News & Views
Four Day Streak Of Fresh Highs
A wave of selling gripped energy markets overnight, snapping a four day streak of fresh highs, but not yet breaking the upward sloping trend-lines that have helped the rally in energy prices near 90% over the past four months. The big question of the day is whether or not the buyers will step in, as they have numerous times during previous pullbacks.
It’s the last trading day for March RBOB and ULSD futures, so watch the April contracts for price direction today in those markets that haven’t already rolled. You’ll see RBOB futures prices “up” about 8-9 cents when the April contract takes the prompt position next week as the spec changes from Winter grade to Summer grade. Note that spread is around half as large as it has been in years past, thanks in large part to the EPA’s RBOB specification streamlining rules put into place last year, and the current tight supply situation for prompt barrels due to the rash of refinery shutdowns.
Group 3 ULSD is taking on the role of the most interesting basis market in the country this week, an unusual position for the normally sleepy Midwestern market that tends to be much less volatile than the neighboring Chicago market. Diesel deliveries have plummeted thanks to a handful of refinery shutdowns in the region and the temporary shutdown of Explorer pipeline last week, and now the draw to pull barrels into Texas. Basis values have reached the highest in more than three years, as regional supplies on a days of supply basis have dropped to their lowest levels in five years.
Big changes in the “other” Americas. Brazil’s Petrobras is going through a major leadership overhaul, and Mexico looks like it’s going the opposite of green as reports suggest it will increase coal production, and allow refineries that have struggled to meet new tighter fuel specs to continue operating and sell off-spec products.
News that the U.S. struck Iranian-backed militia in Syria didn’t seem to concern markets in the slightest this week, a sign of the excess capacity sitting on the sidelines in the Middle East acting as a price buffer for markets.
Race To Restart Refineries
Gasoline and diesel prices have reached fresh 1+ year highs every day so far this week, although another wave of selling has pushed prices modestly lower this morning after an overnight rally. The entire energy futures complex is in an extremely overbought condition following 4 months of price increases, so a big pullback is to be expected at some point.
The race to restart refineries and resupply large swaths of the south that are tight on products continues, but outages are rare at this point, and mostly concentrated in the West Texas region for now. Texas did approve a temporary RVP waiver statewide through March to try and speed along resupply, adding to the TXLED diesel additive waiver approved by the EPA last week.
Yesterday’s DOE report offered a clearer picture into how dramatic the impacts of the polar plunge were on refinery runs, crude output and total demand across the country.
The drop in PADD 3 refinery runs last week rivaled the largest disruptions in history, but even though more refineries were impacted, the total production knocked offline was less than what we saw in 2017, 2008 and 2005, and with most plants in some phase of restart, we should see a bounce back next week. PADD 2 run rates also dropped sharply on the week as numerous plants in Kansas and Oklahoma faced power and extreme cold issues of their own. Refiners on the East and West coast weren’t directly impacted, although the disruption should allow them a nice bump in margins that’s much needed after a brutal year that has many plants on the verge of closing.
The EIA this morning highlighted the dramatic drop in natural gas production last week that contributed to both the widespread power outages, and the forced closure of so many refineries. One thing we saw after the 2005 hurricanes was that refiners got much better at preparing for hurricanes to minimize damage, and they’ll no doubt be coming up with new plans for avoiding this type of catastrophe in the future as well.
Damage To Plants Exceeding Expectations
Gasoline prices touched fresh 18 month highs overnight, and are holding on to gains in the early going. Diesel prices are also ticking higher, but are lagging the strength in gasoline, even as the fundamentals for diesel look stronger than gasoline near term.
Tuesday’s session was highlighted by a heavy wave of selling in the early going that proved short-lived and gave way to gains after an hour or so. U.S. stock indices also staged a large intra-day rally after heavy morning selling, thanks in part to some calming words from the FED Chair who was testifying before the Senate banking committee. While the correlation between stocks and energy price moves daily remains fairly strong (near 80% for the S&P 500 and WTI and ULSD contracts) the timing was mismatched as energy contracts rallied early and equities later in the day, that suggests petroleum prices are still being driven primarily by refinery news this week.
While significant progress is being made in restarting shut down plants across the country, several plants are discovering that restarts will take a month or so due to damage exceeding original expectations.
While refined product supplies in general are tight across Texas and some adjoining markets, it looks like diesel is the bigger concern for outages in the short term. We’ve already seen spot to rack price spreads for diesel rally to their widest levels in more than a year this week, and a supply outage at the terminal in Odessa, TX was reported Tuesday evening. Complicating tight supplies, diesel demand across the U.S., based on EIA calculations, has been above average for this time of year, as economic recovery and some shift in consumption patterns (think delivery trucks) combine to offset the negative impacts of COVID.
The diesel strength is not just limited to the Gulf Coast. Group 3 ULSD basis differentials reached a three year high yesterday, even as demand in the region slumped dramatically due to the cold snap last week, and the neighboring Chicago market is seeing similar gains. With the refineries in KS and OK that were forced to shut units due to that storm all restarting this week, and the Explorer pipeline operating normally, it seems the price rally is due to barrels being diverted to other markets across the south, rather than moving north to the Midwest, which in turn forces buyers to pay up in order to find replacement barrels.
The API reported a large draw in diesel stocks last week, even as gasoline and crude stocks saw small builds. The EIA report this morning is expected to show some wild numbers as the refinery and oil production shutdowns will be showing up in the numbers for the first time.
HollyFrontier released their 4th quarter earnings this morning, reporting a loss of $117 million for the quarter due largely to "weak demand for gasoline and diesel coupled with compressed crude differentials.” The company did highlight its balance sheet strength and “ambitious” capital and turnaround plans as demand recovers.
Damage Caused By Extreme Cold Snap
WTI led the energy complex in another strong rally Monday, reaching new one-year highs as optimism for long term demand and short term disruptions to the supply network continued to encourage buyers. Prices continued marching higher overnight, but those gains were largely wiped out in the early going after WTI reached $63.
Equity markets seem to be losing their upward momentum as interest rates rise, which could be enough to put an end to the four month old rally in energy markets now that the supply network is getting back to work.
The great refinery restart across the southern half of the U.S. is underway, with progress slow but steady. A common theme noted in restart plans Monday is that most plants are able to begin the restart process this week, but may take several weeks to reach full rates due to various damage caused by the extreme cold snap. A few plants will take more than a week to initiate restart as their damage was more extensive. The slow restart is likely to mean that allocations across large parts of the south are likely to remain for another week or two, but widespread outages at the terminal level should not occur.
The shortages are most pronounced across West Texas, which went from one of the most oversupplied markets in the country two weeks ago, to now trading 25-30 cents over USGC spot markets as resupplies are concentrated in the major metro areas for now.
Large hedge funds have been steadily jumping on the WTI bandwagon for months, pushing the net length to multi-year highs in recent weeks, and now some of the largest trading houses Banks in the world are calling for even higher prices. The big push in WTI prices following those reports suggests they may have encouraged more money to flow in to the oil trade. Whether or not that allows those trading houses banks to offload their length will remain a mystery.
RIN prices briefly spiked Monday after the new EPA administration changed its stance on the case of small refinery RFS waivers that’s soon to go before the Supreme Court. Sellers quickly emerged however as the agency’s stance doesn’t seem like it will influence the court’s decision, and based on the flip flopping of the agency depending on who is in the White House, that’s probably a good thing.
Refinery Restarts Underway
The snow is gone and the power is on, after a 70 degree warm up in five days and the refinery restarts are underway. How long those restarts take, and which plants may choose to move up spring maintenance as long as they are doing repairs anyway will be the two main factors determining if tight supplies last a few days or a few weeks. Oil prices are ticking up and products are seeing small losses as the traders seem to be cautious about the return to relative normalcy this week.
While some news outlets are suggesting that the damage done last week may mean a spike in retail gas prices north of $3/gallon, it appears wholesale price gains may be limited to the 10-20 cents for diesel and 20-30 cents for gasoline thanks in large part to excess capacity before the storm and soft demand.
Notices filed to the Texas Commission on Environmental Quality (TCEQ) throughout the week detail the hundreds of facilities from production, transportation and refining of oil and natural gas products that were knocked offline due to the cold or lack of power. A Reuters article highlighted that the subsequent emissions events over the past week surpassed those reported for an entire year at several facilities.
The EPA issued a temporary emergency waiver on TXLED diesel additive and El Paso oxygenate requirements to try and help expedite resupply through March 5. The relatively limited scope of those waivers probably won’t have much impact since the TXLED additives are often blended at the terminals anyway, and neither of the largest RBOB markets of Houston or DFW appear to be getting a break. We are still in the early days of the spring RVP transition however, so producing on-spec gasoline is still relatively easy compared to summer-time blends, which will help output crank up quickly.
Baker Hughes reported a decline of one active oil rig in the U.S. last week, snapping a streak of gains that stretched for 12 straight weeks. With the chaos in Texas last week, it’s hard to say how accurate the count may have been, with estimates suggesting nearly half of the Permian Basin’s output was forced to temporarily shut in, and the “active” drilling rigs were likely anything but.
Money managers look like they froze along with much of the energy industry last week, making only minimal changes to their holdings in the petroleum-based energy contracts. Most notable in the CFTC weekly report is that WTI net length held by large speculators ticked to a new 18 month high, and open interest in WTI & Brent contracts surged to its highest in almost a year. That renewed interest from the big money speculators could mean we’ll see more volatility in the weeks ahead as the influx or exit of their dollars can create large price swings.
Today’s interesting read: How margin requirements spiked along with natural gas prices last week.
Energy Prices Pause After Furious Rally
A slow warmup in temperatures, and a cool down in U.S. equity markets has energy prices pausing after a furious rally that has pushed gasoline prices to 1.5 year highs.
While electricity has been restored to the majority of homes taken offline by the extreme weather this week, power is still a major bottleneck for fuel distribution at the terminal level as the orders to (justifiably) focus on getting supply to those at risk of freezing over industrial demand mean that many fuel supply locations can’t yet load trucks, just as those trucks are starting to get back on the road. Fuel outages at retail stations across the state of Texas are growing, and are likely to spread for at least a couple of days as the restart races for businesses of all varieties begin.
A Bloomberg report Thursday suggests that four of the largest refineries in TX could take weeks to restart, and if those estimates are accurate, it’s likely other plants in the region could face similar challenges as damage done by frozen pipes and instruments could become a complicated theme of repair work. A handful of refineries are already attempting to restart units over the past 24 hours, but we won’t know until Monday how those efforts are progressing.
Cash markets don’t seem too fazed by those reports, as gains in basis values continue to be fairly small despite the widespread refinery upsets. Gulf Coast gasoline transitioned to March cycles this week, meaning they’re trading against the summer-spec April RBOB contract. Don’t be surprised to see RVP waivers granted by the EPA to try and alleviate supply bottlenecks in the coming weeks.
Colonial pipeline continues to report that it’s operations are ongoing without shutdowns due to the power issues, although it appears the schedules may have slipped a few days as the main origin points in Houston/Pasadena/Pt Arthur/Beaumont and Lake Charles are all struggling with refinery closures and other power/freezing challenges.
The DOE weekly report showed a large crude oil inventory and a tick up in product demand that helped limit the selling in Thursday’s session, just as it was beginning to snowball. The crude decline was driven almost entirely by a large increase in exports of more than 1.2 million barrels/day, while refinery runs were close to flat (up just 26mb/day) on the week. With refinery runs estimated to be down 20% or more this week, shipping lanes frozen and Permian oil output estimated to be down 40% or more, we should see some record setting figures in next week’s report.
The EIA published a closer look at the supply & demand of electricity in Texas over the past week, detailing how almost all sources of power in the state saw output reduced right as demand was peaking. The charts they provided are a stark reminder of the challenges each form of electricity generation faces, and suggests the lofty plans to run all cars on electric power in the next 20 years is going to be easier said than done.
How Long Until Power Comes Back On?
How long until the power comes back on? That’s the big question being asked by millions of people across the U.S. and Mexico, and a huge proportion of the energy industry as the remnants of a brutal stretch of winter weather moves East, and the thawing out process begins. In addition to the direct impact, the trickle down effects of the collapse in oil, refined products, natural gas and ethylene production are being felt around the world.
The refining hubs along the Gulf Coast from Corpus Christi to New Orleans have temperatures above freezing this morning, and should stay that way for the next week, except for a few hours tonight. If that thaw allows most plants to resume operations by the weekend, the impact of this chaotic event should be short-lived. Of course, the warm up also means that more drivers are about to hit the road, while terminals and stations that have been closed for a few days may or may not be able to come back online with supply, power and/or intact pipes to meet demand.
If you remember the panic buying in the wake of Hurricane Harvey, it’s not hard to imagine that the next few days could create a demand spike as news of the refinery shutdowns hits the mainstream just in time for people to start leaving their homes again, and could create a preventable panic phenomenon which could create supply shortages all on its own.
The Houston ship channel was able to resume limited operations after the ice blocking shipping lanes started to break up, a most unusual occurrence that may have some Texans reluctant to use the phrase “When Hell Freezes over” ever again.
We did see some heavy selling for about an hour Wednesday morning after a WSJ report that said Saudi Arabia was going to increase its oil output now that prices had recovered. That wave of selling wiped out the early gains for crude and product futures, but was fairly short lived and the march higher picked up later in the morning.
Basis markets continue to show strength for both gasoline and diesel grades across most U.S. spot markets, but those moves are still relatively minor compared to disruptions we’ve witnessed over the past two decades, a testament to the excess capacity in the U.S. and the softer-than-normal demand environment. In addition to stronger spot prices, numerous rack markets stretching from Arizona to Maryland have switched from seeing suppliers having to offer steep discounts to move product during the winter doldrums, to enforcing strict allocations as resupply options become questionable.
The API reported large draws in oil and diesel stocks last week, while gasoline stocks had another large build. The DOE’s weekly report is due out at 10 a.m. central today, and should give some glimpse into the impact on gasoline demand caused by the winter storms that battered the East Coast two weeks ago, that now appear quaint in comparison. Don’t expect the report to move the market much as last Friday’s data doesn’t mean much after almost 1/3 of the country’s refining capacity was forced to cut back this week.
In other non-frozen refinery news this week, Calumet laid out plans to convert part of its Great Falls Montana facility to Renewable Diesel production this week in an SEC filing, joining a long list of refiners looking to jump on the BTC/RIN/LCFS and new Canadian CFS programs that combined can offer more than $4.50/gallon in subsidies for RD production. The company also closed on the sale and leaseback of its Shreveport facility in an effort to save enough cash to survive the weak margin environment that was hammering refineries before the storms hit.
Great Falls Renewable Diesel Opportunity:
We believe Great Falls, which connects western agriculture with West Coast and Canadian clean product markets, presents one of the most compelling opportunities for Renewable Diesel production in North America. We estimate the oversized hydrocracker built in 2016 can be reconfigured to process 10-12,000 BPD renewable feedstock at the lowest capital cost per barrel of any announced industry project. Hydrocracker conversions are typically faster to market, cheaper, and less technically challenging. In addition, the planned configuration could retain 10-12,000 BPD low-cost Canadian crude processing, providing Montana customers with clean energy and our unique specialty asphalt. Future dual train operations are currently estimated to generate $220 to $260 million of Adjusted EBITDA assuming mid-cycle market prices and existing environmental market structure (BTC, RINs, LCFS).
Given strong investor interest in renewables, Calumet expects to utilize third party equity for this unique opportunity, without expending Calumet funds.
Week 7 - US DOE Inventory Recap
Refined Products Continue To Push Higher
Refined products continue to push higher this morning, reaching new pre-COVID highs as the country deals with perhaps the largest single refinery disruption event in history. Roughly 1/3 of all U.S. refining capacity has been disrupted to some degree, with most of the plants in the list below being forced to shut units or cut back run rates by a brutal combination of pipe-bursting cold and a lack of steady power, with more storms hitting large parts of the country today.
When all is said and done, it appears this event will have impacted more U.S. refineries than any other single event, but the price reaction remains relatively minor compared to storms like Katrina (2005) or Ike (2008) for a variety of reasons, most notably that the plants are largely expected to begin restarting in the next 24 - 48 hours with minimal long term damage. For comparison, in the wake of Katrina and Ike, we saw some spot markets trade up by $1 -$2/gallon, and this time around (so far anyway) we’re still talking about 10 - 20 cent increases. We’re also already working in a reduced demand environment, and we’ve seen consumption plummet further so far this week, which should help limit the disruption coming from the supply side of the equation.
In addition to the rally in futures, most cash markets are seeing stronger basis values as buyers try to find available barrels to replace those that are lost. The buying is unusually widespread from coast to coast, to coast as the country’s refining hub is temporarily crippled. Supplemental barrels for some Southwest markets will have to come from California, East Coast markets will lean more heavily on resupply from Europe, and the Midwest may just have to fend for itself for a while, which usually isn’t too hard to do this time of year.
Colonial pipeline continues to operate, but some shipments appear to be delayed as the availability of product and power to push it up the line are both suspect in the lines largest origin points. So far we’re still talking about tight allocations in the markets fed by that line, not complete terminal outages, which would be likely if its main lines are forced to close. Explorer pipeline was forced to delay restart of its main line that runs from Houston, through DFW, to several Midwestern markets due to the latest round of ice & snow.
It’s not just physical lines that are being impacted by this event, with so much of the industry headquartered in Houston, the power outages in that city are creating headaches across the country on a transactional level as some servers that drive business operations are struggling, as are the employees who rely on them.
The weekly DOE inventory report is delayed due to the President’s Day holiday, and will be largely ignored anyway as the data was compiled before the polar plunge dramatically changed the refining landscape.
Today’s interesting non-weather-related read: The case of the missing Oil.
Winter Storm Impacts Refinery Production
Refined products are seeing large gains this morning after more than 20% of the country’s refining capacity was forced to shut after most of the country was literally and figuratively frozen by record-setting cold temperatures.
This winter storm is now rivalling Hurricane Harvey for its impact on refinery production, and may well surpass that storm when all is done as another day of cold & snow is forecast before things start to warm up. The impacts of this storm are much more widespread, with refining disruptions in PADDs 2, 3 and 5 all reported so far as power outages stretch from the West Coast to the Gulf Coast and now to the East Coast.
The list below details the plants that are said to be shutting down until power and temperatures stabilize. Note that so far the Louisiana refineries seem to have missed the worst of the cold and are continuing to run, whereas most plants surrounding Houston area are having to cut back.
In addition to the refinery disruptions, Explorer pipeline was forced to shut operations due to power problems around Houston, and is expected to attempt a restart Wednesday. So far Colonial pipeline operations are said to be continuing as normal, which is critical to keep this even from causing localized supply shortages to widespread outages.
RBOB gasoline futures were up by 10 cents in overnight trade, but have pulled back to “only” up seven cents this morning, while diesel prices are up around four cents. It’s worth noting that RBOB futures came within a penny of the high trade set last January in the wake of Iran’s attack on U.S. troops, which creates a big resistance layer on the charts right around the $1.80 mark. If knocking 1/5th of the country’s refining capacity offline isn’t enough to break that resistance, we could see this as a major selling opportunity and prices could easily pull back 25-30 cents in the next several weeks.
Another thing that’s probably keeping the price rally from picking up too much steam in the early going is that large portions of the population are hunkering down indoors and avoiding the roads for a few days, which is creating huge spikes for electricity and natural gas demand, but is probably doing the exact opposite for gasoline consumption.
Similar to what we saw during the record-setting hurricane season in 2020, the reduced demand and excess refining capacity sitting idle caused by COVID seems to be acting as a buffer against a more dramatic spike in prices. It will probably be another couple of days before damage assessments can be done, but with warmer temperatures ahead, there’s a good chance most of these refineries will be starting back up before the weekend.
Crude oil futures rallied north of $60 Monday after one million barrels/day of production was expected to close due to the storm, but are giving back most of those gains this morning as three million barrels/day of crude oil demand is temporarily off-line due to the rash of refinery closures.
Today’s interesting read: Cleaning up after a 150 year old refinery.
In Another Technical Breakout To The Upside 2-15
We’re in another technical breakout to the upside for energy futures this morning after a strong rally Friday set the stage for WTI to break above $60 overnight, and for refined product to push through to new 13 month highs.
The last time we saw futures trading at these levels was just after Iran launched missiles at a US base in Iraq in January of 2020, sparking some calls for $100 oil. The highs set back then also happen to set the next layers of chart resistance and an upside price target as the rally continues.
Trading volume is light due to the President’s day holiday in the US. Futures are trading until noon central time today, then will halt until the overnight session starts back up at 5pm. Spot markets are not being assessed so most rack prices will stay steady unless this rally picks up more steam and forces suppliers to make a holiday change.
The rally in prices is welcome news for oil producers, and we saw the Baker Hughes rig count increase for a 12th straight week. As has been the case for much of the past few years, the Permian basin accounted for the majority of the change in drilling activity with 5 of the 7 total oil rigs added in that region last week.
Speculators are also happy to see this rally, as they’ve continued to add to net length in oil and diesel contracts, although they have reduced their bets on higher gasoline prices for a 2nd straight week. Net length in WTI is just a few thousand contracts away from reaching a 2.5 year high, and open interest in both WTI and Brent has grown rapidly over the past few weeks, in a sign that large funds are willing to make large bets that oil prices can continue moving higher even after a 70% rally in the past 3.5 months.
The new US Secretary of State announced Friday that he would be revoking the Houthi rebel’s designation as a terrorist organization, just 2 days after assuring Saudi Arabia the new administration would not stand by after the Houthi’s attacked a Saudi Airport. Some reports suggested those attacks played a big role in Friday’s strong rally, even though they happened on Wednesday.
Today’s interesting read: Why the rapidly changing global refining landscape means big changes are in store for shipping routes.
Another Soft Start For Energy Markets
It’s another soft start for energy markets Friday as the upward momentum has waned in the back half of the week. Although most prices are still modestly in the red (March RBOB did manage to turn positive around 8 a.m.) we’ve already seen refined products bounce 1.5 cents off of their overnight lows, and they haven’t yet even tested the upward-sloping trendline, so it’s still too soon to call an end to the 3.5 month old bull market, which marks the longest sustained rally in two years.
A rally in the U.S. Dollar is getting some of the credit for the pullback in oil prices, even though the correlation between the two has been strongly positive for much of the past month, reversing the normal relationship. A pullback in equity markets after reaching fresh record highs this week is also getting some credit for the pause in the rally, and the correlation between daily moves in the S&P 500 and WTI remains north of 80%.
OPEC’s monthly oil market report showed the cartel’s total output increased by 181,000 barrels/day in January, with increases from Saudi Arabia, Venezuela and Iran offsetting decreases in Libya and Nigeria. We should see a sharp drop in output soon as Saudi Arabia prepares its unilateral production cuts it announced when it couldn’t convince the Friends of OPEC alliance led by Russia to cut output to avoid flooding the fragile market with supply. Like all of the other monthly reports released this week, OPEC expects an acceleration in demand growth in the back half of the year but the full year demand estimates were revised slightly lower from last month due to extended lockdowns.
Did you know refinery-effect snow was a thing? It happened this week in Denver, and based on the forecast, some plants in TX and LA could experience something like this next week, that is if they’re still able to operate through the record-setting cold that’s forecast for parts of the country that don’t insulate their pipes. Expect to see some terminal and/or refinery disruptions if the forecasted temperatures materialize across the south, not to mention the likelihood that trucks may breakdown if they leave their diesel untreated for the cold.
Monday is President’s Day, so spot markets will not be assessed, and most rack prices will carry through from tonight until Tuesday. NYMEX contracts will trade in an abbreviated session on Monday, but there will not be a settlement.
Moving Through February Demand Doldrums
Energy prices are seeing a modest pullback to start Thursday after WTI and ULSD futures stretched their winning streak to eight straight sessions on Wednesday, reaching new one-year highs in the process. Some sobering fundamental data seems to be giving the market reason to pause, although the trend-lines are still intact and pointing higher for now, and prices have already bounced off of their overnight lows.
Gasoline prices are faring the worst this week as we move through the February demand doldrums with a parade of winter storms and record-setting cold on tap for the next week.
The DOE’s weekly report didn’t offer any help to the stumble in gasoline prices as another large build in inventories, most of which came in PADD 1, reminded traders that prices are up 65% from three months ago even though inventory levels have swelled by more than 10% during that stretch. The past three weeks alone have seen gasoline stocks move from below the five year average seasonal range to the top end of that range. With demand still struggling, leaving days of supply at the highest levels since the lock-downs last spring, the chances of the normal seasonal drawdown in supplies is looking like a challenge.
Refinery runs picked up across all 5 PADDs last week, which seems to be putting downward pressure on basis values along the coastal markets. Meanwhile mid-continent markets have strengthened this week, as inventories in the Midwest remain below average, and in what could be some expectation that the cold snap could cause some refinery hiccups, particularly for those plants on the southern edge of the region that don’t plan for single digit temps.
RIN values continue to come under heavy selling pressure this week. The new EPA administrator appointee seems to be holding his cards close to the vest, saying in an interview that he planned on reviewing options for the RFS, and not offering any hint on potential obligation changes.
The IEA’s monthly oil market report called the global supply/demand rebalancing “fragile” as the new, more-contagious variants of COVID-19 threatens the demand recovery. The report did make a reduction in its expected total demand for 2021, but only because the actual demand numbers for last year were found to be lower than previous estimates, so the rate of expected change year on year has not changed. The IEA’s report also highlighted that refinery runs in the Atlantic basin are set to lead the recovery in 2021, after they dropped to the lowest level in the 50 years the agency has been tracking those levels.
The EIA’s monthly short term energy outlook highlighted similar concerns for the first half of the year as the IEA’s report, with expectations for a strong recovery in the back half of the year. The STEO highlighted the relatively small spread between winter and summer gasoline grades this year, which are roughly half of what we’ve come to expect. The report suggests the weak demand and low refinery run rates are the cause for this small spread, but failed to mention the EPA’s fuel compliance streamlining that should make summer-grades less expensive this year.
Perhaps the most interesting detail in the February STEO is the comparison of natural gas prices in the U.S. which are hovering around $3/million BTU, vs. other parts of the world that are paying $10-$20. Chart below.
In case you can’t get enough of the monthly reports that remind us COVID has hurt demand, but it should get better eventually, OPEC’s monthly oil market report will be out later this morning.
Parade Of Winter Storms Hits Demand Across The Country
Oil and diesel prices are moving higher for an eighth straight day after Tuesday morning’s attempted sell-off proved to be short-lived. RBOB prices are struggling to keep up so far after a large build in U.S. gasoline inventories gave traders reason to pause. Tuesday’s bounce keeps the bullish trend lines intact, and the path open to test the 2020 highs set before COVID lockdowns became a reality even as more fundamental signs suggest this rally may have outkicked its coverage.
The API was reported to show a 3.5 million barrel draw in oil inventories last week, while distillates declined by just under ½ million barrels. A large build in gasoline stocks of 4.8 million barrels seems to be the reason that the March RBOB contract is the only one of the big 4 petroleum futures trading in the red this morning, while the others add modest gains. The DOE’s weekly status report is due out at its normal time this morning, with the gasoline demand number sure to be closely watched as a parade of winter storms has hit demand across most of the country in the past two weeks.
Speaking of winter weather, a major cold snap is bringing temperatures well below normal for this time of year to a wide area of the country. Already, there are reports that several utilities are putting customers on notice that this could mean curtailments in natural gas availability due to a spike in heating demand. In years past this would often mean a spike in ULSD prices as heating oil demand for homes, and dyed diesel demand for power plant supplemental fuel. While we’ve been in the midst of a very strong rally in ULSD prices the past three months, this latest cold snap doesn’t appear to be doing much so far to add more fuel to the rally, with basis and time spreads hardly reacting over the past several days. A note this morning from the EIA may help explain why as the U.S. Northeast is still sitting on inventory levels for diesel that are well above normal levels.
The latest in the long line of refining casualties in the past year: Exxon announced it is closing one of the three remaining refineries in Australia, despite efforts from the government to bridge the gap until demand picks back up.
The Chevron refinery in Richmond, CA had a spill near its wharf in the San Francisco bay, but it appears that leak was contained, and given its relatively small size of around 600 gallons should not be a major issue for the bay area, or the refineries operations unless additional damage is discovered during the investigation. Bay area fuel diffs have been under heavy pressure lately as local shutdown orders continue to hamper fuel demand.
RIN markets have been relatively quiet this week after several weeks of wild trading as the political football known as the RFS continued to be punted back and forth in Washington. This week the EPA is hearing testimony on a proposed plan by the previous administration to extend the deadlines for complying with the RFS for 2019 and 2020, although a final ruling on that matter isn’t expected until the spring.
Several Stock Indices Hit Record Highs
Energy and equity markets are both seeing modest pullbacks Tuesday morning, after several stock indices hit record highs Monday and energy prices briefly reached new one year highs in the overnight session. The bullish trend lines are still safe for now, and we’ll need to see refined products drop a nickel or more before they’re threatened.
Refinery margins had been steadily increasing during the three month rally, with most crack spread calculations doubling during that stretch. Those spreads have pulled back in the past week however, in tandem with the pullback in RIN prices that’s continued even after an attempt to cap the price of RINs was struck down on Friday.
The EIA this morning reports on the growing exports of propane from the U.S. as demand for both heating, cooking and plastics in Asian markets continues to increase.
It’s hard to read anything about the energy industry these days without climate change being included in the discussion, while new. Don’t expect that to change any time soon, as the Fed is starting to include climate risks into its policy making according to a paper published Monday, noting the “far reaching economic and financial consequences for many households and businesses." Meanwhile, another paper published Monday by a group of scientists cautioned against any current financial modeling based on climate change predictions. The report started by saying simply “The rules by which climate science can be used appropriately to inform assessments of how climate change will impact financial risk have not yet been developed.”
Today’s interesting read from the FT: why this rally is unusually widespread across many commodity markets.
Early Stages Of Major Commodity Rally
The rally marches on for energy prices, with Brent crude reaching the $60 mark overnight, and refined products hitting fresh, one-year highs. Most contracts are now trading 70% higher than the low trades from November first, with a well-defined bullish trend line serving as a buying point during any number of attempted sell-offs. A Bloomberg article argues that we’re in the early stages of a major commodity rally as the vaccines start to unleash pent up demand around the world.
While the path upward is still clear, there’s not much more room to go until refined products face a major test at last February’s highs. If they can break that resistance, there’s a case to be made for a run towards $2, but if they fail, we could see some harsh selling as the complex is looking severely overbought and there are signs that the big funds may be jumping off the gasoline bandwagon.
Large speculators remain bullish on oil and diesel prices, but seem to think the gasoline price rally has outkicked its coverage based on last week’s Commitments of Traders report. Net length held by money managers (the large speculative category in the report) grew in WTI, Brent, ULSD and Gasoil contracts, but was cut by 22% in RBOB contracts on the week. It appears that some of those sellers may have been head-faked by the selloff to end January as prices continued to move higher after the report’s data was collected last Tuesday. That said, in years past, when the big funds decide the seasonal rally is over, they typically liquidate gasoline positions heavily over a period of a few weeks, which could end up being a factor that finally brings the three month long rally to an end.
Baker Hughes reported a net increase of four oil rigs operating in the U.S. last week, with the Permian basin up by six rigs, while other locations declined by two. That’s the eleventh consecutive week of increases in the U.S. oil rig count, with the Permian adding 43 of the total 68 rigs during that stretch. It’s also worth noting that in the summer of 2019, oil prices traded lower than they are today, and there were 400 more drilling rigs active than there are today, so there’s still plenty of room for activity, although most producers remain cautious given the weak demand environment.
Diesel Futures Break Through New One-Year Highs
Several U.S. equity indices reached are trading at all-time highs, which seems to be helping the rally in energy futures continue. Diesel futures broke through to new one-year highs overnight, taking over the role as the leader of the energy complex as RBOB prices seem to have lost some of their relative strength with gasoline demand slumping. RBOB futures did reach new 11 month highs overnight, but are still two cents away from breaking last February’s high water mark.
While the bulls are still in control, the enthusiasm after the strongest weekly rally in three months has been tempered a bit by some weak economic news. While still moving higher for the day, refined product prices have pulled back more than two cents from their overnight highs following the January jobs report.
The non-farm payroll report for January showed “little change” with an increase of 49,000 jobs for January, while November and December’s numbers were revised lower by a combined 159,000 jobs. That means job growth in the U.S. essentially stalled out over the past three months. Meanwhile, despite the lackluster job creation, both the headline and U-6 unemployment rates both had sizeable moves lower (to 6.3 and 11.1% respectively) which means more people left the labor force than found jobs for the month, which doesn’t sound bullish for fuel consumption.
The forward curve charts below show that the recent rally in energy prices has been largely limited to the front end of the curve, forcing prices into a steeper backwardation. That type of curve ordinarily implies near term supply shortages, although in most markets there’s still more concern of having oversupply than not enough.
The California Energy Commission’s weekly fuel report charts below show total output rates for the states refiners hovering near multi-year lows as demand continues to slump. Note the large swings between production of CARB and non-CARB fuels as plants continue to yo-yo their output to balance both a challenging demand environment and the drastically different economics for fuels sold in state vs being exported.
Gasoline And Diesel Prices Higher Than Before Lockdown
Gasoline and diesel prices are now higher than they were before the world went into lockdown last year as the bull market for energy futures marches on. The bulls seem to have clear control as prices tick higher for a fourth straight day, but need to clear the February 2020 high trades (just two cents above the highs set last night) if the momentum is going to continue.
Near term fundamentals continue to look weak, but it seems that the market is shrugging off those figures, and focusing instead on the potential for increased demand down the road as vaccinations start to spread more than COVID, and a new stimulus package is expected to keep freshly printed dollars moving into the economy.
Crude inventories did decline according to the DOE’s weekly reports, but by much less than the API estimate for the week, as imports ticked back up, and refinery runs slowed in 4 of the 5 PADDs. Demand estimates were down across the board, which drove large builds in gasoline and jet fuel stocks, while distillates held steady on the week thanks in large part to a tick up in export volumes.
Ethanol stocks continue to build as producers seem to be taking advantage of the run up in flat prices, and in RIN values, over the past two months. RIN Values did drop for a third straight day Wednesday, but that seemed to be ignored by the RBOB futures market once again.
In refinery news, a private equity group in Dallas is bidding to buy the shuttered Come-By-Chance refinery in Newfoundland, with plants to convert it to renewable diesel production since that’s what all the cool refineries are doing these days. There were reports that three different FCC upsets happened over the past few days, one on the East Coast and two on the Gulf Coast, which may help explain part of the relative strength in RBOB prices and time spreads this week, but all of those issues appear to be getting fixed and should not have long term impacts on supply.
The EIA’s annual energy outlook was released yesterday, which projected estimates that U.S. oil production and consumption will take years to recover from the pandemic. The report also highlights the uneven impacts of the COVID lockdowns, and how the return to normalcy may look very different among sectors of the economy.
Oil Prices Trade At Highest Values In Over A Year
Oil prices are trading at their highest values in more than a year this morning, and refined products are nearing one year highs of their own in what appears to be a technically driven rally after prices bounced hard off of the bullish trend lines Monday, and broke through chart resistance yesterday.
A decline in oil inventories reported by the API is getting some of the credit for the continued rally, with the industry group reporting a 4.3 million barrel draw in crude stocks. Gasoline and diesel stocks had smaller declines of 240,000 and 1.6 million barrels respectively. One thing to watch out for is that we saw a huge draw in last week’s DOE report largely driven by a surge in exports and decline in imports. If those trade flows normalize this week, we could see a large build in crude stocks that might throw a little cold water on the bulls.
One odd thing about this rally is that it’s happening despite a strong move higher in the U.S. Dollar, which typically would put downward pressure on commodities in general, and energy contracts in particular. The correlation between the currency and energy contracts has flipped to positive in recent weeks, another sign that the most recent runup may be more technical for energy than fundamental as buyers of U.S. dollar-denominated oil are now paying more for the product, and their exchange rate.
Another odd thing about this rally? It’s happening despite RIN values pulling back sharply, falling more than a dime from the multi-year highs they reached last week. RIN values and product prices often move in the same direction as the federal renewable fuel credits act like a tax to refiners who don’t have the capability to blend their own ethanol, bio and other renewable products, which means a rise in RIN prices requires a rise in crack spreads for the margins to stay even.
A third oddity about this rally is that it’s coming in the wake of a major winter storm that is hitting demand hard all along some of the country’s most populated areas on the east coast, while another major cold snap moves in right behind it that’s likely to further reduce consumption. Despite that, we’re seeing RBOB lead the move higher even as we could be in for the worst week of gasoline demand in some markets since Christmas.
The storm does not seem to have done any lasting damage to supply infrastructure in the North East, with no extended terminal or refinery downtime. In fact, it does not appear that there are any major refinery outages being reported that might cause the spike in RBOB outright prices and time spreads that we’re seeing this week. Actually, the only newsworthy refinery reports are that the refinery formerly known as Hovensa, is increasing its output, bringing a new competitor back to the Atlantic basin for the first time in years.
A strong recover rally in U.S. equity markets after some heavy selling last week seems to be adding to the bullish sentiment, but equities are pointing to a flat open so that doesn’t seem to explain the early strength in RBOB today.
Given the equity headlines over the past week, you might think that the RBOB rally could be a short squeeze, but since large speculators have actually been building their net long position to the highest level in a year over the past several weeks, that doesn’t seem to be a likely cause.
At this point, it doesn’t matter much what’s causing the rally to continue, until that bullish trend line is broken, it seems the path of least resistance is for energy prices to keep moving higher despite all the potential headwinds. The big test for RBOB and ULSD remains the February 2020 highs around $1.68 and $1.72. If the break there, we could see another 15-20 cents of upside, but a failure could mean a move back into the $1.40s based on nothing more than a natural technical correction of the three month old rally.
Winter Storm Cripples Demand Along East Coast
Refined products are in a technical breakout to start Tuesday’s session, even as a major winter storm cripples demand along the east coast. The rally appears to be technically driven after prices bounced sharply off of trend-line support Monday, creating an outside-up bar, and following through with a strong rally overnight that is pushing prices towards one year highs.
The worst winter storm to hit parts of the east coast in five years doesn’t seem to matter to traders this morning even as it’s sure to sap transportation demand in the region over the next few days, without getting cold enough to spark a surge in heating demand. That fundamental weakness will be a good test for this rally in the back half of this week, and next when we see the inventory reports that will reflect the slowdown. The next natural resistance level looks to be the $1.68 range for RBOB and the $1.72 range for ULSD, both marking last February’s high water marks.
Exxon reported a $20 Billion loss in the fourth quarter, as the company wrote off $19 billion in impairments in its upstream operations, “…including certain dry gas resources in the United States, western Canada, and Argentina.” The refining & downstream segment “only” lost $1.2 billion for the quarter.
Marathon reported positive earnings for Q4 with solid gains from its midstream assets, soon-to-be discontinued Speedway operations, and a billion dollar write up in inventory values helping to offset a $1.6 billion loss in their refining segment. Its Dickinson ND Renewable Diesel facility is expected to be online in the next couple of months, with a 12mb/day capacity that will head to California to earn the additional $1.50/gallon or so in LCFS credits, on top of the $1 federal Blenders tax credit. Those credits are of course on top of the RIN value.
February Trading Starts On A Strong Note
Energy futures are starting February trading on a strong note, after stumbling across the finish line in January. An early rally of 3-4 cents in refined products Friday was erased later in the day, and there was a flurry of selling just before settlement that put the complex back on the verge of breaking below the bullish trendline that’s been in place since the first of November. Today’s bounce keeps the bull market intact for now, but we’ll need to see the high water mark set Friday broken this week if the upward momentum can hold.
Equity markets continue to see an uptick in volatility with a large sell-off Friday coinciding with the pullback in energy futures, before both asset classes started to rally again overnight. Even though the correlation between the two has weakened in the past couple of weeks, whenever there’s an uptick in volatility it seems one often influences the other, and now that the Reddit revolution is pointed at Silver contracts, a heavier influence on other commodities could be a possibility.
Baker Hughes reported 6 more oil rigs were active in the U.S. last week, a tenth straight week of increases. The Permian basin accounted for 4 of the 6 rigs, and accounts for 192 of the 295 total drilling rigs currently active in the country.
Money managers continue to be conflicted on their energy contract holdings with the large speculative category of trader adding net length in RBOB, ULSD and Brent contracts last week, while cutting length in WTI and Gasoil contracts. Net Length in RBOB and ULSD is at its highest level in a year as a strong rally in crack spreads encourages more funds to jump on that bandwagon.