an approval period before becoming official, it looks like we’ll get to see another court battle over the Small Refinery Exemption portion of the RFS as Delek sued the EPA last week for failing to respond to its SRE request from 2019. This isn’t exactly news, as Delek had provided a notice of intent to sue the EPA for this issue 18 months ago, but should finally force the agency into making a decision that could set an important precedent.
Money managers cut back on their net length in energy contracts across the board last week, but the moves were relatively small, suggesting there was probably more liquidation happening after the report data was compiled last Tuesday. WTI length held by the large-speculative category of trader dropped to its lowest level since the rally began last November. Refined products meanwhile actually saw new long positions added, but those were barely edged out by new short positions on the week. ULSD contracts continue to see large speculative bets on higher prices near 3 year highs, which could create more volatility if those funds decide they’re better off playing Robin Hood or crypto than the CME.
While interest in petroleum futures may be waning, speculators continue to add more length in carbon positions. RGGI credits saw managed money reach a new record for speculative length last week, without a single short position reported for that trade category. CCAs did see a small pullback in speculative length for a 2nd week, which may have contributed to a larger pullback in prices following the 3rd quarter credit auction.
Baker Hughes reported 8 more oil rigs were put to work last week, 6 of which were in the “other” category of smaller basins, with the remaining 2 coming from the Permian. The total US oil rig count is now 233 rigs above its low set last year, but remains 278 rigs below where we saw it just before the COVID lockdowns started, even though prices were $10-$15/barrel lower then than they are today.
Seeing A Seventh Day Of Heavy Selling
We’re seeing a 7th straight day of heavy selling in energy futures, a streak that’s knocked 28 cents off of gasoline prices, and 18 cents for diesel after the bull trend that lasted nearly 9 months finally broke. The volume and consistency of the selling suggests that we’re witnessing a strong liquidation from large speculators who had recently increased their bets on higher prices to multi-year highs, and are now licking their wounds.
Next stop on the charts looks to be the March lows some 10-15 cents below current values, but it’s rare for these contracts to go 1 direction this long so there’s a good chance we could see a bounce before the downtrend continues. It’s worth noting that the October RBOB contract, which is winter-grade, already traded down to within 30 points of the March lows this morning.
What about Bob? It’s been 30 years since a Hurricane hit New England, and it looks like Henri is going to be the latest since Bob to do so. Current models have the storm making a direct hit on Providence RI Sunday afternoon as a category 1 storm. Expect port traffic to start being impacted Saturday unless the storm’s path shifts back out to sea today. The big question for fuel supply will be if any of the terminals in the area sustain major damage, and you can expect terminal operators to shut down loading well ahead of landfall to preserve tank integrity by keeping the inventory in those tanks, if the current path holds. If terminals can avoid infrastructure damage this event will probably disrupt supply for a couple of days, not a couple of weeks. Side note for historians (or Mark Wahlberg fans) 1991 not only brought the region’s last hurricane landfall, it also brought the Perfect Storm later that year.
After lagging the action for the early days of the selloff, RINs decided to make up some ground in a hurry the past 2 days, dropping nearly 10 cents in Thursday’s session, and falling another 10 cents already this morning. Usually when we see this big of a move in RINs, there’s a story from Washington about a change in the RFS driving the action. Not this time. Instead there was talk in the market that a large refiner that would normally be a RIN buyer was suddenly selling large quantities of RINs, helping to drive the big drop. In a separate story, Marathon announced it was partnering with ADM to provide feedstocks for the company’s increasing number renewable diesel production facilities.
Selloff Stretches To A Sixth Straight Day
Several energy contracts have dropped to 3 month lows this morning as the selloff stretches to a 6th straight day. The main driver of the big move today is an apparent taper tantrum as the FED telegraphs an end to its most recent round of money printing. A secondary catalyst seems to be the fallout from two tropical storm systems reaching the major population centers along the East Coast that may keep many drivers off the road, at a time when it’s already looking like domestic consumption is heading lower.
Energy futures were already looking like they may be due for a big move lower prior to the FED minutes release, and the selloff in equities seems to be adding to the negative sentiment even though the correlation between daily price movements in the two asset classes had broken down in recent weeks. Whenever FED stimulus is a market driver, we experience the strange “Good news is bad news” phenomenon. Yesterday was no different when the FOMC minutes suggested that the Delta variant won’t derail economic recovery in the US (Good news!) which means the FED has less reason to keep injecting money into the system (Bad news for investors wall street bankers!)
As the remnants of TS Fred dump heavy rain across large parts of the country, Henri has gone from an afterthought to a real threat as forecasts continue to shift the storm west. 2 days ago there was no threat to land, and now the New York harbor is showing up in some models, while the terminals from New Haven, Providence and Boston are now all in the forecast cone, suggesting the waterborne deliveries that region relies on are likely to face some disruption over the next few days. The good news is the handful of remaining refineries operating in the region are not in the forecast cone, and Colonial pipeline has spare capacity, which should help keep any supply disruptions contained.
Now that the July lows have been taken out for WTI and ULSD (and will be for RBOB once we roll to winter-specs in 2 weeks) the next stopping points on the charts look like the March lows. That means downside targets $57 for WTI, $1.73 for ULSD and $1.87 for RBOB.
Not much to write about from yesterday’s DOE report, and it didn’t seem to have much influence on the crescendo of selling. Diesel demand continues to look strong, holding above its 5 year range, while gasoline demand looks like it may have made its seasonal turn, and dropped back below its 5 year seasonal range.
Week 42 - US DOE Inventory Recap
Has Domestic Consumption Already Reached Its Peak?
Energy futures are trying to bounce after 4 days of selling have pushed the complex to the edge of a technical breakdown yet again. The difference this time, compared to the handful of other times we’ve seen technical support tested this summer, is that sentiment seems to have quickly shifted to acknowledge that domestic consumption may have already reached its peak for the year, with another long uncertain winter looming.
We’ll need to see refined products rally another 5 cents or so from current levels to break the short-term downtrend, otherwise it looks like we’re set up for a test of the $2 mark for both gasoline and diesel as we move into September.
This Reuters article highlights the uneven demand recovery for petroleum products since the start of COVID, and why unfinished products are driving total consumption back above pre-pandemic levels even as traditional consumption stalls.
The API was said to show another week of only minor changes in US inventory levels, with crude and gasoline stocks both down around 1.2 million barrels, while diesel inventories were up around 500,000. The DOE’s weekly report is due out at its normal time this morning.
Both Grace and Henri are now forecast to reach hurricane strength this week. Neither storm should be a major disrupter for energy supplies. Grace continues to shift south on its way towards Mexico, while Henri could brush Cape Cod on its way north, which could create some delays in vessel traffic in the region.
A report from the Dallas FED this week highlighted the rapid growth of renewable energy sources in Texas over the past decade, and discusses the challenges that brings for the state’s electric grid, particularly with solar production set to quadruple in the next few years.
Energy Futures At Fourth Straight Day Of Losses
Energy futures are looking at a fourth straight day of losses, but RBOB gasoline futures have just moved into the green after trading lower overnight, putting a brief hold on the selling. Most futures and cash market prices are trading near 1 month lows as demand concerns and seasonal influences both appear to be weighing on a market that has been flashing technical warning signs for some time.
A large drop in Chinese refining rates was also given some credit for the selling as it was seen as a sign of weakening demand in the world’s largest energy importer, rather than a sign of lower refined product supply with those plants cutting runs. In addition to the energy concerns, there are larger concerns that the recent spike in COVID rates is further complicating supply chains that have been a mess for months.
For much of the past decade refiners with advantaged crude oil could make healthy profits while those without (like most on the US East Coast) struggled to break even. We’re seeing a similar phenomenon today in the renewable fuel refinery race as the shortage of bio-mass feedstocks is making huge profits for those with flexible inputs while others who must run soybean oil are facing challenges. Relief could be on the way as the world’s largest soybean exporter has reduced domestic biodiesel blending requirements, which will allow more soybeans to reach the global market and be turned into food, tires, or perhaps renewable fuel.
The vicious cycle of drought is forcing water allocations across the South West, and in turn threatening electricity supplies in the region, which ends up being bullish for supplies like natural gas. This phenomenon is not unique to the US, as Brazil is facing shortages of both water and electricity, which is helping boost US fuel exports to supplement their supply.
Those exports are a lifeline to US refiners as they help both relieve a supply overhang as the demand recovery plateaus this summer, and avoids the Renewable Fuel obligation that tacks another 20 cents/gallon of cost to domestic sales. Citgo noted that higher export volumes from its refineries helped push the company to its first profitable quarter since 2019, when it lost access to Venezuelan crude.
There are 3 active storms in the Atlantic basin, but none look to be a supply threat. Fred moved onshore Monday with minimal disruption to the Florida panhandle, and terminal loading racks resuming liftings last night. Grace still appears headed for Mexico, staying well south of the oil production and refining zones along the Gulf Coast, and Henri is doing loops around Bermuda and doesn’t appear to be heading to the US.
Another Monday Selloff For Energy Futures
It’s another Monday selloff for energy futures as traders had plenty of time over the weekend to get worried about how the rapid spread of the Delta variant might impact fuel demand. 4 out of the past 5 Mondays have seen gasoline prices drop at least 6 cents, and today’s early action threatens to do much more than that if we take out last Monday’s low trades near $2.17, which would open up another 10 cents of downside potential near term. ULSD looks like it has less of a technical trap door than RBOB, with near term support at $2.00 and $1.96.
Tropical storm Fred is about 100 miles off the Florida Panhandle this morning, and is expected to bring heavy rains across the South East after making landfall later today, but should not be a major factor on supply infrastructure. TS Grace was on track to hit Florida based on Friday’s models, then shifted west over the weekend and looked to be a threat to Houston Sunday, but the latest models have shifted West again and have it pointing towards Mexico, and not a refinery threat at all. Tropical Storm Henri is expected to be named later this morning, and is forecast to circle Bermuda, but doesn’t look to be a threat to the US coast at this time.
Money managers were bailing out of crude oil positions last week, but adding to length in refined products. The Net length in WTI dropped to its lowest level since November last week, after reaching a 3 year high in June. We have not yet seen a snowball effect of selling creating selling as speculators have to meet margin calls, when their bets on higher prices go wrong, but if WTI breaks below $65, that could be coming. ULSD length held by money managers pushed to the highest level since November 2018 last week, which probably means some hedge funds are wanting a do-over this morning.
Baker Hughes reported 10 more oil rigs were put to work last week, bringing the US total to a fresh 16 month high. The gains were spread across the country with the Williston basin adding 4 rigs, Eagle Ford 3, and 1 each for a few others including the Permian.
Gasoline Futures Have Gone Nowhere This Week
Gasoline futures have gone nowhere this week, currently trading just $.0001 below where they left off last Friday. In between, we saw an 8 cent drop Monday, only to rally 13 cents, followed by a nickel pullback that leaves us where we are today. Crude oil and diesel prices haven’t been as volatile as gasoline, but are following a similar choppy but aimless pattern.
Tropical depression Fred is struggling to regain strength, and is now forecast to barely regain tropical storm strength before moving up the west coast of Florida this weekend. That system now looks like more of a demand threat than a supply threat as it promises to bring heavy rains to wide portions of the south east, without threatening infrastructure. The system churning in Fred’s wake is now given 80% odds of developing, and looks to be headed on a similar path.
OPEC’s monthly oil market report showed the cartel’s output grew by more than 630mb/day last month, which for perspective is enough oil to supply the largest refinery in the US. Saudi Arabia continues to account for the majority of the increase, as it unwinds its voluntary production cuts, which were in excess of the joint agreement made last year. The report increased expectations for world economic growth in 2021 and 2022, but did not increase its oil demand estimates. OPEC’s report also highlighted the strength in US Gasoline cracks, and added that strong exports to Brazil due to widespread refinery outages in that country were a key contributor, along with the other items already highlighted by the EIA earlier in the week.
The IEA’s monthly oil market report noted that global fuel demand abruptly declined in July after strong increases in June as the world reacts to the latest COVID outbreaks. The report suggests that because of the latest fallout, it’s unlikely that OPEC will be able to unwind their production cuts on a linear path next year as supplies are suddenly looking like they’ll outpace demand once again.
Political Posturing Has Short-Lived Impact On Prices
The rollercoaster action in energy futures continues this week as some political posturing proved to have a short-lived impact on prices, and the weekly fundamental data offered a mixed bag to traders.
RBOB gasoline continues to be the most volatile contract, bouncing 9 cents off of its lows Wednesday, only to drop nearly 3 cents again overnight. That bounce was significant for short term charts as it broke the lower highs pattern we’d seen so far in August, and creates a more neutral outlook near term, although longer term charts continue to suggest there’s more selling to come by fall.
The big rebound in prices Wednesday came after the White House appeared to walk back their earlier comments about OPEC output, saying the statements issued were “not meant to be for immediate response”. The WH Press secretary did not answer a follow up question asking them to explain how asking OPEC to pump more oil squared with their climate change agenda.
In addition, the letter sent to the FTC “encouraging them to consider” making sure the rules they already have in place are being followed because gasoline and crude oil prices haven’t been moving together lately, looks a little silly considering that the Department of Energy has published multiple reports just this week explaining why gasoline spreads & prices have reached multi-year highs.
The DOE’s weekly report was lacking in big numbers, with only small changes in inventory levels. Refinery runs did tick up in 4 out of 5 PADDs, in what could be the summer production peak before fall maintenance (or hurricane season) starts to reduce run rates. Gasoline demand estimates were down 3.5% on the week, but a tick higher in exports kept inventories from building.
Tropical Storm Fred lost strength crossing the mountains of Hispaniola yesterday, and forecasts suggest it will struggle to reach 60mph winds before making landfall on the Florida panhandle early next week. The lack of strength and path well east of the oil production and refining areas should make this a relative nonevent for fuel supply. Don’t relax just yet however, as there’s already another system coming in Fred’s wake given a 60% chance of being named next week, and with this year forecasted to be busy, it seems like just a matter of time before one of these storms heads for refinery row.
Today’s interesting read: How Chevron & Exxon are working to co-process renewable diesel and SAF through their existing refining systems, a method that could dramatically speed up and reduce costs of producing those bio-based fuels, and perhaps further challenge the feedstock market if the technology is proven and approved.
Week 41 - US DOE Inventory Recap
Whiplash Is The Theme This Week
Whiplash is the theme this week, as refined products have their 3rd straight nickel swing in the early going, wiping out most of Tuesday’s gains…which wiped out most of Monday’s losses. The pullback keeps the August trend-lines pointing down, with lower highs set in each subsequent bounce suggesting more selling to come unless the bulls manage to break back above the July highs.
A major difference in today’s selling is that rising COVID cases aren’t taking the blame for the selling, instead a report that the White House is pressuring OPEC & Friends to produce more oil and help tame prices is getting credit for the selloff.
At face value that doesn’t seem to help explain why gasoline is leading the slide, but the report also suggests the white house is going to push the federal trade commission to take a look at rising gasoline prices. That investigation doesn’t need much effort to see the inconvenient truth that the RFS, LCFS and Cap & Trade programs each add more than 20 cents/gallon to fuel prices, and by design will get costlier each year. Then again, blaming climate change programs for rising prices won’t win many points in Washington, and it will be easier to blame refiners, which could complicate some of the acquisitions currently in process.
After several big moves in the past 2 weeks, West Coast basis values cooled off Tuesday, but could see more buying pressure today if the latest in a string of refinery hiccups disrupts one of the last refineries standing in the SF Bay area.
You think prices are volatile now? Read this WSJ article on the tough decisions retail stations have to make in regards to EV charging stations, one of which is having to guess at what their electricity costs will be. Those retail stations did score a major victory this week when the new infrastructure bill prevented interstate rest-stops from installing EV chargers, which would have put utilities in a position to directly compete with those stations, using federal property in many cases.
The EIA’s Short Term Energy Outlook seemed to offer a bullish boost to prices Tuesday, as the agency’s contracted thinkers at IHS increased their gasoline demand estimates, and lowered their OPEC oil output forecasts. The report highlighted how both calendar and crack spreads for gasoline have reached multi-year highs as inventories have rapidly drawn down in recent months. Once again, the report fails to mention the influence of RIN values on those gasoline prices, which knock about $8.5/barrel (~20 cents/gallon) off of those crack spreads.
The API’s weekly report looks like it was largely shrugged off, with only minimal changes in inventory reported. Crude stocks were said to be down 816k barrels, gasoline was down 1.1 million and distillates built 673k. The EIA’s version of the stats are scheduled to be out at their normal time this morning.
Charts Continue To Favor Lower Prices
Energy futures are bouncing after another big selloff Monday, as technical support seems to have held once again, and a broader selloff in commodities seems to have cooled down for now. Despite the bounce, charts continue to favor lower prices as the summer winds down.
While the headlines tend to try and blame any big move in prices on some fundamental story, and it’s hard to argue that the Delta variant would do anything besides hurt gasoline demand, we can’t dismiss the idea that part of the latest wave of selling could be tied to expectations that the FED will be forced to tighten up its monetary policy to combat inflation pressures after another strong Jobs report Friday, and other signs of pressure on wages and other costs. That idea certainly caused some big concerns in the Gold market overnight Sunday, and the timing seems to match up with the lows in energy prices, suggesting that fund flows based on the expectation of monetary policy (aka free money) are at least partially to blame for the big moves.
After softening last week, West Coast basis values jumped again Monday following reports of multiple refinery hiccups in the past 2 days. The EIA highlighted the rapid rise in gasoline prices across the US West Coast and Rocky Mountain regions, citing the refinery closures/conversions over the past year and a resurgence in mobility as the driving forces. Later today we’ll see the agency’s prediction for the future in their monthly Short Term Energy outlook.
Tropical Storm Fred is expected to be named later today, and is on a very similar path to Hurricane Elsa a month ago. The major difference in the path based on the current models is that Fred would pass over the Dominican, which could be good news for Florida as the mountains there are more of a road block to storm than Cuba was for Elsa. The current models do not show Fred becoming a hurricane before hitting Florida this weekend, but the pattern over the past couple years is for these storms to surpass the early estimates for strength. This should not be a major disrupter for energy supply as it’s expected to stay east of the oil production and refining areas, and Florida is awash in product these days as no one who has a choice vacations there in August.
Another Day Of Heavy Selling In Energy Contracts
It’s another day of heavy selling in energy contracts, with refined products now down 17 cents or more so far in August. As has been the case for most of the past 18 months, demand fears from the latest rise in COVID cases is taking much of the blame for the latest wave of selling. The charts meanwhile had been hinting for some time that a substantial pullback may be coming after a 9 month rally finally appeared to have stalled out.
The big test this week looks to be the July lows which WTI has already broken below this morning, putting the contract at risk of a drop to $62 in short order. Refined products still have some work to do to get close to those lows ($1.96 for ULSD and $2.07 for RBOB) which could create a bit of a technical tug of war between crude and its products.
Speaking of which, money managers (aka hedge funds) continue to struggle with timing on refined product trades. The latest CFTC COT report showed funds increasing their net length (bets on higher prices) last week, just in time for the latest round of heavy selling. Distillates in particular look troublesome for the large speculators, as the length held in HO contracts reached a 3 year high last week, and may add to the selling pressure if that length is forced to liquidate by margin calls. The performance in crude oil bets has been better, with WTI net length reaching a 9 month low ahead of this sell-off.
Baker Hughes reported a net increase of 2 oil rigs operating in the US last week, offsetting the drop we saw in the previous week. Don’t expect this stagnation in drilling activity to cause a drop in oil production however, as a Rystad energy report last week detailed that drilled by uncompleted (DUC) wells have dropped to an 8 year low as producers are choosing to work through their backlog before focusing on drilling new wells.
The recent spike in West Coast basis values should be drawing imports of refined products to Northern California and PNW ports, but they may soon find competition from Mexican buyers if a weekend fire at the country’s largest refinery disrupts operations. The country has been walking back its plans to open up its fuel market, trying to give PEMEX back control of the nation’s fuel supply, and events like this fire show that ultimately the country will need outside help.
A storm system moving towards the Caribbean is given 70% odds of being named this week, with a good chance that it will head towards Florida, which would keep it east of the oil production and refinery centers in the Gulf of Mexico. A 2nd system right behind the first is given 20% odds of development, and we’ve reached the time of year where it will be rare not to have some system we’ll need to watch daily.
Gasoline Prices Recoup Heavy Losses
Gasoline prices have recouped most of the heavy losses suffered in the front half of the week, but need to extend this two day rally to avoid more downward pressure as charts continue to favor lower prices. The September RBOB contract (RBU) continues to be the standout in the entire complex as we begin the early stages of the fall RVP transition, and summer spec products start to become scarce. ULSD and WTI have also seen nice rebounds off of Wednesday’s lows, but are still pointed for large losses on the week and hinting at more to come.
The relative strength in gasoline prices has pushed crack spreads to 2 year highs, providing some much needed relief to the beleaguered refining industry. On the other hand, RIN values are about $1.50/gallon higher than they were 2 years ago, which offsets a large portion of that improvement in the gross refining margins. Perhaps an even bigger concern for refiners is that the traditional driving season is quickly coming to a close, and with so much uncertainty about what the winter will bring with the various COVID variants, these current values may look lofty in the near future.
For a contrary opinion, See this Reuters article on Chinese fuel demand for a good break down of how gasoline consumption remains on pace to hit a record this year despite the recent increases in COVID cases.
The US president signed an executive order on “Strengthening American Leadership in Clean Cars and Trucks” Thursday. In that order the EPA & Transportation secretaries were told to “…consider beginning work on rules” that would push for 50% of new vehicles to be carbon neutral, and to increase the fuel efficiency of traditional vehicles starting with model year 2027. Note the order wasn’t to begin the work, but to consider beginning the work. Based on that, and Washington’s general inefficiency, it seems more likely that the rules will still be debated in 2027 rather than having them adopted.
Perhaps the most notable detail (which naturally is overlooked) is that the President also encouraged the agencies to follow California’s lead in adopting these standards, which could mean the continued spread of the LCFS & Cap & Trade programs.
(c) Given the significant expertise and historical leadership demonstrated by the State of California with respect to establishing emissions standards for light-, medium-, and heavy-duty vehicles, the Administrator of the EPA shall coordinate the agency’s activities pursuant to sections 2 through 4 of this order, as appropriate and consistent with applicable law, with the State of California as well as other States that are leading the way in reducing vehicle emissions, including by adopting California’s standards.
The FERC rejected a request by airlines and cargo plane operators to grant emergency access to Kinder Morgan’s SFPP North line system to get more fuel to Reno, but ordered the parties involved to establish a conference aimed at “resolving current and long-term issues” regarding to that pipeline’s capacity. The order did not require a singing of Kumbaya at the end of the conference.
2 potential storm systems continue to be watched by the NHC, with the 2nd still given 60% odds of developing next week.
Energy Complex Tries To Bounce This Reversal Thursday
It’s Reversal Thursday as the energy complex tries to bounce after 3 straight days of selling. It will take more than a penny rally in refined products to change the technical outlook however, with several short term indicators continuing to flash red, and longer term charts looking toppy.
Even though outright prices have come under heavy pressure this week, RBOB calendar and crack spreads have seen a strong rally as inventories in PADD 1 (and more specifically PADD 1B, home to the NY Harbor) have dropped substantially in the past 2 weeks. (See the gasoline inventory charts from the DOE report below.) The September/October (U/V) RBOB spreads are notoriously volatile as September is the last summer-grade spec for the year, and it looks like this year will be no different.
Still not sure why some West Coast diesel basis values have gone through the roof lately? Take a look at the PADD 5 diesel chart from the DOE report below. California’s weekly fuels report sheds more light on the situation, showing northern California inventories falling below their seasonal range, while Southern California stocks are above their range, that explains the 25 cent spread between LA and SF spots.
There are two storm systems to keep an eye on in the Atlantic over the next few days. The 1st only has a 20% chance of being named, but the 2nd is given 60% odds of development. NOAA increased their forecast for the hurricane season, which was already expected to be above average, so we can expect a parade of storms to start forming soon with the peak of the season still 7 weeks away.
Today’s environmental pipe dreams update: The President will announce an executive order with no specifics for a target of 40-50% electric vehicle sales by 2030, while Exxon mulls jumping on the net zero by 2050 bandwagon.
Week 40 - US DOE Inventory Recap
News Of Oil Tanker Seized By Iranian Forces
Energy prices are coming under pressure for a 3rd straight day, although so far the theme of the sell-off has been bend, don’t break. News that an oil tanker had been seized by Iranian forces near the world’s most strategic waterway, had buyers step in Tuesday morning after an early wave of selling had the energy complex looking poised for a big drop. Reports this morning that the tanker had been released seems to have calmed fears of an immediate escalation that could disrupt supplies and has WTI trading back below $70.
Daily and weekly charts continue to suggest that prices have likely topped out after a 9 month rally, and the July lows of $2.07 for RBOB and $1.96 for ULSD look like the near term target to the downside.
The API reported inventory draws across the board last week, but even a decline of nearly 6 million barrels of gasoline wasn’t able to help prices sustain an overnight rally attempt. Oil stocks were said to decline by 879k barrels, while diesel was down 717k on the week. The EIA’s weekly stats should be out at 9:30 central.
Coffeyville Resources announced it was pausing its Renewable Diesel production at its Wynnewood, OK refinery due to high feedstock costs as oil refiners compete for other types of oil to take advantage of California’s credit programs and also help the environment. As the chart below shows, soybean oil prices have tripled in the past year as the race to make more renewables has refiners competing with food producers as the truly alternative feedstock sources like waste oils are depleted.
Marathon reported an operating profit for the first time since the pandemic hit. A few notes from their Q2 earnings release are included below.
Insult to injury: For those in the US struggling to maintain adequate supplies of jet fuel, the EIA this morning reminds you that inventories of Jet are above average across the country as refiners have rapidly ramped up production in recent months. It’s no surprise that refiners will gladly return Jet output after being forced to shift to other distillates last year when Jet demand collapses, as aviation fuels don’t create a RIN obligation, and save those producers somewhere around $.20/gallon as result. The shortage of drivers to get fuel from terminal storage to the end user tankage continues to be the bottleneck in the supply chain however, with more airports forced to ration their supplies as a result.
Energy Futures Facing Second Day Of Selling
Look out below? Energy futures are facing a second day of selling after an overnight rally attempt failed, setting up another test of the bull market that has pushed prices higher for the past 9 months. The headlines are trying to pin the move on rising COVID case counts, and weaker (but still expanding) economic numbers from the US and China, although the timing of the price swings intraday – and the lack of correlation with moves in equity markets – suggests this is more of a technically driven selloff (perhaps the hedge funds are growing weary of whiplash) rather than a macro-economic trade.
Depending on how you choose to draw your trend-lines, you could say that if WTI stays below $70 today we’re destined to see a drop to $65 in short order, or you might saw we need another $2 of downside before saying the end of the rally is here. Refined products are in a similar situation, still trading some 16 cents above where they dropped to 2 weeks ago, but looking more likely to see another wave of heavy selling.
Taking over the West: HollyFrontier is buying Sinclair’s energy assets, in a deal valued around $2 billion, just months after agreeing to buy Shell’s refinery in Washington state. The deal gives Holly an incredible amount of optionality across the rocky mountain & PNW regions with both traditional and renewable diesel refining capacity. That geographic concentration could also bring with it some anticompetitive concerns that could complicate closing.
Speaking of anticompetitive concerns: OPIS is getting yet another owner. Dow Jones’ parent News Corp is acquiring the company in a deal valued at $1.15 billion, or roughly 17 times EBITDA. That deal should allow the merger of S&P Global (Platts parent) and IHS Markit to continue, after anti-competitive concerns prevented Platts from acquiring OPIS for the 2nd time in 10 years. Paying that multiple of earnings may sound frothy to some, and a sign of a market top to others, and looks like yet another sign of companies racing to make a play on the various aspects of emissions and carbon trading, which could make the deal a bargain if OPIS can outpace its rivals in that space.
Coming to America: See this Bloomberg article on the trucking industry reaching overseas to deal with the driver shortage plaguing the country, and why a backlog in the immigration processing system is limiting that option.
We had a busy start to the Atlantic hurricane season, then a long lull since Elsa hit a few weeks ago thanks to high levels of Saharan Dust limiting storm development. There’s a new system given low odds of developing over the next week, but it looks to be a fish storm. Don’t rest too easy, the forecast still calls for an above-average season and 90% of the typical activity in a year is still in front of us.
August Trading Starts Off On Soft Note After Strong July
Refined products dipped more than 3 cents overnight, starting August trading off on a soft note after a strong July. Don’t get too excited however as we’ve already seen those losses cut in half, and prices remain just one decent rally away from multi-year highs.
Iran reportedly attacked an Israeli-operated fuel tanker off the coast of Oman over the weekend. 2 people were killed in the drone attack, making it the most serious of the numerous Iran-sponsored tanker attacks that have occurred over the past few years. The sabre rattling has begun with the US, Britain and Israel all promising a response, and Iran threatening to retaliate. Hopefully this time they won’t shoot down a commercial airline jet by mistake.
We’d like a do-over please: 2 weeks ago, hedge funds were bailing out of energy contracts after the biggest daily selloff in over a year. Last week, refined products saw net length held by money managers increase by more than 20% and Brent increased by 19% as prices bounced. The net position in ULSD is at its highest level since November 2018, which happens to be the last time diesel prices were trading this high.
Meanwhile, hedge funds continue to steadily add to long bets in various environmental credits, with CCA and RGGI contracts both seeing new speculative longs added last week. CARB reported last week that LCFS deficits outstripped credits generated in the first quarter, reducing the overall credit bank by roughly 3%.
Baker Hughes reported a net decrease of 2 oil rigs last week, snapping a 4 week streak of increases. Of the 11 basins that Baker Hughes specifically notes in its weekly rig count, none had decreases, and in fact 2 increased, while the “other” category made up the decline, suggesting that the major plays continue to see slow but steady growth in activity despite the total weekly drop.