News & Views
Seasonal Divergence In Demand For Refined Products
Gasoline prices are moving modestly lower for a 2nd straight day, while diesel contracts are holding near multi-year highs as the seasonal divergence in demand for the refined products seems to be influencing prices again.
RINs have been the big mover this week with D6 ethanol values dropping to a 6 month low after reports that the blending quotas may have been leaked. Insert your own Trading Places joke here.
Nicholas has stalled out over Louisiana, dumping heavy rains on areas of the Gulf Coast still trying to recover from Ida, 3 new potential storms are lurking in the Atlantic. The first is given 70% odds of developing over the next 5 days, and may brush the coast of North Carolina as it moves North East, and should avoid a direct landfall. The 2nd is also given high odds of developing and could be a threat to the East Coast next week. The third has low odds of formation as we move through the halfway point of another busy hurricane season.
Today’s interesting reads: Why Chevron’s CEO sees tight supplies and higher prices for petroleum products persisting, and why a spike in natural gas prices is having widespread effects on various supply chains, particularly across Europe. The EIA this morning reported that the US barely held on to its status as a net exporter of petroleum products in the first half of 2021. With Europe scrambling to find new power supply options, and natural gas suddenly a hot commodity again, US producers are faced with an increasingly unpopular but increasingly profitable decision to boost production levels.
Speaking of unpopular: The President suggested that “Bad Actors” are behind the rise in gasoline prices this year, a claim the AP (along with just about everyone in the industry) finds to be baseless.
Tropical Depression Nicholas Hovering Over Heel Of Louisiana
A handful of bullish numbers published by the DOE yesterday morning pushed energy futures to multi-month highs. The prompt month diesel contract was the most noteworthy reaching levels not seen since 2019. The drop in refined product inventories (despite cratering exports), the 7.5% decline in gasoline demand, and the decreased output of gas and diesel fueled yesterday’s rally.
Tropical depression Nicholas is still hovering over the heel of Louisiana. While repairs have been halted due to the downpours, it doesn’t sound like and new damage has cropped up with the latest storm. The EIA published a note this morning highlighting the damage caused by Ida last month and the breadth of energy infrastructure shutdowns.
Colonial restarted its main Line 2 yesterday after shutting it preemptively due to flooding from the storm. The refined product artery taking product from Houston all the way up and through the Atlantic seaboard has returned to normal operations.
A system crossing the Atlantic looks to be heading towards the Lesser Antilles next week with an 80% chance of developing into an organized storm. Another looks to be forming off the Atlantic coast next week as well, projections keep it out to sea for now.
Prices are drifting lower this morning, taking a breather from this week’s rally. American crude oil, gasoline, and diesel benchmarks are shedding ~.7% so far today while the three are poised to end the week with gains. Tomorrow’s price action could be pivotal in deciding if this 18 month-long rally will push energy prices to multi-year highs or if we will finally see a sizable pullback as the US gets back to (some form of) normalcy.
Week 46 - US DOE Inventory Recap
Inventory Data Taking Credit For Rise In Prices Today
The American Petroleum Institute estimated and across the board draw in petroleum inventories for last week. The report published yesterday afternoon showed national crude oil stocks down nearly 5 ½ million barrels with gasoline and diesel down ~2.8 million barrels. The Department of Energy is set to release the official totals at its regular time this morning (9:30 Central).
The inventory data is taking credit for the rise in prices today. After a flippant day yesterday, energy futures are climbing, with confidence, higher this morning. Prompt month gasoline and diesel futures are both up around 1.5%. West Texas Intermediate futures are up nearly 2% setting a new 6-week high.
Power outages remain the main issue in areas affected by the landfalls of Hurricane Nicholas. Now downgraded to a tropical depression, the storm has stalled out and seems content to hover over a waterlogged Louisiana. Although it may not be causing any new infrastructure damage itself, Nicholas is hampering Ida recover efforts in the Pelican State. The EIA estimates nearly 1.2 million people lost power during the late August storm.
As one dissipates another appears: the five-day outlook from the NOAA shows yet another area of interest with an estimated 20% chance of development over the next week. In the short term eyes will be on the storm brewing just off the Atlantic coast which should stay out to sea. In the long term however, the system forming off the West coast of Africa is doing so in a manner commonly seen this time of year and often results in a major hurricane.
The current outlook falls below.
Green Futures Markets Are The Theme This Week
Green futures markets seem to be the theme this week with past and present weather impacts in the driver seat. American crude oil, gasoline, and diesel benchmarks are adding .5%-1% gains so far this morning as the market intently watches for headlines on flooding and power outages along the Gulf Coast.
Tropical storm Nicholas has made landfall in southern Texas and is heading towards Houston, the center of the storm set to arrive early this afternoon. There hasn’t been any reports of refinery closures as of yet but word from the major players is they will take action as necessary to safely maintain operations if possible.
Unfortunately it seems the Houston refinery cluster isn’t the only concern for this iteration of storm activity. Plants in Port Arthur, Lake Charles, and Baton Rouge are also within Nicholas’s forecast error cone putting over a third of the nation’s refining capacity at risk. Moreover refineries in New Orleans could be especially susceptible to flooding and power outages should Nicholas shift east over the next couple of days, with 20+ inches of rainfall estimated.
Oil technicals are flashing buy signals this week with the prompt month contract poised to test the $75 level. The recovery rally we’ve experienced for the past year and a half has more than made up for the COVID crash that took place in early 2020. Should the upward momentum seen this week sustain past some resistance levels set last month, the energy complex could look to test waters not seen since 2015.
Oil Demand To Exceed Pre-COVID Levels Next Calendar Year
The energy complex is trading higher this morning on news that OPEC expects oil demand to exceed pre-COVID levels next calendar year. Despite the inherent conflict of interest in setting a price based on the word of someone who would like to see prices higher, the bulls have added 1-1.5% gains to the big three American petroleum benchmarks.
Traders are also noting lingering supply concerns adding to the buying pressure this morning, however tempered by Baker Hughes reporting an addition of six operating oil production platforms last week. Four of the rigs returning to service were located offshore that were shut down from Hurricane Ida. Nearly a third of the eleven closed late last month have started up again, just in time for the next summer storm.
Tropical storm Nicholas popped up in the Gulf of Mexico over the weekend, heading towards Houston with gale-force winds later tonight. While the storm isn’t likely to develop into a hurricane before marking landfall, it’s slow speed will cause widespread flooding, possibly as far as the already-soaked cities of south Louisiana.
Even after Nicholas comes and goes this week (hopefully without making mischief), the Atlantic storm procession will continue. Two areas of interest are active now with the more troubling of the pair taking aim at the Atlantic seaboard. Currently it’s a coin flip if the system will organize in the next 5 days, but the tropical wave coming off the western coast of Africa has an 80% chance to form over the next week.
Prices Up After Yesterday's Downward Pressure
Prices are up today after yesterday’s trading saw some downward pressure on news that China plans on selling portions of its oil reserves in an effort to “stabilize prices”. Despite the announcement the energy complex is bouncing today with gas, diesel, and American crude oil futures all adding ~1.5% to their prompt month futures price this morning.
Tropical storm Mindy came and went earlier this week, dumping rain across north Florida before dissipating. Hurricane Larry will likely make landfall on the eastern-most tip of Newfoundland early tomorrow morning. Attention now turns to two areas that have a 70% chance of cyclonic development over the next five days. The system over Central America will likely garner the most attention as it looks to skip over the Yucatan Peninsula into the warm water of the Gulf of Mexico over the next week.
Near-term uncertainty prescribed the EIA’s STEO report published yesterday along with the across-the-board pull back in headline values from another EIA report (weekly inventory) seem to be taking credit for this morning’s buying action. More interesting than the drop in oil and product stocks is the pronounced impart Hurricane Ida had on crude production, refining throughput rates, and imports. While a storm knocking out a quarter of the nation’s refining capacity would have sent prices soaring nearly 10 years ago, the US’s status as a net exporter grants it the ability to turn off exports in the event of a supply disruption, limiting financial fallout for futures prices.
Week 45 - US DOE Inventory Recap
Large Inventory Declines Across The Board Last Week
More back and forth action for energy markets this morning as 1.5 cent gains overnight have flipped to 1.5 cent losses.
The API was said to report large inventory declines across the board last week, which isn’t surprising when almost all Gulf of Mexico oil output was closed due to Hurricane Ida, along with roughly 10% of the country’s refining capacity. Expect more of the same from the DOE’s version of the weekly status report which is due out at 11am eastern time.
Tropical storm Mindy was named late Wednesday and moved onshore in northern Florida overnight, dumping more rain on an area that’s had plenty already this year. Hurricane Larry continues to churn through the Atlantic but is not going to hit the US coast. 2 other systems are being watched by the NHC, one in the Caribbean is given just a 30% chance of developing, but is still expected to bring more heavy rain to the Texas Coast next week.
The EIA’s short term energy outlook reduced demand expectations slightly for the next year, but noted that tight supplies caused by lower refinery runs should keep prices relatively high near term, after retail gasoline prices reached a 7 year high this summer. The report did acknowledge the influence that high RIN Prices were having on gasoline. One other interesting note from the STEO: The Producer/Merchant category of trader has shifted to a net long position in WTI futures for the first time in 2 years. That means, on average, oil producers are not hedging their oil output with crude trading near $70/barrel (aka locking in prices at multi year highs) even though they were willing to lock in prices when they were in the $30 range.
Ethanol prices meanwhile have spiked nearly 30 cents so far in September, even though corn prices have dropped to their lowest levels of the year. A lack of liquidity in ethanol futures makes seeing the forward curve challenging, but it appears that this spike is a reflection of short term shortages not a long term change in values.
Choppy Holiday Week For Energy Prices So Far
It’s a choppy holiday week for energy prices so far as an overnight rally in gasoline and crude oil wiped out Tuesday’s losses. Inventory reports are delayed a day, and are expected to show some huge swings as the industry continues its slow recovery from Hurricane Ida while keeping a wary eye out for the next storm.
5 of the 9 refineries knocked offline by Ida are in some stage of the restart process this week, but it could be months before some are back fully, and in the case of the Belle Chasse facility, market chatter suggests it may never come back online. The big blow to production is driving a large increase in gasoline imports to the US, with estimates that we’ll see the most deliveries from Europe since the Colonial hack crippled East Coast supplies back in May.
Markets around the world are watching the European Central Bank this week as they debate how to deal with rampant inflation. Record money printing aka stimulus by central banks around the world has pushed stocks in several countries (including the US) to record highs, and there’s more than a little concern as to how the markets will react as those cash infusions come to an end. The correlation between energy and equity markets has weakened in the past few weeks, but the negative relationship with the US Dollar has become more pronounced, making any central bank policy more influential on fuel prices.
Hurricane Larry continues to churn through the Atlantic, but is staying far enough out to sea to only threaten the US with rough seas. Newfoundland could take a direct hit from this storm, but the Come By Chance refinery that is right in the path and used to be an importer of refined products to the US has been shuttered due to economic reasons for years, so there will not be a supply threat from this storm. There’s another system in the Gulf of Mexico given 50% odds of developing, with projections show it moving east towards Florida but potentially bringing heavy rain to the oil infrastructure still trying to recover from Ida. A third potential system is moving off the African coast, with low odds of development given. We’re just a week away from the peak of the storm season so don’t be surprised to see another storm or two named soon.
A new weight loss strategy? The Financial Times picks up the (renewable) diesel vs donuts debate.
Energy Futures Lower After Reversing Gains Seen Yesterday
Energy futures are lower so far this morning after reversing some gains seen during yesterday’s abbreviated trading session. Prompt month gasoline, diesel, and crude oil futures are all down nearly 1.5% to start the day. A decision to cut October prices for oil sales to Asia by Saudi Arabia is taking credit for the selloff today as some interpret the move as the Kingdom’s anticipation for weak short-term demand.
Repairs are underway and production is coming back online in the areas hit by Hurricane Ida last week. It seems that the plants in the Baton Rouge area have all resumed (or in the process of resuming) operations while five refineries in the New Orleans area are still waiting for the restoration of power and/or repair damage to start cranking back up.
In addition of refinery shutdowns, Baker Hughes reported a total of 11 active oil platform closures across the nation last week. The 14 rigs closed in Louisiana ahead of Hurricane Ida were barely offset by the spare opening of production sites in Alaska, New Mexico, and Oklahoma. It would not be a surprise to see these rigs come back online as repairs are completed.
It looks like the NE has dodged a bullet this week: Hurricane Larry’s projected path has shifted east over the weekend. As it currently stands only the Canadian Province of Newfoundland remains in the storm’s path. The northern Atlantic seaboard is breathing a sigh of relief this morning as another storm hitting in such quick succession could have made an already dismal situation even worse.
Refinery Outages in the Gulf of Mexico
Energy prices are drifting higher this morning with several factors taking credit for the positive sentiment. Continued refinery outages in the Gulf of Mexico, optimism surrounding global economic recovery, and a weak US dollar are all being mentioned this morning. Gasoline prices are leading the way this morning with prompt month futures up just over 1%, diesel and American crude oil trail slightly adding just .5% so far today.
Planning on driving this weekend? You’re not alone. The EIA published an article this morning noting the highest retail gasoline prices we’ve seen since 2014. While speculators like betting on higher gas prices going into holiday weekends, the EIA attributes the rise in prices to an increase in vaccinated travelers, low national gasoline inventories, and higher crude oil prices.
Hurricane Larry churning out in the middle of the Atlantic is set to become a major hurricane by this time tomorrow. While it’s path is anything but set in stone, extrapolating its current trajectory has it slamming into the island territory of Bermuda and possibly the US Atlantic seaboard. The Northeast has already been drenched by multiple storms so far this hurricane season, the latest of which, fallout from Ida, has caused widespread destruction in the area.
The Bureau of Labor Statistics just published their September payroll report this morning. The official unemployment rate (U-3) continued to edge lower but its rate of recovery has slowed this month leading to increase in Delta variant concerns. Equities and the US dollar extend modest losses this morning on the news.
Industry Continues To Grapple With Fallout From Ida
Energy futures are ticking higher this morning, recovering from modest losses to start September as the industry continues to grapple with the fallout from Ida, and uncertainty heading into the last weekend of the driving season.
Ida continues to wreak havoc, 4.5 days after first making landfall. We’re seeing dramatic images of flooding in Philadelphia and New York City and flash flood warnings continue north to Boston. No word yet if any of the few remaining refineries in PADD 1 were impacted by the storm, but given the widespread river flooding it seems at the very least we’ll see some delays in barge traffic over the next several days.
Most of the refineries in Louisiana remain offline and recovery efforts have been hampered by a combination of lack of power and flooded roads. The two largest plants, Exxon Baton Rouge and Marathon Garyville are both reportedly attempting to restart this week. The success or failure of those startups will be critical to determine how long the local fuel shortages last, and whether or not they expand to other states since the Plantation line will need their supply to continue operating.
Yesterday’s DOE report was highlighted by total US petroleum demand smashing its all-time high, nearly 500,000 barrels/day above the previous record set in the summer of 2018. Perhaps even more impressive is that record was set despite gasoline and jet fuel demand remaining below pre-pandemic levels, which is a testament to the strong growth in propane/propylene and the “other oils” category which now regularly surpass distillates as the 2nd largest demand category behind gasoline.
US Crude oil production ticked up to a post-pandemic high of 11.5 million barrels/day, but will drop more than 1 million barrels next week due to the Gulf of Mexico shutdowns.
Week 44 - US DOE Inventory Recap
Impacts To Fuel Supply Network Are Significant But Largely Contained
A month known for volatility is off to a quiet start for energy and equity markets. While damage assessments are still in the early stages, the price action in futures and cash markets continues to suggest that the impacts to the fuel supply network are significant but largely contained.
Don’t adjust your dials: The winter-spec October RBOB contract took over the prompt position for futures today, some 14 cents below where the summer-spec September contract left off. If your local market hadn’t already transitioned to September pipeline cycles last week, you’ll notice a big jump in basis values today that will offset the drop in the futures price until the terminals start to transition to winter grades in 2 weeks. What does that mean? It means your local prices are down only about 40 points on the day so far, not 14 cents.
OPEC and Friends are scheduled to meet today, and reports suggest the cartel will not make any changes to its output plan this time around.
The API reported a build in gasoline stocks of more than 2.7 million barrels, while crude oil and distillates both had draws of roughly 4 million and 2 million barrels respectively. That report probably explains why RBOB has held modestly in the red overnight, while WTI and ULSD see small gains. The DOE’s version of the weekly statistics is due out at its normal time this morning. Today’s report may have less influence than normal as the data was collected before nearly all Gulf of Mexico oil production was shut, along with more than 2 million barrels/day of refining capacity. Following most hurricanes that hit the area, we typically see a sharp rebound in production that creates chart stalactites, but it could be a little different this time around as damage to Port Fourchon, which moves roughly 90% of offshore oil, could prevent some of those wells from coming back online as quickly as they would if the oil had a place to go.
A lack of power continues to slow the process of getting refineries and pipelines back online, although progress is being made on all fronts. The Plantation pipeline remains shut near its origin but they did announce a plan to attempt a restart later today, which should ease concerns about the product shortages spreading to more states along the East Coast. The port of Pascagoula is also reported to be back in operation with restrictions today, which should help get some product moving to Florida.
Transportation challenges are more painful than ever during this event as the long hauls that save the day in many supply disruptions simply aren’t an option in most cases due to a lack of drivers. It’s also showing up as a challenge with some terminals in the area running out of ethanol, which prevents them from selling the gasoline they have on hand.
As Ida now targets the East Coast with flooding rains, Tropical Storm Larry has formed off the coast of Africa. This storm is predicted to become a major hurricane over the next week, but just like his predecessors Julian and Kate, he’s predicted to stay far out to sea and not pose a threat to the US.