News Archive

Market Talk - 2021 august

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Market TalkTuesday, Aug 31 2021

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.   

Click here to download a PDF of today's TACenergy Market Talk.

Market TalkMonday, Aug 30 2021

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. 

Click here to download a PDF of today's TACenergy Market Talk.

Market TalkFriday, Aug 27 2021

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. 

Click here to download a PDF of today's TACenergy Market Talk.

Market TalkThursday, Aug 26 2021

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. 

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the DOE weekly report.

Market TalkWednesday, Aug 25 2021

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.

Click here to download a PDF of today's TACenergy Market Talk.