Market Talk - 2022 december
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The Missing Story Of A Year That Smashed Pretty Much Every Record In the Books
Energy prices are limping to the finish line of the wildest year on record. If you only look at the ending prices, you would probably wonder what all the fuss is about. WTI is only up 4% on the year, while Brent and RBOB futures are up a pedestrian 7%. Of course, that misses the story of a year that smashed pretty much every record in the books.
An average trading day in 2022 saw gasoline price move more than 13 cents/gallon, while distillates swung by an average of almost 19, which is nearly 4 times their long-term average range. We had multiple times throughout the year where futures and/or cash markets moved by more than $1/gallon throughout a single session. That extreme volatility, combined with increasing margin rates from the exchanges, and higher interest rates, led to many traders being forced out of these markets or choosing to sit on the sidelines for the rest of the year (or longer) since they couldn’t handle those swings, which pushed open interest for these contracts to a 6 year low.
So, what’s ahead in 2023? It’s hard to imagine the world will face another shock like the largest war in Europe since WW2, or a global pandemic, so there’s a strong chance we’ll have less volatility. The war in Ukraine, COVID, and interest rate policy all look like they’ll remain major themes that can influence prices. There’s a large amount of new refining capacity that has either come online in the past few months or is scheduled to in the next year which should also help calm refined product markets. The challenge for the US and Europe is that 90% of new capacity is coming from Asia and the Middle East.
Short term it looks like the US dodged another supply bullet as the damage from the Christmas Blizzard - that impacted just about every single refinery east of the Rockies - looks to be limited. Even though several plants will need another week or two to complete repairs, and at least one refinery will be offline for months, the larger complexes along the gulf coast – which accounts for roughly half of all US capacity – seem to have escaped with relatively minor damage.
If you haven’t already been bombarded with notices, here’s a reminder the Federal Superfund tax is being reinstated in 2023 and will start showing up as a line item on your invoices. Please note the tax only applies to the petroleum portion of the fuel, so any ethanol, biodiesel, or renewable diesel should not have that fee apply. In addition, if you’re in the state of Washington, the new clean fuel programs start Sunday, which are estimated to add approximately 50 cents/gallon to refined product prices, with most suppliers embedding this in their daily prices.
Energy Prices Attempting Move Lower To Begin Penultimate Day of Trading For 2022
Energy prices are attempting another move lower to begin the penultimate day of trading for 2022. We saw a very similar sell-off happening this time yesterday, only to see a strong rally in the afternoon wipe out those losses. Refinery restarts, weak equity markets and increasing COVID counts in China are all getting credit for the selling over the past couple of days, although it’s unclear what may have prompted yesterday’s buying spree that added 14 cents to diesel prices in just under an hour.
The selling in both futures and cash markets seemed to follow news that the country’s largest refineries along the Gulf Coast were making fast work of restarting units shut by last week’s storm, reducing the chances of significant supply disruptions from that downtime.
While many facilities weathered the storm well, there’s at least one long-term casualty so far. Suncor issued a press release Wednesday saying its Commerce City refinery – the only one in the state of Colorado - would shut completely, most likely for several months, to allow for damage assessments and repairs following multiple fires since the plant was knocked offline last week. The release says full operations are expected by late Q1 2023. The loss of a refinery in the Denver area will max out pipeline resupply options from the Midwest, TX Panhandle and from Wyoming. It would also be a great time to have a refinery 100 miles to the north in Cheyenne, but that facility was converted to RD production 2 years ago when oil refiners were desperate to stay afloat. Given the region isn’t directly tied into any major spot markets, don’t expect this shutdown to have an influence on prices beyond the cities directly impacted.
Remarkably, that shutdown announcement may not have been the worst news of the day for the facility, as the EPA announced it was investigating the state of Colorado for discriminatory air permitting policies, which could make restarting the Suncor facility much more challenging. You may recall the EPA recently made it all but impossible for the St. Croix refinery FKA Hovensa to restart after multiple operational upsets, and it’s not too far-fetched to think the Suncor plant could wind up with a similar fate, particularly given its horrible operating track record over the past couple of years.
The API reported small inventory builds for refined products last week of 510,000 barrels of gasoline and 38,000 barrels of distillates, while oil inventories fell by 1.3 million barrels. Given that products still increased despite the pre-Christmas demand rush, and oil only declined slightly despite the Keystone shutdown and importers avoiding taking oil into Texas to avoid year-end taxes, those figures seem pretty bearish and are likely contributing to the latest sell-off attempt. The DOE/EIA’s weekly report is due out at 10 am central today. Don’t expect to see any impact of the refinery shutdowns in this report as the data was collected for the week ending last Friday, right when the storm’s impact was being felt.
Energy Prices Are Taking A Breather In The Wake Of The Great Christmas Blizzard Of 2022
Energy prices are taking a breather in the early trading Wednesday, pulling back slightly after a strong 2-day rally in the wake of the great Christmas blizzard of 2022™.
The list of refineries that were knocked offline due to the winter storm continued to grow Tuesday, even as restart efforts were well underway for many, as much warmer weather takes hold. At least 23% of the US refining capacity was hit by this storm, and many will need weeks to fully restore operations. That said, the severity and duration of this storm along the Gulf Coast was much less than what we saw in February of 2021, and early estimates suggest the lasting damage to facilities will be relatively minor in comparison, even though the impacts appear to be more widespread.
The rash of outages has caused ripple effects along the pipeline and terminal networks across most markets east of the Rockies, although the impact of outages and delays is less severe given we’re in the midst of the winter demand doldrums. Basis markets are also hinting that the impact of this event will be muted as the urgent buying seen Friday quickly slowed during Tuesday’s session as many traders seem content to wait and see what the actual production losses will be, and whether or not anyone will be in the office to care this week.
Vladimir Putin decreed that bans the sale of oil to countries who aren’t buying it anyway in retaliation for price caps. It’s worth noting the empty threat has a July 1 expiration date and leaves the door open for exceptions to avoid interfering with flows to India and China which may need ships insured by the “banned” nations to continue some purchases.
ULSD futures came within ½ cent of touching their December highs Tuesday before pulling back by 10 cents, which puts a new layer of chart resistance at the $3.41 range. If prices manage to break through and hold above that level, there’s not a lot on the charts to stop another run at the $4 mark in early 2023.
RBOB saw a similar pattern, coming within a penny of its December 1 high print at $2.42 Tuesday before dropping 8 cents. The weekly charts aren’t as favorable for the gasoline bulls as they are for distillates, with a rather significant-looking layer of chart resistance set up in the $2.50 range.
Energy Futures Had A Big Rally On Friday
Energy futures had a big rally on Friday, and are following through with higher prices to start the short week as a pair of major supply disruptions, one actual and another potential, grip the market. ULSD continues to lead the move higher and came within striking distance of setting a new high for December overnight, marking a rally of more than 60 cents/gallon since bottoming out 2.5 weeks ago.
Russia threatened to cut its oil output in retaliation for sanctions on Friday, which sounds scary but may actually have to do more with limited options to sell and transport some of the nation’s production than a strategic plan to strike back at nations participating in the embargo.
Numerous refineries were knocked offline by the winter storm last week, including several of the largest in the country. Refineries accounting for approximately 18% of total US capacity had units reported offline over the weekend, although the total number of facilities impacted is likely to be much higher, which could place this event in the top 5 all time for disruptions. The steady stream of reports of refineries dropping had basis values for gasoline and distillates rallying in addition to the strong move higher in futures on Friday as the big physical shippers were scrambling to find replacement barrels.
Much warmer temps are sweeping the country allowing damage to be assessed and restarts to begin. While there’s never a good time for a mass refinery disruption, the week between Christmas and New Years typically has the weakest demand of the year, so may limit the impact of these shutdowns on the market. The timing is also likely to encourage some of those facilities to move up maintenance to take advantage of units already being offline and demand being weak. Oil and natural gas output was also hit by the huge storm, but it appears that the electric grids held up well in most cases, unlike what we experienced in early 2021.
The disruptions weren’t limited to production and refining facilities. Numerous terminals and pipelines across the country were reporting various issues, and vessel traffic in and around the NY Harbor was temporarily halted as the storm passed. Here too the impacts may have been much worse if they hadn’t happened just after the pre-holiday rush and just before Christmas day, which marks the slowest day for terminal loadings of the entire year.
Money managers were jumping back on the energy bandwagon last week with large percentage increases in net length seen across the board. While the percentage increases are large, the starting positions were fairly small, so the actual number of contracts added was less impressive. New length and short covering were consistent for crude and products, while open interest continues to hover near 6 year lows.
Baker Hughes reported 2 more oil rigs and 1 more natural gas rig drilling in the US last week, after both counts had declined in the prior 2 weeks. Drilling activity in the US has stagnated over the past couple of months as lower prices and various supply chain and labor shortages continue to have producers acting conservatively.
Keystone pipeline received approval to restart its shuttered line on Friday, with flows to the Cushing OK hub expected to resume this week.
Energy Futures Are Trying Another Rally To Wrap Up The Pre-Holiday Trading Week
Energy futures are trying another rally to wrap up the pre-holiday trading week after stalling out in Thursday’s session. ULSD is leading the charge once again, up 9 cents in the early going, while WTI is pushing $2 gains and making an attempt to get back to $80, and RBOB is lagging up just 5 cents so far.
Another big sell-off in equity markets knocked the wind out of the energy price rally yesterday, although products did recover most of their losses as stocks staged a strong afternoon bounce to end well off their lows. Even though equity and energy prices haven’t had a strong correlation lately, it was clear from the timing of the swings that stocks were leading the move in both asset classes yesterday, particularly with not much else available to influence trading this week.
So far there’s been at least 1 refining casualty from the winter storm, as the Suncor facility outside Denver was knocked offline following a record setting drop in temperatures earlier this week. So far that’s the only confirmed outage at a refinery, but it seems inevitable that there will be more. There are numerous reports across the south of pipelines and terminals having to slow operations due to the cold hitting areas that just aren’t used to or prepared for it. While the predictions of single digits reaching the Gulf Coast have sparked some all-too-familiar panic buying, the natural gas and heating oil markets are largely shrugging off the storm however as the cold isn’t expected to last very long, and much warmer temperatures are forecast for next week.
While the slide in fuel prices in the back half of the year has brought some much-needed relief to inflation-weary consumers, a Bloomberg article this week highlighted the combination of challenges that have caused more than $100 Billion to vacate the commodity arena, and forced some companies out of business.
Meanwhile, this WSJ article offers a good reminder that much of the trading is not done by people anymore, and the hedge fund algorithms that drive oil prices aren’t having as much fun as prices drop.
Energy Prices Continue To March Higher This Week
Energy prices continue to march higher this week, with refined products seeing 2-4 cent gains in the early going, while crude oil prices are up around $1. Volumes continue to be light in pre-holiday trading, with little in the way of market-moving news, and fewer people around to read it as the week progresses.
The blizzard bringing the coldest Christmas in 30 years is sweeping the country, and certainly won’t help fuel demand as thousands of flights are being cancelled and drivers stay off the roads. The high winds and plummeting temperatures are hitting Texas today, so we should know more tomorrow on whether or not there are supply disruptions from this storm as well.
A few notes from yesterday’s DOE weekly status report:
Total US Crude supplies, including the SPR, dropped to a 36 year low last week.
Gasoline inventories increased for a 6th straight week, outpacing their typical seasonal increases after the shift to winter-grade products. Total gasoline stocks are now above 2021 levels, after 6 months of holding well below their seasonal range. Refiners cut back on run rates for a 2nd week as that rapid increase in inventories has some projecting containment issues this winter if demand continues its sluggish pace.
Diesel demand saw a healthy spike last week as the fleet of delivery vehicles no doubt contributed to the pre-christmas rush. Expect those consumption estimates to plummet over the next two weeks as commercial fuel use collapses over the last week of December and first week of January.
Exports of gasoline and diesel slowed noticeably last week, although both remain well above average levels. There are likely to be some big swings in import/export flows the next two weeks as traders around Texas try to minimize their year-end tax exposure, not to mention the potential impacts of the winter storm on port activities.
RIN values have seen steady buying this week, with D6 values reaching a 3 week high after plummeting to start December following the EPA’s proposal for the RFS for the next 3 years.