News & Views
President Considering Giving Refiners Relief
The big story this morning is a report that the President is considering giving refiners relief from the RFS has refined products down around a nickel, as several options appear to be on the table to burst the RIN bubble, a day after they reached yet another record high. The big drop on what amounts to a rumor may seem dramatic, but for those that lived through the RINsanity trade of 2013 when EPA relief knocked credits from $1.40 to $.20 in just a few months, the reaction makes a lot more sense.
One detail from the report that seems to make it more likely that the EPA will act: It’s 2 democratic Senators leading the discussions with the EPA, as they seek ways to save their state’s lone refinery.
D4 Bio RINs traded up to $2.05 yesterday, while D6 ethanol RINs topped out just under $2.00. Early action in the OTC market suggest we’ll see a drop of at least 15 cents in those prices today with D6 RINs already for sale at $1.85 while bids are 10 cents lower than those offers.
News that the U.S. had lifted sanctions on some individuals and companies in Iran briefly sent prices sharply lower in Thursday’s session, but those losses were quickly erased after it was clear that the majority of sanctions on the country were still in place, and that it was unlikely any new oil would find its way to the market as a result of this change. There will probably be headlines suggesting the lifting of those sanctions is the reason for the pullback in prices today, but given that refined products are down almost 2% while oil prices are flat, this seems to be driven by the RFS story, and not anything to do with Iran.
If the administration does change the RFS, that could very well break the bullish trend for refined products, and the charts suggest we might quickly see another 20-30 cents of downside as a result. On the other hand, fundamentally this could be bullish for Crude as it offers relief to the only real buyers of crude oil. The RVO value before today’s drop was $.23/gallon, so we could see much of that value come out of products, without changing the price of crude and refiners would effectively break even. Until we see some actual action from the EPA however, that strong of a move seems unlikely, and with the Supreme Court scheduled to make a ruling on the RFS small refinery waivers soon, it seems likely that the EPA may take a wait and see approach.
Cold Water Thrown On Petroleum Price Rally
The DOE’s weekly inventory report threw cold water on the petroleum price rally Wednesday, knocking prices backward after they’d reached multi-year highs earlier that morning. Huge drops in demand estimates created large builds in refined product inventories, and suggested that the reopening rally may be outkicking its coverage. Then again, despite the pullback, the upward sloping trend lines have not yet been threatened, and prices have resumed their push higher already this morning, so it’s too soon to say the bulls have lost control.
Gasoline demand estimates dropped sharply last week, falling almost to the same level we saw a year ago when the country was just beginning to talk about reopening. The bulls can easily write off this drop as a temporary holiday hangover as drivers filled up ahead of Memorial Day (or may still be using up that gasoline in their Rubbermaid containers after the Colonial shutdown) and there are signs on the ground that retail demand has been healthy to start June. Diesel saw a second straight week of large demand declines, in what is typically one of its weakest times of the year.
U.S. refinery runs jumped to 15.9 million barrels/day last week, the highest level since COVID started shutting down the country in March of last year. That is still more than one million barrels/day less than we would normally see this time of year when refiners typically start approaching maximum run rates to meet the peak summer demand. On a percentage basis, refineries are operating at 91% of capacity, compared to normal levels around 94% this time of year. Then again, we saw nearly 5% of the country’s capacity taken permanently offline in the past year, so there’s nearly 40 million gallons/day of production that isn’t coming back, making that % comparison less meaningful, and leaving the system more vulnerable to disruption.
Speaking of which, the DOE this morning took a look at the surge in refined product imports this March, following the rash of refinery shutdowns in the U.S. caused by February’s polar plunge.
Week 32 - US DOE Inventory Recap
Another Day, Another Record Set For RIN Prices
The bulls have regained control of petroleum futures as early losses Tuesday morning turned into solid afternoon gains, and that momentum carried through the overnight session, pushing all of the big 4 contracts to multi-year highs. WTI reached 70.62, and ULSD hit $2.1467, the highest for both contracts since October 2018, while Brent reached $72.83, its highest trade since June 2019. RBOB futures finally joined the rest of the complex, setting a new 3 year high at $2.2356 this morning, a level we haven’t seen since May of 2018.
If these early gains can hold on, the charts favor more upside, that should give WTI a run at the $77 range, which would mean ULSD making a run at $2.30 and RBOB pushing $2.40 in the next several weeks.
The API was said to report a draw in U.S. crude oil stocks of 2.1 million barrels last week, which is getting some of the credit for the rally in WTI this morning. That doesn’t help explain why products are also up however since gasoline stocks increased by 2.4 million barrels and distillates grew by 3.7 million. The EIA’s weekly report is due out at 9:30 central.
Yesterday the DOE released its monthly Short Term Energy Outlook (STEO). The forecasts show increased expectations for U.S. Gasoline demand compared to previous reports, noting that demand before and after the Colonial shutdown has surpassed expectations, but will likely stay below pre-pandemic levels until the end of next year. Diesel meanwhile continues to show demand outstripping supply, causing a sharp drawdown in inventories in the U.S., and leaving the supply chain vulnerable over the coming months. The report also noted that diesel crack spreads have reached their highest levels since December 2019, but failed to mention that renewable volume obligations (RVO) eat up roughly $10/barrel of those gross margins.
Another day, another record set for RIN prices with both D6 and D4 values moving steadily higher even as corn and soybean prices pulled back from recent highs. That increase in RINs pushed the RVO cost for each gallon of gasoline or diesel produced or imported north of 23 cents/gallon. Remember that the next time someone asks you why gasoline prices are suddenly so high.
Around the world and across industries, we’re witnessing the challenges faced by supply chains that are built for extremely large scale and efficiency struggling to meet the rapid pace of demand change. In the refined fuels world, that recovery has been hampered by two of the largest supply shocks ever, February’s Polar Plunge that disrupted just about every refinery in PADD 3 and the Colonial Pipeline hack that took half of the East Coast’s supply offline for a week. While things have calmed down considerably over the past several weeks, the fallout from both events is still being felt. Several refineries continue to struggle to bring units back online that were damaged in the freeze, and the FMCSA extended HOS waivers again for truckers are suppliers still struggle to catch up even though Colonial has been fully operational for three weeks.
Soybean Oil Prices Reach Record High Levels
Energy futures are moving modestly lower for a second day after reaching two year highs Sunday night. The pullback so far has been minor, and has come on low volume, so it’s too soon to say that the upward momentum has been lost. As long as WTI can hold above $66, ULSD $2.03 and RBOB $2.12, the weekly charts continue to favor more upside.
RINs surged to new record highs Monday, even though corn and soybean prices reversed course during the day turning big early gains into losses later in the session. Soybean Oil prices have reached record high levels as consumers around the world compete for food, feed, and fuel.
It’s not just grains that are caught up in the clean energy commodity surge, Copper and other metals are seeing huge gains as the world realizes that it’s going to take a lot of those commodities to de-carbonize energy supplies, just in time for miners to be less willing to invest in new projects due to climate concerns of their own.
It’s that time of year again: The Atlantic Hurricane season is officially underway. There’s one system in the Caribbean given a 30% chance of developing over the next week, but it looks like it will probably hit Central America, not North America. With U.S. refining capacity dropping substantially in the past year, and demand getting back closer to normal, the supply chain is more vulnerable than it’s been in a decade if a hurricane happens to hit the heart of U.S. refining along the Gulf Coast. That could mean prices react with $1/gallon+ moves like they did following the hurricanes in 2005 and 2008, rather than the minor moves we saw in 2017 with Harvey and during last year’s record setting parade of storms.
If you want to see a smaller example of what that type of disruption could look like, take a look at rack prices in Colorado this week as the state’s only refinery goes through maintenance, and the refineries that would normally resupply it from Wyoming aren’t operating.
Set For New Record Highs?
Energy futures are hovering around two year highs this morning, despite minor losses in the early going. WTI reached a high of $70 overnight, its highest trade since October 2018.
Set for new record highs? RIN prices have been trading in a narrow range since setting record highs in May. Corn and Soybean futures are both starting the week with strong gains however, which may encourage buyers to push RIN values to make another test of the $2 mark. They may need some help from ethanol markets which have pulled back nearly 30 cents from their May highs. Meanwhile, the industry seems to have abandoned the CBOT ethanol futures contract based on the (lack of) volume chart below, making getting a read on forward values more challenging.
Tug of war: While China is attempting to battle the commodity price boom, and push prices lower, Iran’s shadow war seems to be coming out of the shadows and adding a risk premium to oil prices. Both of these stories may continue influencing prices daily through the summer, although it doesn’t seem that either one will change the global supply/demand balance longer term.
It was another mixed week for large speculators in energy contracts. The CFTC showed that the money manager class of trader increased the net length held in WTI, Brent and gasoil contracts, while reducing length in ULSD and RBOB. The drop in ULSD snapped an eight week streak of consecutive increases. It’s worth noting that the profit taking in ULSD happened at the same time that its European counterpart gasoil saw its net length jump to another two year high after a small decline last week.
Baker Hughes reported that the U.S. oil rig count held steady last week. The Granite Wash basin did see a decline of two rigs, while the Eagle Ford and Woodford basins each added one on the week.
The IEA’s World Energy Investment report forecasts a recovery in spending that will largely offset the impacts of the pandemic this year. The charts below from that report show how that investment is broken out, with renewable electricity investments expected to outpace dollars spent in oil production for this first time this year. The report also notes that while the pressure to consolidate refining activities is strong across much of the world, new investment in Asia and the Middle East will increase global refining capacity by roughly five million barrels/day over the next five years.
Larger-Than-Expected 5.1 Million Barrel Draw
The larger-than-expected 5.1 million barrel draw in crude oil inventories reported by the Department of Energy failed to impress yesterday leaving WTI futures with a modest five cent per barrel gain. Gasoline and diesel futures were up slightly as well, despite the seemingly bearish trifecta of rising stockpiles, increased refinery runs, and dropping demand.
Without any news from OPEC+, Iran, or on demand recovery, energy futures seem content to drift higher this morning, looking to end the week with gains. Even if Washington and Tehran come to a surprise agreement, there is much debate on whether that would be bullish or bearish for oil prices.
Using some very fancy maths the EIA has calculated the total U.S. energy consumption for last year has dropped 7% from 2019. While this may not shock anyone who had to dust off their steering wheels in the past few months, the interesting note was the only energy source that saw an increase in demand were renewables. Prompt month corn and soy oil futures are up over 100% YOY.
The Bureau of Labor Statistics reported the U.S. added 560k jobs in May, dropping the unemployment rate to 5.8%, the lowest it’s been since everything shut down in March 2020. While the jobs number was slightly below economists’ estimates, the generally positive news bumped equities futures this morning; it seems we are heading in the right direction.
Week 31 - US DOE Inventory Recap
Oil Prices Hit Highest Level In Over Two Years
Energy futures are off to a slow start this morning with each of the main benchmarks trading just on the green side of unchanged. The bulls are likely taking a breather after pushing oil prices to their highest level in over two years yesterday. Credit for this week’s rally is being placed in multiple places from demand optimism and OPEC projections to technical trading play.
As if scared to not be in the news, Iran reported a fire has broken out at its 220,000 bpd Tondgooyan refinery yesterday, located just south of Tehran. American and European crude oil futures seem apathetic trading just .15% higher this morning as efforts to extinguish the fire have extended into today.
The American Petroleum Institute’s estimate of a ~5.5 million barrel draw in American crude oil inventories surely isn’t hurting the bullish case for higher prices. The API also reported a build in gas and diesel stocks last week of 2.5 million barrels and 1.6 million barrels respectively. The Department of Energy will weigh in on the matter this morning at 10 a.m. CDT.
The EIA published an article yesterday looking back at the furious rally in RIN prices over the past few months, leading the price of compliance to all-time highs. The Administration highlighted that while rising RFS targets may pump RIN prices higher, the year-long rally in biofuel feedstock (corn and soybeans/soy oil) are the main drivers right now.
Volatility Drops To Lowest Levels Of The Year
Energy futures are holding close to two year highs this morning, but are still below the levels we saw early in Tuesday’s session. As prices have climbed, volatility has dropped to its lowest levels of the year for both equity and energy contracts as investors seem to be optimistic that the reopening trajectory will keep prices moving higher. While the bulls still have control, they need to keep the momentum up this week, or risk forming a double top in ULSD just below $2.12, which was the high from January 2020, that could spark a large corrective selloff this summer.
OPEC & Friends agreed to stick with their plan to boost output now that global demand is returning. If you’re a bull, you see this as good news that the Saudis feel confident enough in the demand outlook to unwind their output cuts, and that Russia didn’t get too greedy with forcing a faster pace of production. For the bears, this is seen simply as more supply coming back onto the market just as the supply/demand equation was back to where it was BC (before Covid).
A vote today in California could seal the fate of two of the last standing Bay-Area refineries. The issue at hand is whether or not to require the Chevron Richmond and PBF Martinez to install wet gas scrubbers to reduce pollution from their FCC units. Given the state of refinery economics in general, and in particular in the state of California, a ruling requiring that investment is likely to mean that one or both of the plants would either idle, or go the way of their neighbors and convert to renewable diesel production.
Speaking of refinery margins, as the chart below shows, gross margins for Gulf Coast refiners are approaching their highest levels in two years. Unfortunately for those plants, once you back out the $9-10 /barrel cost of their renewable obligations with RIN values holding near record highs, they’re right back down close to break-even levels.
Oil And Diesel Prices Trading At Multi-Year Highs
Oil and diesel prices are trading at multi-year highs as June trading gets underway, with the charts favoring additional upside if this early rally can hold. Gasoline prices are also rallying, but are still two cents below their highs for the year. There’s not much fundamental news to pin the 3% rally on this morning. Equities are pointing higher and the dollar is pointing lower, both of which can encourage the energy bulls, and of course there are the usual suspects of demand optimism, shrinking global inventories and a lack of a deal with Iran that can take blame for any rally.
Money managers added to their long bets in WTI and ULSD last week, while cutting back on RBOB and Brent positions. A large round of short covering pushed ULSD’s net length to its highest level in 2.5 years, but unlike recent weeks, its European counterpart Gasoil did not increase in tandem.
Baker Hughes reported a net increase of three oil rigs working in the U.S. last week, two of which were in the Permian basin. That brings the Permian and Total U.S. counts to fresh one year highs, but the totals are still just over half of what they were prior to the pandemic, even as oil prices are approaching three year highs.
ExxonMobil’s pipeline company reported a gasoline leak in Harris County over the weekend and shut the line as investigations and repairs get underway. It’s not yet clear which if the company’s numerous pipeline segments in the area is impacted by that shutdown, and what terminal(s) may feel a supply crunch as a result, but there’s a good chance since it was gasoline that spilled it was the line running to DFW that is offline.
Today’s Interesting read from the WSJ: Why the Californication of fuel programs will make $5 gasoline a reality.
The IEA published a look this morning at the types and sources of biofuels that will help achieve a net zero by 2050 scenario, with organic waste streams expected to take the largest piece of the supply chain, followed by short rotation woody crops.