Market Talk - 2021 september
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Tug Of War Based On Fear
We’re witnessing a tug of war based on fear that’s creating a choppy market for energy prices as September trading comes to a close. Reminder today is the expiration day for October RBOB and ULSD contracts, so watch the RBX and HOX contracts for direction if your market hasn’t already flipped to pricing vs November futures.
Fears of widespread energy shortages in Europe and China have pushed some contracts to 3 year highs this week, while fears of the next financial crisis caused by a potential debt default from either Evergrande or the US government are pulling them back down. Even within the energy complex there’s a rift as ULSD and Brent prices look poised for a technical breakout to the upside, while RBOB and WTI contracts are showing signs of weakness.
RINs had a second straight strong day, trading up to $1.08 for D6 (ethanol) RINs in the afternoon as political pressure continues to be talked about and some in the market seem to be calling BS on the alleged leaked RVO volumes.
Want a simple, non-fear-related reason why diesel prices are holding near 3 year highs? Take a look at the “Diesel Days of Supply” chart below from the DOE’s weekly report. The 5 year seasonal average is 39 days of diesel supply, last year at this time we averaged 44 days of supply, and this year, we’re just over 30 days. Most years this number doesn’t bottom out until harvest demand slows in November, which may mean we see some very tight markets over the next 2 months.
We saw a big increase in PADD 3 refinery runs last week as all but 2 of the 9 refineries shut by Ida now look to be fully online. All 4 other PADDS saw run rates decline however as seasonal maintenance gets into full swing, and there have been a handful of unplanned issues over the past 2 weeks, most notably the fallout from the LA earthquake. PADD 3 rates are probably near a short term plateau however as Shell’s Norco facility still needs at least 2 more weeks to come online, and the P66 alliance facility will need many months, if it comes back at all.
Tropical Storm Victor was named, and is expected to become a hurricane this weekend. Fortunately, like his predecessor Sam, Victor looks to be a fish storm that will not threaten the US Coast, allowing an extended respite after a record-setting 18 storms have made a US landfall in the past 2 seasons, with 2 more months to go in this one.
Today’s interesting read: The complexity of tearing down an oil refinery.
Week 39 - US DOE Inventory Recap
Stand-Off In Congress Sparks Flight To Safety
Energy futures pulled back from multi-year highs Tuesday as the latest stand-off in congress sparked a bit of a flight to safety with equity and commodity markets moving lower, while the US dollar rallied to its highest level in almost a year. The selling in energy contracts seems to be tempered by the ongoing surge in natural gas prices around the world, that is showing few signs of abating anytime soon, which will make various petroleum products more attractive as supplemental fuels.
RIN Values saw their first day of solid buying in weeks Tuesday, as political pressure on behalf of ethanol interests was heating up. There’s still no official word on whether or not the “leaked” RVO numbers last week were real or not, and the congressional staring match over budgets suggests we may not get an answer until that latest dumpster fire negotiation is put to rest.
Tropical Storm Teresa is expected to be named later today, and the models should start giving us a better feel by the end of the week whether or not it will pose a threat to the US. The other storm system that was given 80% odds of developing just to the west of Teresa, is now given only 30% odds. Sam meanwhile continues to be a gentle giant major hurricane that is politely staying out to sea.
A tale of two carbon credits: California Carbon Allowances (CCA) values have continued their seemingly relentless march higher, reaching new record highs on a weekly basis ever since April. A huge influx in net long holdings by money managers (AKA hedge funds) coincided with this steady push higher as it seems the banksters see an easy opportunity to profit from green ambitions, particularly when most of the world is still trying to figure out how their business can participate in the net-zero movement. California’s LCFS credits meanwhile have dropped sharply to a multi-year low, partially offsetting the increased cost of CCAs to consumers.
What’s the difference? LCFS credits can be generated by various renewable fuel & electricity producers that can prove their product beats the carbon intensity target values set by the California Air Resource board (CARB). CCA credits meanwhile are created out of thin air by CARB. So, as production for renewables (Renewable diesel in particular, along with biomethane, SAF, renewable electricity etc) surges, so does the production of LCFS credits, while the CCA pool stays relatively stagnant.
In addition to the big uptick in renewable diesel production, biodiesel that used to be sold in other parts of the US has been pushed west to pick up the additional LCFS tax credit in California that was adding roughly $1.50/gallon (depending on the Carbon intensity value of the fuel) but now is “only” adding around $1.20/gallon after the drop in credit values. Keep in mind that’s in addition to the $1/gallon blenders tax credit, and roughly $2+/gallon in RIN credits for each gallon sold, and suddenly it makes sense why a fuel that costs around $6/gallon to produce can compete with diesel that’s going for around $2.25.
Why does this matter if you’re not living in California? Odds are your state (or country) are considering their own carbon-reduction program for fuels, and if they are, odds are even better they’re considering adopting something like one of the 2 California programs. Oregon’s CFP program follows the LCFS model almost exactly, while the new proposal for New England (TCI) seems to take after the CCA model.
EU & China Continue To Grapple With Energy Shortages
A sixth straight day of gains pushed ULSD and Brent contracts to fresh 3 year highs overnight as the EU & China continue to grapple with energy shortages, and short term solutions seem to be in short supply. RBOB gasoline continues to lag behind the rest of the energy complex as the seasonal headwinds of the end of the US driving season helps alleviate concerns of shortages on that side of the barrel.
Try plastic bags instead? As we saw during the Colonial shutdown last spring, consumers are losing their minds during the fuel supply crunch in the UK, prompting pleas to avoid filling old water bottles with gasoline.
Something worth noting about this latest rally since the big selloff last Monday is that it’s pushed up the entire forward curve, not just the prompt months (see charts below) which suggests at least some traders don’t see this as a short term supply bottleneck, but a longer term structural supply shortage.
So far OPEC & friends have remained disciplined in sticking to their gradual increases in supply despite the higher prices, with some countries in the cartel struggling to meet their quotas, proving once again that pumping oil is slightly more complicated than flipping a light switch on and off. Ultimately, the Saudi’s ability to return spare capacity to the market and an increase in US Production should be the limiting factors in this rally, but, the lingering labor shortages and damage done by Ida are going to slow the pace of those increases domestically.
Shell’s Norco refinery, one of the two remaining refineries shut by Hurricane Ida (and one of the few refineries Shell hadn’t already shuttered or sold) is tentatively planning to begin restart in 2 weeks. The other refinery still shut, P66 Alliance, looks more like it may never reopen as reports surface that a potential buyer intends to convert it to a crude oil terminal.
Hurricane Sam still looks like no threat to the US beyond dangerous rip currents, while the 2 other systems churning off the coast of Africa are still given high odds of development.
So far energy and equity markets seem to be taking news of 2 FED governors’ resignations in the wake of (relatively mild seeming) stock trading controversy in stride. The US Federal reserve is arguably the most influential force in equity pricing, putting it second to only OPEC for oil market power, so it’s possible this story could still end up roiling our markets.
Today’s interesting read: An argument to change the biofuel tax credits to favor second generation technologies over “old school” biofuels that are running short on feedstocks. If last week’s leaked RVO volumes are to be believed, the EPA may already be leaning this direction.
Energy Supply Crisis In Europe Spreads
Diesel prices are pushing to fresh 3 year highs, and Brent crude is making a run at the $80 mark as an energy supply shortage is spreading across parts of the world. RBOB and WTI prices are lagging behind, but still pushing solid gains to start the week.
Today’s price action seems to reflect that the Energy supply crisis in Europe is spreading, and forcing a severe dose of reality onto those with net-zero ambitions. As we’ve witnessed numerous times following supply disruptions in the US (whether that’s fuel, or toilet paper) panic buying is making the situation even worse, and causing many stations to run dry across the UK. It’s not just Europe that’s having problems, power shortages across China are promising to increase challenges for other supply chains that have been hampering global trade for the past year.
Feast or famine: As parts of the world are struggling with a lack of natural gas, producing nations are still struggling with how to limit the excess gas that has to be burned off in flares. See this financial times video on the work being done to improve that process.
Hurricane Sam blew up into a Category 4 storm with sustained winds near 150 miles per hour over the weekend, but its track has shifted favorably and it appears that it will spare most Caribbean islands and the US East Coast. There is still a chance the storm could hit the Canadian coast as it travels north, but in terms of fuel supply disruptions this storm should be a non-event.
The National Hurricane Center is tracking 3 other storm systems, 2 of which are given 80% odds of developing, and are in a position that gives them a chance at heading for either the Gulf or East coasts next week.
Not coincidentally, as diesel prices have reached 3 year highs, the bets placed on higher diesel prices by large speculators has also reached their highest levels since 2018. The money manager trade category is less enthusiastic about RBOB and WTI contracts however, reducing their net length in both last week.
Baker Hughes reported 10 more oil rigs were put to work last week, the 2nd straight week of double digit increases. For months we’ve read stories about how US Producers were being more conservative as prices rose, and now we’ll see if that’s really true as an industry built by “WildCatters” is once again enjoying a very profitable market.
Natural Gas Prices Spike Around The World
Diesel prices reached a new 3 year high overnight, and the rest of the energy complex has wiped out the heavy losses we saw Monday, as concerns of Chinese contagion have been replaced by fears of fuel shortages.
One relatively rare factor helping spur diesel prices higher: natural gas prices are spiking around the world, even before we get to winter, in what could create a very bullish scenario for supplemental electricity sources if we get a severe cold snap. Don’t forget that roughly 1 million barrels/day of refining capacity (~ 5% of the US total) was taken offline permanently last year due to weak economic conditions, and a negative long term outlook for the industry. Those closures/conversion reduce the buffer for the supply network to absorb a disruption, and 2 more gulf coast refineries with a combined capacity north of 500,000 barrels/day are expected to be offline for several more months after Hurricane Ida, leaving the system stretched more than it’s been since the big price rally of 2008.
Hurricane Sam has been named in the Atlantic, and is expected to rapidly intensify to a category 3 or larger storm over the weekend. The storm is still given low odds of making landfall in the US, but there’s still a large amount of uncertainty on its path until it makes its turn north, and as we saw with Henri a month ago, just a few minor shifts to the west can make a huge difference in impact. The good news for fuel supply is it looks like refining country will dodge this storm, while those in the population centers along the East Coast will need to keep an eye on this system next week.
Thursday was another volatile day in the RIN markets, as prices continued to plunge in early trading, only to bounce later in the day as doubts about the validity of the leaked RVO volumes were circulated.
Think the driver shortage is bad here? It appears to be worse elsewhere as BP has announced restrictions on deliveries and temporary closures at some of its stations in the UK due to the lack of drivers. As we know all too well on this side of the pond, it’s not just fuel stations that are feeling the pinch, with the Christmas shopping season promising to create more headaches for industries far and wide.