News & Views
Week 18 - US DOE Inventory Recap
Big Deal For U.S. Refiners Announced Tuesday
The rally continues for energy prices as gasoline futures have reached their highest level since July 2018 overnight, and ULSD has broken above $2 for the first time since COVID started wreaking havoc on the world. With the breakout to the upside this week, charts suggest that ULSD should now make a run at the January 2020 highs of $2.1195, while RBOB may test the May 2018 highs of $2.2855.
The API report Tuesday added some fundamental support to an already bullish technical landscape, with large draws for oil and refined products estimated last week. The EIA’s weekly report is due out at its normal time this morning. Last week the government’s demand estimates for gasoline were lower than anecdotal evidence suggested it should be, so if there’s a correction to the upside in consumption estimates this week the stage is set for this rally to snowball later today.
If you ever needed some evidence that low interest rates are the biggest driver of stock prices (and occasionally energy prices) Tuesday’s price action could be exhibit A.
After a morning temper tantrum when the U.S. treasury secretary (and former FED Chair) Janet Yellen suggested the FED may need to raise rates to keep the U.S. economy from overheating, stock markets recovered later in the day when she walked those statements back. While energy prices were up throughout the day, they did pull back some with the early stock selling, and rallied later in the day as optimism for free money returned.
Ethanol and RIN prices continued their big rally on Tuesday, with both D6 and D4 RINs reaching new all-time highs. Unless there’s a pullback in grain prices, it seems there’s little standing in the way of further advances in the coming weeks until the Supreme Court makes its ruling on small refinery waivers.
A big deal for U.S. refiners was announced Tuesday.
HollyFrontier announced plans to purchase the Shell refinery in Anacortes Washington Tuesday afternoon, and published a slide deck this morning giving the rationale for the purchase. With a price of less than 2X EBITDA for the facility (not to mention the other refineries its closed or sold recently) Shell’s lack of confidence in refining is clear, while Holly makes the case that demand in the PNW region is growing, and the other refinery closures should make this asset attractive. One other benefit of this refinery: deep water port access. That’s something the other Holly facilities in New Mexico, Oklahoma, Kansas, Wyoming and Utah probably won’t have anytime soon.
Holly also reported first quarter earnings, showing another rough stretch for refinery operations which lost $66 million, but were offset by a write-up of $200 million in inventory values, and a $51 gain from a tariff settlement. The company’s CEO said, “A record earnings quarter in our Lubricants and Specialties business, as well as steady performance from HEP, helped offset the impacts of heavy planned maintenance and winter storm Uri on our refining segment during the quarter. As we enter the summer, our focus remains on safely completing the build-out of our Renewables business on schedule.”
Speaking of getting renewable businesses on schedule: CVR announced it was delaying the start of its renewable diesel plant at the Wynnewood refinery in Oklahoma due to the effects of February’s winter storm, and delays in equipment deliveries.
Largest Remaining East Coast Plant Forced To Shut A Unit
ULSD futures reached a 16-month-high overnight while gasoline contracts are just a penny away from fresh multi-year highs of their own as technical and fundamental factors combine to push the energy complex higher. The stage was set for a rally on the charts when buyers erased losses early in Monday’s session, keeping the upward momentum set last week intact. Then reports overnight that the P66 refinery in Bayway, NJ (the largest remaining plant on the East Coast) was forced to shut a unit unexpectedly sent prices sharply higher.
If ULSD can break (and hold) above $2, and RBOB can do the same at $2.17, there’s room on the charts for another 11-12 cents of gains in the near future.
It seems like the only headwind for the bulls this morning is a pullback in U.S. equity markets, with some indices pointing towards their lowest levels in two weeks at the open. The correlation between daily price moves in the S&P 500 and energy futures has strengthened significantly in the past couple of weeks, after having gone dormant for the past couple of months.
RIN values reached new record highs Monday, adding a nickel or more depending on the contract, and are pointed higher again to start Tuesday’s session. The new EPA administration asked a Federal Court to vacate three small refinery exemptions granted in the last days of the old EPA administration. One thing to watch, grain prices have started to see large intraday swings, with big early gains turning into afternoon losses, which could add more volatility to the notoriously volatile RIN market.
More environmental challenges for refiners this week. Colorado’s only refinery faced tough challenges in the hearing about renewing their air permits, while the plant formerly known as Hovensa received a violation notice from the EPA that could eventually halt production at that facility.
An EIA report this morning highlighted the growth in bio-mass-based diesel imports into the U.S. last year, even as total diesel consumption dropped sharply due to COVID lockdowns. Renewable diesel accounted for 60% of those imports, with all of that product coming from Singapore. Exports of biodiesel – most of which go to Canada – were also up in 2020, and there’s likely to be increased competition from buyers as Canada’s clean fuels program goes into effect next year.
Discussion On Environmental Pressure Businesses Face
It’s a quiet start to the week as oil and refined products trading modestly lower this morning, after moving modestly higher overnight. A weak finish on Friday took away the upward momentum in what was an otherwise strong week that suggests from a technical perspective, energy contracts are poised to make an attempt at new highs for the year.
Money managers are looking more bullish after adding to net length in most of the petroleum contracts last week through a combination of new long positions, and covering old shorts. As has been the case for the past several months however, the size of the position changes was minimal on the week, suggesting that the large speculators aren’t ready to make big wagers in either direction at this point. Both the U.S. and European diesel contracts saw heavy short covering as prices approached new highs for the year last week, and the Gasoil contract reached its highest net length held by money managers since September 2019.
Baker Hughes reported one less oil rig was operating in the U.S. last week, marking a second straight single-rig decline in their weekly count after six-months of steady increases. The Permian basin dropped three rigs last week, while other shale plays added a net of two.
The Berkshire Hathaway annual meeting this weekend named an eventual successor to the Oracle of Omaha, and included plenty of discussion on the mounting environmental pressure faced by businesses today. When asked about the companies large stake in Chevron, Buffet responded by saying (in part), “I do think the world is moving away from hydrocarbons….I will not be uncomfortable about being in the oil business…[the world is going to] need a lot of hydrocarbons for a long time”, and that he was glad that “we've got them. I think Chevron has benefitted societies in all kinds of ways, and I think it will continue to."