Market Talk - 2021 july
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Rash Of Refinery And Logistics Issues Plague Markets
It’s been a strong week for energy contracts, with RBOB gasoline pushing north of $2.35/gallon for the first time since October of 2014, and leading the rest of the petroleum complex higher. Cash markets have also moved to multi-year highs as a rash of refinery and logistics issues plague markets across the western half of the country.
Oil and diesel prices have also had solid weeks, but remain below the multi-year highs they set early in July. That will remain a pivotal test near term, and if they fail to break above those levels, the case for a large technical-driven selloff continues to grow.
RIN values have joined in on the rally, even though grain prices have moved sideways, which could be at least partially blamed on the spike in West Coast product prices, since they will no doubt attract fresh imports, which generate a renewable volume obligation for the supplier.
Today is the last trading day of the month, so watch the September product contracts (RBU/HOU) for price direction.
Earnings week for the 2nd quarter has brought a deluge of data to sift through. The themes of dramatically different year on year comparisons, and new investment in renewables/carbon capture are prevalent throughout. This WSJ article highlights that the new focus on climate change isn’t just about appeasing investors, it’s also about protecting operations from extreme weather. A few highlights from some of the earnings releases are included below.
Energy Futures Continue To Hover Near Multi-Year Highs
Energy futures continue to hover near multi-year highs, although the gains this week have been muted. That lack of conviction may suggest that buyers are growing weary after 8 months of strong gains, or it could just be some consolidation before the next big move higher. The difference is likely to be whether or not we can see prices push through to new highs over the next week or two.
Yesterday’s DOE report showed inventory draws across the board. RBOB futures did jump initially after the report, but quickly gave up those gains as it became clear that the inventory draw last week had more to do with a drop in imports than an increase in consumption. Evidence at the street level of a summer demand plateau seems to be confirmed in the DOE’s estimates, which appears to be giving buyers reason to pause after pushing gasoline prices to 7 year highs.
It seems like every day there’s a headline about Jet fuel shortages at airports across the country. Make no mistake, the shortage is not one of supply (even though this “expert” says it is) – the charts from the DOE weekly report below how that nationwide supplies are above the top end of their seasonal range, and refiners have capacity to produce more (and would love to make more given the lack of RVO with Jet) as demand returns to more normal levels. The shortage is in the capacity for transportation as a driver shortage continues to challenge many industries, and is made worse in the case of jet fuel, because many shippers were forced to abandon their space on pipelines in 2020, and in some cases are struggling to get it back now.
It’s quarterly earnings reporting time and not surprisingly given the recovery in prices, oil producers are showing huge improvements over last year. The picture is not quite as rosy for oil refiners however, even with big gains in crack spreads, many are still seeing operating losses at some plants, with the RFS taking much of the blame.
Gasoline Demand (And Perhaps Prices) Reach A Plateau
RBOB gasoline futures reached fresh 7 year highs in Tuesday’s session, but were unable to drag oil and diesel prices along for the ride. All petroleum contracts are ticking modestly higher to start Wednesday’s session, and even the laggards are just 1 strong day away from reaching multi-year highs of their own, as the market continues to shrug off concerns of rising COVID cases, and shutdowns. Read this Reuters article to see an argument why gasoline demand (and perhaps prices) have reached a plateau.
San Francisco continues to steal the spotlight with spiking basis values as refinery shutdowns, various logistical hurdles caused by wildfires, pipeline slowdowns and now an emergency request from airlines to have the FERC force more jet fuel shipments all combine to send prices soaring 20-30 cents above futures, and 10-20 cents around neighboring markets.
Inventory draws across the board reported by the API seem to have helped encourage buyers through the overnight session, although the moves are relatively small. The weekly industry estimate showed gasoline stocks dropped by 6.2 million barrels, crude stocks were down 4.7 million barrels and distillates decreased by 1.9 million. The government’s version of the weekly inventory report is due out at its normal time. Keep an eye on import levels, particularly for gasoline, as it seems the US has become the target for the fuel the rest of the world can’t use.
Speaking of which, RIN values are ticking steadily higher over the past few days, despite corn & soybean prices. Those refined product imports – which create an RFS obligation – are one reason that may be helping those credits find a bid. Ethanol producers meanwhile are feeling the heat of accusations that their fuel is bad for the climate, and sent a letter to the President Tuesday committing to join the rest of the world in pretending it can reach net zero emissions by 2050.
Some good news for renewable energy: The EIA reported that renewables surpassed both coal and nuclear to become the 2nd largest power generation source in 2020.
Bad news for renewable energy: That same report projects coal will outpace renewables in 2021 as rising natural gas prices make it more competitive.
RBOB Gasoline Futures Try To Lead Petroleum Complex
RBOB gasoline futures are trying to lead the rest of the petroleum complex on another rally this week, moving higher for a 6th straight sessions, and coming within $.0025/gallon of reaching a new 7 year high overnight. Diesel and crude oil contracts are reluctant to follow so far, and remain a few percentage points below the multi-year highs they set earlier in the month. Which contract wins the tug of war this week may well determine if the 8 month old rally can continue, or if we’ll see a more substantial pull back in prices this fall.
The Dallas Fed’s manufacturing survey for July showed another month of above average production for the state, while also highlighting the ongoing inflationary pressures many companies are facing. The report also offered a glimpse into the challenging labor market that is being felt across industries, and the country.
American Airlines is the latest in the long list of companies impacted by the driver shortage this summer, and has encouraged pilots to conserve fuel as a result. Make no mistake, it’s not a shortage of fuel - refiners would love to make more Jet – as that product does not create a Renewable Volume Obligation like gasoline and ULSD do, and is one of the last outlets for higher sulfur blends, it’s a lack of capacity to get that fuel where it needs to go.
While there may be plenty of fuel nationwide, regional shortages are becoming more common, with the San Francisco bay area becoming the latest to see prices spike as inventories dwindle. SF diesel basis values spiked another 7 cents in Monday’s trading, adding 16 cents to those differentials in the past 2 weeks. With two of the areas 5 refineries already shutting their doors to convert to renewable diesel production, and 2 more being told last week they’ll need to spend hundreds of millions of dollars to install equipment to reduce pollution, it seems like resupply will have to come from overseas.
LA Spot values have also risen due to a pair of refinery issues in July, but are so far lagging the move this week. In normal years, we’d expect a fleet of trucks to long haul fuel to alleviate the regional shortages across the Western half of the country, but, well, you know the story.
Today’s interesting read: The wave of deal making changing the landscape of US oil drillers.
Energy Futures Tread Water To Start Last Week Of July
Energy futures are treading water to start the last week of July, and US equity markets are seeing small losses after reaching fresh record highs Friday.
Although volatility has dropped in both energy and equity markets since spiking a week ago, things aren’t as calm as they seem based on current prices, as we did have refined products trading over nearly a nickel range overnight. The last week of July will bring a key test for the energy bulls, that have already passed two big tests so far in July. If prices do not break to fresh highs before month end, there will be an argument that the weekly charts are forming a rounding top pattern that could end up meaning sharply lower prices as we get closer to fall.
Ethanol prices appear to be on the verge of a technical breakdown, along with corn futures which traded below their 200 day moving average for the first time in nearly a year on Friday. That selling in grains didn’t prevent a jump of more than 3 cents in RIN values Friday, although some stronger offers did appear in the afternoon, which could create some downward pressure to start the week, especially with futures flashing red.
Hedge funds look like they may have thrown in the towel after last Monday’s brutal sell-off (and likely missing out on the subsequent rally) with managed money net length seeing sharp reductions across the energy board last week. WTI and RBOB net length plunged to the lowest levels since last October as long positions were cut, and new short positions were added. Those new shorts may help explain the strong rallies in WTI and RBOB Wednesday and Thursday if those new speculative shorts were getting squeezed out. Brent and Gasoil contracts also saw large declines in the large speculator books, while ULSD was the only contract to see a single digit percentage drop on the week, which could end up being a sign of hedge funds struggling to figure this market out as there’s a case that the ULSD contract looks the weakest currently on the charts.
The EIA last week took a closer look at the spike in renewable diesel production expected over the next 3 years, which is forecast to bring US capacity from less than 1 billion gallons/year currently, to nearly 5 billion gallons by 2024. The report notes that even with this surge in production, RD will only account for roughly 20% of West Coast diesel refining capacity, and 4% of USGC capacity after these upgrades are made. The report also highlights the challenges the consequences of higher feedstock and RIN prices caused by this race to take advantage of California’s credits go green.
Baker Hughes reported 7 more oil rigs were put to work last week, continuing the steady increase in drilling activity as producers enjoy the highest prices in nearly 7 years. Unlike the past month, the Permian led the increases this week, with 4 more rigs operating in the country’s largest basin.