Market Talk - 2021 february
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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.