News & Views
Week 52 - US DOE Inventory Recap
Energy Futures Pulled Back From Multi-Year Highs Set In Tuesday's Session
Energy futures pulled back from multi-year highs set in Tuesday’s session as inventory builds and bad weather both appear to be dampening the bullish enthusiasm. Although we’ve seen several similar short-lived pullbacks over the past few weeks, charts are showing signs of a potential rounding top, that could mean sharply lower prices in the weeks ahead if we don’t see a bounce in the next few days. Of course, it’s too soon to make that call, and we’ll need to see another pullback of 5% or more before the bullish trend can be called broken.
The pullback in futures didn’t get moving until around midnight, well after the API reported its inventory levels for the week Tuesday afternoon, and yet those stock builds are getting some of the credit for today’s selling. Based on the timing of the pullback, it seems like that part of the selling was caused by the realization that even though there were numerous refinery hiccups on the West Coast, and multiple power outages at terminals on the East Coast, the severe weather sweeping the country this week is ultimately likely to have a more negative impact on fuel demand than supply.
Zombie Storm? The NHC is giving 40% odds that this Nor’easter could develop into a named storm after moving off the US Coast later this week. Fortunately, it does not appear that this storm will come back to haunt the coast on Halloween as the path keeps it moving east and away from shore…for now.
The API reported inventory builds across the board last week, with crude oil stocks up 2.3 million barrels, diesel up just under 1 million barrels, and gasoline up by about ½ million. The EIA’s weekly report is expected at 9:30 this morning. One interesting note from the API report, even though total US crude stocks have been steadily building over the past month, stocks at the Cushing OK hub (which is the delivery point for the WTI futures contract) continue to decline. This phenomenon could create a scenario where the short squeeze in futures drives WTI sharply higher, even while physical markets elsewhere aren’t feeling the squeeze. Long term, this may continue to drive liquidity to the Houston-based contracts that have been gaining popularity in recent years.
Meanwhile, the EIA’s winter fuels outlook is predicting higher expenditures for all heating fuels this winter as prices for many energy contracts are already at multi-year highs even before the first rounds of cold weather start to hit parts of the country this week. The report also highlights how the pull from overseas is contributing to tighter than average supplies. (Charts below)
Looking for a reason to buy this latest dip in prices? Saudi Aramco warned that spare capacity is rapidly dwindling, suggesting it’s unlikely that OPEC changes its resupply stance when they meet next week.
Gasoline Futures Are Leading The Energy Complex Higher This Morning
Gasoline futures are leading the energy complex higher this morning, setting yet another 7 year high, even after the rally in oil contracts stalled out Monday. Weather disruptions on the East and West Coasts seem to be a major factor contributing to the strength in RBOB as time spreads continue to surge with only a few days left before the October contract expires.
The Bomb Cyclone that hit the West Coast over the weekend disrupted operations at 3 different refineries in Northern California, sending basis values for San Francisco spots sharply higher on the day and outright prices to all-time highs in some cases.
So far there have not been any reports of upsets at the remaining East Coast refineries, but heavy flooding has been reported in the area, so some disruption to the supply network is still possible. Even if the refineries continue operating, this Nor’easter will definitely disrupt vessel traffic in and around the New York harbor at a time when supplies are unusually tight. At least one terminal in the area was shut due to power outages, and from the forecasts, it’s probably not going to be the last one to have a temporary disruption as the storm passes. Lines space values for gasoline shipped on Colonial remain in positive territory, which has been an extremely rare occurrence over the past two years, another sign of the tightness in prompt supplies.
Countries around the world are announcing their climate plans this week, ahead of the global summit in Scotland this weekend. One of the biggest questions heading into the summit is whether or not China (the country with the most pollution) will attend. Overnight reports suggest that the country’s president will not join the summit, which is a major blow to the credibility of any pact reached.
The other big headline today is that Tesla has surpassed $1 Trillion in market cap, and its founder is now worth more than Exxon. Meanwhile, even ambitious projections for electric car production puts them at less than 5% of the global vehicle count 10 years from now. Exxon meanwhile continues to pursue its own carbon reduction agenda through its carbon capture and sequestration (CCS) projects.
The Dallas Fed’s Texas manufacturing survey showed that growth in the state remains above average even as costs are rising (aka inflation), and raw material shortages are limiting output. A highlighted note from chemical manufacturers shows that some are unable to keep up with demand, as we’ve seen with a shortage of additives across several markets in the past month.
Minor Drag Coming From Diesel Contracts Seem To Have Lost Their Luster With Investing Community
WTI traded north of $85 overnight and RBOB gasoline is above $2.52, both fresh 7 year highs as the petroleum bulls were able to maintain control despite a few rounds of heavy selling last week. With those new highs set, the charts continue to favor a run towards $90 for crude, with some minor drag coming from diesel contracts that seem to have lost their luster with the investing community.
The most exciting market last week was New York Harbor ethanol that reached a multi-year high north of $3 early in the week, only to drop by 35 cents to end the week as the supply bottleneck seems to have relieved itself to the time being. RIN markets also had a noticeable pullback on Friday after a strong rally earlier in the week.
Money managers were all over the place with petroleum contracts last week, with large increases in net length held in WTI, RBOB and Gasoil contracts, while ULSD and Brent saw sizeable reductions in the bets on higher prices. There was a big jump in new short positions held by the large speculative class of trader in both ULSD and Gasoil contracts, while WTI saw a 22% drop in shorts last week. Those moves by the large funds are correlating to the price action we’re seeing today, with RBOB and WTI both breaking to fresh 7 year highs while ULSD lags behind, needing another 4 cents to catch up to the rest of the complex.
Baker Hughes reported a net decline of 2 oil rigs working in the US last week, snapping a streak of 5 straight weekly increases. Wyoming accounted for the bulk of the drop, with a net decrease of 3 rigs, while the other states combined to add 1. A WSJ article Friday highlighted the challenges drillers are having finding employees and equipment (along with pretty much every other industry) which seems to be limiting the number of active oil rigs these days much more than price. If you need a reminder of why we’re still extremely fortunate despite these tight supply chains, read about the explosion at an illegal Nigerian refinery last week.
While the US is facing a trifecta of severe weather this week with a Bomb Cyclone hitting the West Coast, Tornados threatening much of the south, and a Nor’easter pummeling the East Coast, the tropics remain quiet with just over 5 weeks left in the Atlantic Hurricane season, so any impacts this week are likely to be reduced demand in areas hardest hit, without any major threat to supply infrastructure.
Trendlines Stayed Intact Through Yesterday’s Round Of Selling
The 1 ½ year old bullish trendlines stayed intact through yesterday’s round of selling. Prompt month refined products futures trimmed a neat 1-1½% during Thursday’s formal trading session. Both American and European crude oil benchmarks saw a similar pullback as traders chalk up the day’s price action as profit-taking.
It looks like all heating fuels are expected to be costly this winter as the EIA adds propane to the list. Low inventory levels caused by supply/logistics bottlenecks and an unseasonably cold winter seem to be the common threads behind the prediction for heating fuels.
4-D chess or lost in translation? While it seems the headlines are painting Putin as a welcher, the Kremlin has stated earlier their help may come with a cost. Regardless, natural gas futures prices have pulled back from the 13-year high that they set earlier this month and are currently trading at $5.30 MMBtu.
The energy complex will need to extend its buying today if futures are to add their fifth consecutive week of gains. While yesterday’s selloff was likely a healthy pullback, most technical indicators are still flashing ‘overbought’ signals. A sizeable pullback seems to be in the cards, its just the age-old matter of “when”.
Petroleum Product Inventories Boosted Futures
An across-the-board draw in petroleum product inventories boosted futures prices yesterday after the big three (gasoline, diesel, and WTI crude) tried to start the day with modest losses. Gas and diesel saw the largest drawdowns in stocks at 5.4 million barrels and 3.9 million barrels, respectively. Likewise, the two refined product contracts lead the complex higher, each posting a ~1.3% gain on the day.
While the combination of growing adoption of renewable fuel and collective abandonment of coal usage is expected to cut emissions over the next 30 years, the EIA still anticipates a 5% increase in the world’s CO2 footprint through 2050.
RIN prices are rallying this week after completely recovering from last month’s selloff surrounding the fake(?) email containing biofuel blending targets. Both ethanol (D6) and biodiesel (D4) credits added 5 ½ cents yesterday, bringing their price to $1.41 and $1.67, respectively.
Diesel prices in the Midwest have hit fresh 16-month lows against the New York Harbor Heating Oil contract. While it is common to see prices in the region slope off with the cooling weather, witnessing it happen this early, and in the middle of harvest season, is uncommon. Seasonally high days of supply seem to be the culprit for the dropping prices in the Heartland.
The European crude oil benchmark hit fresh multi-year highs in overnight trading before pulling back with the rest of petroleum futures early this morning. Whether this morning’s action is profit taking, ‘Reversal Thursday’, or the beginning of the sizable pullback some are anticipating is yet to be seen. What has been seen, over the past couple weeks, is early morning selling reversed mid-day as some traders find a reason to continue buying.
Week 51 - US DOE Inventory Recap
Pivotal Test For The Energy Complex In The Back Half Of The Week
Buy the dip was the theme of Tuesday’s session as nickel losses for refined products in the morning were wiped out in the afternoon. So far today we’re seeing a similar pattern, with 4 cent losses overnight being cut nearly in half this morning. This back and forth action after prices hit fresh 7 year highs Monday sets up a pivotal test for the energy complex in the back half of the week. Reports that the Chinese government was planning to intervene to halt the surge in electricity prices had coal prices dropping sharply, and was getting credit for sell-off overnight.
If the bulls can continue surviving these selloff attempts, the charts continue to favor higher prices, and a run towards $90 for crude seems like the path of least resistance. If they can’t regain the upward momentum this week however, expect to see products drop by about a dime in short order and make a more serious test of the upward sloping trend lines.
The API was said to show decreases of 3 million barrels for both gasoline and diesel last week, while crude stocks increased more than 3 million barrels. Based on the market reaction, that report didn’t mean much as refined products are leading the slide lower, further compressing crack spreads that have come under pressure this week, after a strong rally earlier in October. A Reuters article this morning highlighted how stronger crack spreads are encouraging refiners globally to increase run rates, which are expected to continue increasing through the winter.
The DOE’s weekly status report is due out at its normal time this morning. A few things to watch for in today’s report: US Crude production may have climbed back to Pre-Ida levels last week, even though roughly 250mb/day of production capacity in the Gulf of Mexico remains offline, showing the ramp up in onshore output the past two months. Also watch refinery runs to see how facilities are recovering from a rash of unplanned maintenance events over the past month that have contributed to tighter than normal supplies in many markets. Last, look at the swings between PADD 3 and PADD 1 refined product inventories to see the impact of the Plantation pipeline shutdown. The backwardation in NY Harbor spot prices through the end of Thanksgiving has shrunk by nearly a nickel this week suggesting the squeeze is behind us.
While refined product prices have stalled out this week, ethanol prices continue to surge, with spot prices on the East and West coasts both rallying north of $3/gallon this week. That strength in ethanol seems to be contributing to strength in the RIN markets, which are at their highest levels since Labor day.
Surging natural gas & coal prices have been front page news over the past month, and have contributed heavily to the rally in oil and refined products. An EIA note this morning highlighted the expected growth in natural gas demand from non-OECD countries in Asia (primarily China and India) and how US exports are set to double in the next decade to help meet that demand.
Momentum Is Waning In Refined Product Markets
Momentum is waning in refined product markets this week after prices stalled out early Monday and are slipping modestly lower again this morning. While the pullback of 5-6 cents from the 7 year highs set early Monday morning are noteworthy, we’ll need to see prices drop another 7-8 cents in the coming days before they threaten the bullish trend lines that have been in place since the August pullback. In other words, so far this week’s selling looks more like a correction to an overbought market, rather than a reversal of that upward trend.
While refined products are struggling, both WTI and Brent are moving higher this morning, putting downward pressure on crack spreads. Unfortunately for refiners, there’s a double whammy on their margins this week as RIN values reached their highest settlement in nearly 6 weeks yesterday, even though RIN values and crack spreads often move in the same direction.
Keep an eye on calendar spreads this week, as severe backwardation in futures that’s steadily grown over the past month’s rally seems to be having strong influence on regional cash markets and inventory levels. What we’re seeing today in the RBOB market, with November prices down a penny more than February values, could be a sign of what’s to come once the supply squeeze has passed. For both ULSD and RBOB, we could see 5-10 cents price drops in front month values just to get the curve back to a more normal level.
This phenomenon is perhaps most glaring in the Group 3 diesel market, where basis values for ULSD dropped to 8 cents below futures, a level we’re used to seeing during the demand doldrums in winter, not during the peak of harvest season where we are today. The weakness in Midwestern diesel values seems to be trickling down to the gulf coast, as shippers will want to avoid moving barrels north to sell at a net loss, which should eventually correct the pricing mismatch.
An EIA report this morning highlights how improvements in drilling and well completion over the past decade allow for more oil to be produced in the Permian basin with lower costs. Meanwhile, the EIA’s monthly drilling rig report highlights that output per rig is forecast to drop slightly in the coming month as producers sacrifice efficiency during the restart race, but total output is expected to continue climbing along with the drilling rig count.
Chinese Power Shortage Partially Blamed For Refinery Output Dropping
There’s a saying that market-based prices don’t go straight up, but if you just looked at the chart of energy prices over the past several weeks, you might think otherwise. The steady march higher continues this morning as the world remains without a short term solution to the energy supply crunch, and the big 3 NYMEX contracts all reached fresh 7 year highs again overnight, with refined products up 45 cents in the past month, and more than $2/gallon over the past 18 months.
While the bulls clearly have control of this market for a time being, there’s also a saying that energy prices like to take the stairs up and the elevator down, so it would not be surprising to see a big price drop when the upward momentum finally wanes.
(Not) adding fuel to the fire: The Chinese power shortage was partially blamed for refinery output dropping to a 15 month low, showing how a lack of one fuel can lead to less production of another. It’s not a completely fair comparison because the country’s quota system on oil imports is also playing a big role, but it is indicative of the challenges faced in the near term as the world tries to get back to normal.
It’s not just fossil fuels that are seeing big rallies. Ethanol prices have been surging alongside gasoline, with spot prices in the New York harbor surpassing the $3 mark last week. Note the unusually large spread between Chicago and New York ethanol prices in the chart below as a sign of the ongoing logistical challenges for delivering fuel via rail and truck around the country.
Not buying it? It wasn’t too surprising to see money managers continue jumping on the petroleum bandwagon last week, adding to their net length in WTI and ULSD contracts. Brent crude meanwhile saw a 9% decrease in the bets on higher prices held by large speculators, which suggests that some of the big money bettors think this rally is getting a overextended. RBOB contracts saw a small reduction as new shorts were added, which seasonally looks like a solid bet as gasoline demand is heading towards the winter doldrums.
Baker Hughes reported 12 more oil rigs were put to work last week, the largest weekly increase in 6 months, as the race to increase production at these lofty levels accelerates. Half of the additional rigs put to work last week were in the “other” basin category, suggesting that smaller operators are outpacing the bigger operators in the major US shale plays.
Today’s interesting read: This WSJ article taking a deeper look at the energy supply crunch and the impacts on both fossil fuels and renewables.
Another Day Another Round Of 7 Year Highs
Another day, another round of 7 year highs for Nymex energy contracts. Refined products are leading the way higher again this morning with calendar and crack spreads both strengthening following a large decrease in refinery runs reported yesterday by the DOE, and aided once again by stronger RIN values. The charts continue to favor more upside, with a run at $90 crude still looking likely.
In addition to the now-standard supply squeeze justification for the steady march higher, yesterday we saw space on Colonial’s main gasoline line drew a positive value for the first time since the cyber-attack in May as the pipeline was allocated for the first time in more than a year. Historically, the 4th quarter has drawn some of the strongest values for space on Colonial’s mainlines, when they used to be allocated anyway, as the Gulf Coast will typically become long in the winter and open the arb to the east coast.
That said, this could be a short term phenomenon caused by the Plantation downtime as shippers look to alternate options to get caught up, rather than a return to the days when CPL space regularly traded for big premiums. New York harbor spots are severely backwardated, with nearly 5 cents of value for product available today vs 2 weeks from now, which also suggests the market sees a short term squeeze on supplies, and once that squeeze is over, we may see an end to the rally in futures as well.
Refiners slashed run rates in 4 out of 5 PADDs last week, with total US run rates dropping more than 4% on the week. That type of move is typically caused by a major disruption like a hurricane, but in this case it seems to have been caused by a combination of planned maintenance and unplanned upsets. We have also seen numerous refiners defer or delay maintenance in the aftermath of Hurricane Ida.
The tropics remain quiet with 6 weeks left in the hurricane season. Currently there’s only one system being tracked by the NHC, but it’s given almost no chance of developing and it’s position makes it a non-threat to the US. That said, a La NIna system in the Pacific has formed, which could increase the odds of more storms forming before this season comes to an end.
Week 50 - US DOE Inventory Recap
Gas And Diesel Benchmarks Set New 7-Year Highs
Gas and diesel benchmarks set new 7-year highs in the overnight trading session with drawdowns in the refined product inventory estimates by the API is taking credit for the early morning buying. The Institute is showing a drop of 4.6 million barrels of national gasoline stocks, 2.3 million barrels for diesel, and a build of 5.2 million barrels of WTI crude oil. Interestingly enough, it’s crude oil futures that are leading the way higher this morning, despite the seemingly bearish inventory data. WTI and Brent are both tacking on over 1% in gains this morning, followed closely by refined product futures adding .8% so far today.
The EIA published their Short Term Energy Outlook around noon Wednesday. The monthly report, along with an accompanying article, highlighted the expectation of increased spending on home heating this winter due to elevated natural gas and heating oil prices in conjunction with colder-than-usual temperatures. The report also expects crude oil prices to drift lower through 2022, but the only range they can give with 95% confidence is that future prices will be somewhere between $40 and $140.
It’s not over but it’s looking good: the only tropical activity in the Atlantic Ocean is a small system given a 10% chance of development and heading out to no man’s land. While we may be past the peak of hurricane season, latecomers are still a possibility (i.e. Hurricane Sandy).
The Department of Energy’s weekly report is due out at 10am Central Time this morning. The last of the myriad fundamental reports to be released this week, the inventory levels published could put a punctuation mark on this week’s buying and carry further gains into the end of the week or dispel the API’s estimates and throw some cold water on this overcooked rally.
Energy Prices Are Pulling Back This Morning
Energy prices are pulling back this morning lead by Brent crude oil futures losing nearly 1% so far today. The three American benchmarks (WTI, New York gasoline and diesel) are all down around half a percent to start the day.
The monthly OPEC report published this morning is taking credit for the drift lower in futures prices. The cartel decreased its anticipated global oil demand growth for 2021 but noted how record natural gas prices could continue incentivizing drillers despite potentially unfavorable economics for crude oil.
The International Energy Agency’s World Energy Outlook, also published today, highlighted the slow-but-sure emergence of the renewable/carbon neutral energy industry. Even if the “Net Zero Scenario” is achieved, which the IEA notes will be a long and arduous road, they still anticipate a retention of ~80% of oil demand through 2030. The report also notes the anticipation of 2021 having the second highest increase in C02 emissions on record due to an increase in coal and oil use in place of cleaner options that are unavailable due to supply bottlenecks.
The ‘data deluge’ isn’t over: The Energy Information Administration will publish its Short Term Energy Outlook later today and inventory reports from the American Petroleum Institute and the EIA are both delayed due to Columbus/Indigenous People’s Day and will come out tomorrow.
WTI futures are trading below the psychologically important $80 level this morning, testing the rally’s meddle against the benchmark’s 5-day moving average. The technicals seem to indicate crude oil is overbought but a price correction would be met aptly by a slew of support levels between $70 and $80.
Natural Gas Futures Prices Are Falling For A Fifth Straight Day
Refined product futures are taking a bit of a breather this morning after setting new 7 year highs overnight. Prompt month gasoline, diesel, and American crude oil futures are drifting lower by .1-.5% this morning with Brent crude (commonly referred to as the world’s oil benchmark) holding on to meager gains.
Natural gas futures prices are falling for a fifth straight day as the EIA published a note highlighting the Azerbaijan’s natural gas production and export capabilities to Eastern Europe. Bullish sentiment on the benchmark has chilled ever since an offer of aid came from an unexpected party last week.
Commodities, equities, and the dollar all seem to be ignoring the latest round of saber rattling out of North Korea. Against a backdrop of missiles, Jong-un has announced further arms developments to “literally increase war deterrence”. While some consider this an attempt to spurn the U.S., others are concerned the truly inflammatory provocation can be found on the country’s propaganda website.
We are seeing a bit of a break from the years-long correlation of equities and energy prices. Economic impacts from the pandemic, supply and logistics concerns, and inflation fears are all seeming to have opposite effects on the two asset classes. The question now is will the two reunite in price movement once if the aforementioned disruptions begin to abate, or will they enter a feedback loop.
Tropical activity in the Atlantic basin is minimal so far this month. Currently there are two areas of interest, both with less than 40% chance of cyclonic development over the next 5 days.
Petroleum Futures Soared To Fresh 7 Year Highs
Petroleum futures soared to fresh 7 year highs overnight as the global energy supply crunch looked like it might get worse before it gets better, leaving us in this strange new world where “alternative” fuels come from oil and natural gas. Now that last week’s high trades have been taken out, there’s nothing on the charts to prevent crude making a run at the $90 mark near term, which would add around another 20 cents to refined products.
It seems just about everywhere you look these days, there’s another story of how fossil fuels are becoming both the cause and effect of climate change. Whether it’s flooding in China that’s hampering coal production, or drought in Brazil that’s creating a need for supplemental energy supplies, or even the heavy rains that have damaged multiple pipelines across the US in recent weeks, petroleum supplies are seen as both the problem, and (near term at least) the solution.
Kinder Morgan’s SE (plantation) pipeline was scheduled to restart over the weekend, after being closed for more than a week to fix a leak. The shutdown of the 2nd largest Gulf Coast to East Coast pipeline system didn’t stir too much action outside of local terminal markets that saw tight allocations, as Colonial’s main lines remain below capacity. Meanwhile, KM announced it had completed work on its “Pennsylvania Access” project that will help more product flow from Midwestern refineries to PA and NY.
Money Managers continue to add to net length in energy contracts, with the CFTC reporting the large speculator category seeing heavy short covering (bets on lower prices getting squeezed out) and new length added last week. Read here why Reuters columnist John Kemp thinks the hedge fund trade is crowded, and risking a reversal, even though the net length held by money managers is still far below 2017-2018 levels. Something else you may notice in the Commitment of Traders charts below, the “Other reportable” category of trader that made up smaller speculative traders saw a mass exodus during the chaotic trading in early 2020 (read how Chinese retail investors got burned by bad bets on WTI for a good reason why that is). If you start seeing more headlines about buying oil as a hedge against the global energy shortage – or other types of inflation – we could see an influx of those funds once again. Given the relatively small size of the energy futures arena compared to equity and currency markets, movements like that can have a huge impact on prices.
Baker Hughes reported a net increase of 5 oil rigs drilling in the US last week, 3 of which were added in the Permian basin. We’re seeing rack spreads in West Texas markets reach their highest levels since the SNOVID refinery shutdowns earlier in the year as the steady increase in drilling activity has created a steady increase in diesel demand.
There are two new tropical systems near the eastern edge of the Caribbean to keep an eye on this week, although neither one is given high odds of development by the NHC.
The Bulls Took Back Control Of Energy Futures
The bulls took back control of energy futures Thursday, with refined products bouncing 10 cents off of their early morning lows, and trading up to within a few cents of the 7 year highs set earlier in the week overnight. That bounce is a reminder that supply shortages rarely have short term solutions, and the squeeze we’re seeing in many parts of the world may well get worse this winter before it gets better. From a technical perspective, all that matters short term is whether or not the highs set earlier this week can hold resistance. If they break, there’s room to run on the charts, and we could soon be talking about crude pushing the $90/barrel mark, and products adding another 20-30 cents/gallon.
The good news is natural Gas prices around the world have pulled back sharply from record highs this week. The not so good news, is that pullback came after Russia suggested it can help alleviate the shortages…for a nominal fee of course, and as China has ordered coal miners to increase output. When you stop and think about it, it’s actually pretty wild that in major producing nations (like the US & Russia) natural gas is still being burned off because there’s more supply than capacity to get that fuel to the market, while other parts of the world are struggling to keep the lights on because they don’t have enough supply.
Speaking of which, the IEA published a report suggesting that methane emissions from flaring and leaks is the low hanging fruit of the climate agenda, something that can make a meaningful improvement on emissions, in a short amount of time and in a cost effective manner.
Add another supply bottleneck to the growing list: Spot ethanol prices in the New York Harbor have surged to $2.90/gallon this week as logistical bottlenecks continue to hamper the movement of mandated fuels. Meanwhile, it was another busy day in the RIN arena, with D6 values dropping 12 cents in the early morning, only to bounce 10 cents by the afternoon. Then again, considering RBOB prices also bounced by 10 cents from their overnight lows, the RIN movement seems relatively tame.
That doesn’t make cents: The shutdown of Kinder Morgan’s pipeline FKA Plantation finally made national news Thursday as restart efforts were delayed until the weekend. The reporter(s) seemed to get their dollars and cents mixed up however, when suggesting that NYH gasoline prices were up 50 cents on the day, trading $7.50/gallon over futures, implying outright prices nearing $10/gallon. Don’t rush out and fill up your Rubbermaid totes with gasoline! In reality, NYH spots are trading 6-7 cents/gallon over futures and those diffs were up 50 points. The shutdown has barely caused a ripple in basis markets, nor has it caused space on Colonial to start trading at a positive value, suggesting traders expect supplies will return to normal in a few days. Don’t blame the reporters however, with most of the world focused on a shortage of (natural) gas supplies, it’s easy to get the two mixed up.
Bulls Aren’t Giving Up Control Of This Market Just Yet
We saw a big pullback in energy prices over the past 24 hours, but a 5 cent bounce from overnight lows suggests the bulls aren’t giving up control of this market just yet.
Wednesday’s trading created an outside down pattern on the daily charts after setting a new 7 year high overnight, only to end the day with a lower low than the previous session. That type of bar is known to be a classic reversal pattern that sets up more selling at the end of a rally, and that’s exactly what we got overnight with products dropping another 5-6 cents from the settlement, which marks a decline of 12-15 cents from the highs set just 24 hours earlier.
Now the fun begins as prices have bounced nearly 6 cents off of trend line support based on the huge rally over the past 3 weeks, suggesting this selloff was more profit taking after the market was severely overbought, and not a reversal in trend. As long as we see products hold above those overnight lows ($2.25 for RBOB and $2.35 for ULSD) there’s an argument to be made that the upward trend is still alive and should favor higher prices in the weeks to come. IF that trend breaks, expect another 10 cents of downside in short order.
For what it’s worth, the big physical traders don’t appear to be buying the big run-up in futures, with basis values for gasoline in particular and diesel to a lesser degree sliding this week. Speaking of which, it’s been a bad week for spills, with a tank leak at the 2nd largest refinery in the country making for some eye popping videos, but the market shrugged it off as the oil is contained in the berm system designed for just this type of event and operations at the refinery don’t seem to be impacted. Similarly, LA-area refiners don’t appear to be facing shortfalls from the pipeline leak that’s been headline news for the past several days as prices in the market haven’t flinched. Meanwhile, Kinder Morgan’s refined products pipeline FKA Plantation remains closed until the weekend due to a spill in Alabama. Originally that line was scheduled to come back online Wednesday, but restart has been delayed until the weekend as it appears a cause of the spill is still under investigation. Allocations at terminals along the line have tightened up, and some outages are occurring, but so far the impact is relatively contained.
The EIA published its annual world energy outlook Wednesday. The highlight (or lowlight depending on your perspective) of the report was that despite the bandwagon effect of net-zero by 2050 claims, production of oil, nat gas, and even coal, is expected to continue growing for the next 30 years as emerging markets – primarily in Asia - continue to drive demand. That report is a harsh reality check for those aiming to end fossil fuel usage.
Not much exciting from yesterday’s DOE status report. Total US refinery runs did surpass 2019 levels for this time of the year, marking the first week since the start of COVID we’ve seen that. Run rates were up in 4 out of 5 PADDs for a 2nd week, as plants seem to be returning from fall maintenance and taking advantage of the unplanned downtime at 2 gulf coast plants since Ida knocked them offline.
The tropics remain quiet, with no expected storms to be named over the next 5 days according to the NHC.
Week 49 - US DOE Inventory Recap
Concerns That Energy Shortage Will Derail Global Economic Recovery
Petroleum futures are pulling back this morning, after setting fresh 7 year highs overnight. Concerns that the energy shortage in parts of the world is going to derail the global economic recovery are taking blame for a wave of “risk off” selling this morning that’s hitting both energy and equity markets. While the correlation between US energy and equity markets has been close to zero during the past few weeks, there is a clear tick higher in volatility in both asset classes which is as good a gauge as any other for the fear that’s creeping into the marketplace after an extended period of calm.
For anyone that remembers the “staycation” effect when gasoline prices surged north of $4 in 2008, and what happened to the economy over the following year, it’s easy to understand why the cost of natural gas in Europe quadrupling over the past 3 months, or coal prices reaching record highs in Asia, is a bit concerning.
The API reported inventory builds across the board Tuesday afternoon, which threw a bit of cold water on the runaway rally, although given that fresh highs were set overnight after the report, the market seems to not care too much about US stockpiles when Europe and Asia are struggling to make ends meet. The fact that domestic inventories are able to build even as substantial oil production and refining capacity remains offline following Hurricane Ida, proves once again the resilience of the US supply network, which is going to be leaned on perhaps more than ever to help alleviate the shortages elsewhere in the world.
Speaking of which, an EIA report Tuesday detailed how a change in China’s tax policy has reduced imports of some petroleum products, and exports of others, which may be adding to the supply bottlenecks being felt in many markets. The EIA’s weekly status report is due out at its normal time this morning, and following that report the agency will release its International Energy Outlook for the year. A sneak peek at that report released this morning forecasts that despite the rapid increase of net-zero carbon pledges, and steady growth in renewables, petroleum liquids are expected to remain the primary source of global energy for the next 30 years.
The Financial Times has an ongoing series on electric vehicles, and this Tuesday’s update on “how green is your Electric Car” gives one of the most concise, objective looks yet on the pros and cons of EVs– with the best visuals you’ve likely ever seen on this topic.
Witnessing A Technical Breakout In Energy Prices
We’re witnessing a technical breakout in energy prices as oil and diesel contracts have surged to 7 year highs after chart resistance at the 2018 highs failed to contain the rally. OPEC & Friends decision to stick with their existing plans for oil output sent prices soaring Monday morning, and that momentum has carried through the overnight session. With OPEC members not willing to formally commit to new production increases (don’t forget they are already planning to increase output by 400,000 barrels/day each month) it seems there will not be a short-term answer to the supply crunch for energy supplies being felt around the world these days, which gives the bulls a strong argument to keep pushing prices higher.
While gasoline prices haven’t yet joined diesel and crude at 7 year highs, the fact that we’re seeing winter-grade gasoline specs rival the highs from summer-grade prices earlier in the year, after the US driving season has been put in the rearview mirror is no less impressive.
A pair of pipeline leaks last weekend are creating plenty of trouble for their local communities, but so far appear to be having limited impact on prices.
The well-publicized oil spill caused by a pipeline leak near Los Angeles is creating plenty of ecological damage, even though the size of the spill (roughly 3,000 barrels) is fairly small in comparison to evens like the Deepwater Horizon spill that was estimated near 60,000mb PER DAY for several weeks) or the Exxon Valdez spill which was more than 260,000 barrels. While the damage to beaches and wildlife is tragic, and may take months to recover, the relative small size may explain the lack of market reaction so far. Adding insult to injury? Some reports suggest that a ship’s anchor may have caused the pipeline to rupture (although the cause is still being investigated) which gives an unfortunate new perspective to the ship backlog at the port of Long Beach.
Meanwhile, a not-so-well-publicized leak in Alabama shut down the pipeline formerly known as Plantation last week, causing some suppliers to restrict product allocations at terminals across the South East. The lack of publicity for this event suggests that Kinder Morgan’s strategy of changing the pipeline’s name to something generic like the Products (SE) Pipeline, is a stroke of brilliance, and/or that the industry has become numb to supply disruptions after going through so many over the past year. Gulf Coast basis values barely flinched following the news, and premiums for line space on the competing Colonial line remained in negative territory. Reports suggest the pipeline expects to resume operations tomorrow (10/6).
RINs had a 5th straight session of strong buying interest, with D6 values moving north of $1.30/RIN for the first time in nearly a month, and rallying 45 cents since bottoming out last week. The strength in RINs seems to be helping keep refined products outpace the rally in crude oil as crack spreads will adjust to offset the impact of the RVO for refiners. The industry continues to wait for official word on the long overdue blending obligations from the EPA, and with congress gridlocked on debt, infrastructure and tax bills, it’s hard to know if we’ll see the actual numbers anytime soon.
Meanwhile, BP became the latest refiner to announce plans to expand its Renewable Diesel production, with an investment at its Ferndale WA plant that would allow co-production of RD along with traditional refined products. That means that BP, Chevron and Exxon are all working towards avenues of co-producing renewables at existing refineries, while Marathon, P66 and Holly are going the route of converting existing refineries to produce RD. The outcome of these new investments may define the refinery landscape in the coming decade, as co-production could allow some refiners to stay afloat – and continue producing other products – vs a conversion that all but ends most other output.
Rapid Tightening Of Fuel Supplies Around The World
It was a quiet start to the week with most petroleum contracts hovering near unchanged on the day after reaching fresh 3 year highs on Friday, as traders seem to be waiting to see the results of today’s OPEC meeting. A sudden rally just before 8am central suggests they may be holding tight. The big question was whether or not the cartel & its new friends will change their plan to bring idled production back online slowly, given the rapid tightening of fuel supplies around the world since they last met, and while an official announcement isn’t out yet, the market reaction (so far) suggests they’re not changing course.
Not surprisingly, as prices have pushed to fresh multi-year highs, money managers continue to jump on the bandwagon, increasing their net length held in 4 of the 5 busiest petroleum contracts last week, with only ULSD contracts seeing a pullback in length held by the large speculator trade category. This influx of bets on higher prices from large funds can be a double edged sword for prices, as they can both exacerbate a short supply situation like we’re seeing in parts of the world today, but also create a snowball effect of selling once the hot money decides to head for the exits. Short covering was the theme for RBOB contracts last week, as the money manager short position was cut by nearly ¼ in just one week as it appears the seasonal gasoline demand-slowdown trade may be overshadowed by the global supply crunch this year.
Friday was another busy day for RIN trading, with multiple 10 cent swings up and down throughout the day, ending the day with double digit gains as the recovery rally from the fake RVO leak is now nearly completed.
Baker Hughes reported 7 more oil rigs were put to work last week, 3 of which were in the Permian basin, as the industry’s recovery starts to pick up steam. The total US count is now up 239 oil rigs vs this time last year, but remains 282 rigs below the count from this time 2 years ago.
A Dallas FED report last week highlighted how the Texas economy has been diversifying away from its dependence on oil, which should continue to fuel growth in the state in coming years. Right on cue, a WSJ article this weekend took a look at the progression of Exxon’s algae-based fuels.
There are 3 active storm systems being tracked by the NHC this week, but none look to be a major threat to fuel supplies. The one with a chance of hitting the US coast is only given 10% odds of developing into a named storm.
Today’s interesting read: The wide variety of factors creating supply chain disruptions that are impacting everything from fuel additives to Christmas presents.
Roiling Markets Around The Globe
A big Thursday reversal saw an 8 cent bounce from an early selloff in refined products, which pushed ULSD and crude prices to fresh 3 year highs. Government intervention, or the lack of in some cases, is the theme of the week roiling markets around the globe. The US government seems to have gotten out of its own way to avoid the latest debt ceiling stand-off, but remains gridlocked on longer term spending & tax bills, not to mention the RFS rulings that are already almost a year overdue.
The big story Thursday was the Chinese government has reportedly ordered energy companies to secure supplies “at all costs” this winter, reminding many market veterans of a similar plan that helped oil prices reach record highs 14 years ago. Here’s the cliff notes:
2008: Beijing hosts Olympics: Chinese government mandates fuel suppliers stock up ahead of the games to ensure no outages on the world stage. WTI reaches $147 and ULSD surpasses $4 in the months leading up to the games….before crashing to $32 and $1 later in the year as the world financial markets get hammered by housing & banking crisis, and Chinese suppliers stop their artificial purchases.
2022: Beijing host Olympics: Chinese government orders fuel suppliers stock up ahead of the games to ensure no outages on the world stage, coal and natural gas prices trading at record highs, crude and diesel prices reach 3 year highs.
Does this mean we’re in for another record high in oil and diesel prices? Some options traders are definitely betting that way as $200 call options on Brent have been trading this week.
Three big reasons why this time the Chinese fuel hoarding will be different than the last time, and why $200 (or even $100) seems like a stretch:
First, OPEC & the US have a combined 10 million barrels of spare capacity for oil production, which in 2008 was less than 2 million barrels.
Second, international spectators won’t be allowed at the games due to COVID, so the desire to window dress for millions of spectators may be substantially less than it was 14 years ago.
Third, most of the globe is still dealing with a refining capacity overhang, meaning that if prices continue to rally there will be an incentive to figure out a way to get oil or diesel on a boat and make money to solve the problem, and perhaps offer a life line to those refiners who have been contemplating shutting their doors.
Of course, we’ve seen plenty of evidence this year that turning spare capacity back on isn’t like flipping a switch, and logistical hurdles mean new supplies will take at least months to come back online. Here too the government intervention may get in the way as US drillers already struggling with worker shortages (like just about every other industry these days) are concerned that things could get much worse if vaccine mandates are passed.
While the China story earned much of the credit for the big price bounce on the day, it seems that another big rally in RIN prices may have been more of a factor as refined products outpaced crude gains on the day by a wide margin. There is still no official word from the EPA or the White House on the RVOs, and each day that passes without an update seems to be giving the market more confidence that the numbers “leaked” last week were fake.