Market Talk - 2022 september
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Diesel Prices Look Like They May Have Lost The Tug Of War Contest This Week
Diesel prices look like they may have lost the tug of war contest this week as the energy market is limping into the weekend with nickel losses for refined products. It’s been a volatile week for all sorts of markets around the world, with recession fears and central bank action weighing heavily on demand forecasts, while the Nord Stream Sabotage, numerous global refinery issues and potential OPEC cuts next week weighing on supply.
October ULSD and RBOB futures expire today, so for the NYH and Group 3 regions that haven’t already switched to the November reference month, make sure you’re watching the HOX and RBX contracts for direction today.
California gasoline basis values for the prompt delivery cycles didn’t move Thursday as apparently no one was desperate enough to pay $2.45/gallon over November futures to get supplies, and no sellers were willing to start off the inevitable price crash by making a lower offer. Diesel prices in the state continued moving higher however with some prompt markets moving to 50 cent premiums over November futures.
Hurricane Ian devastated parts of Florida, and is now heading for Charleston as a category 1 storm, but looks like it has spared energy infrastructure so far. Terminals in Tampa and Jacksonville reopened Thursday, and while dangerous road conditions will limit fuel deliveries for a while, it really is a remarkable story that fuel supplies were able to return so quickly when Tuesday morning it appeared that Tampa may take a direct hit and those terminals could be wiped out.
The Port of Charleston is now in the path of Ian, but the current models show the storm’s eye moving north and east of those terminals, which should help limit the damage just as we saw in Tampa since the rotation of the storm will push water out and not in, which may prove critical since landfall is scheduled right around high tide. Some terminals in the region have reduced allocations ahead of the latest landfall, but since most of the state is supplied from inland sources via Colonial pipeline anyway, the odds of a lasting disruption to supplies is low even if there is damage to the waterborne terminals.
There is another potential storm system moving off the coast of Africa today that’s given 50% odds of developing next week by the NHC. The location of that system would give it a chance to make it to the US if it develops.
Exxon sent a letter to the White House trying to explain why limiting fuel exports won’t help increase inventories along the East Coast when the pipelines are already full and Jones Act qualified tankers are maxed out.
Diesel Prices Are Trying To Lead The Energy Complex Higher This Morning
Diesel prices are trying to lead the energy complex higher this morning, having rallied 35 cents in the past 3 days. Gasoline and oil prices seem to be unwilling participants in diesel’s attempted rally however, following stock markets back into the red after a big rally Wednesday.
Besides the sabotage of the Nord Stream pipelines, refinery closures from maintenance and strikes across Europe are also adding a bullish factor for distillate prices this week. It’s worth noting that the COVID impact on refineries is still coming into play, as facilities that put off projects 2 years ago when they were struggling to survive now have no choice but to catch back up in order to keep those facilities operating.
Speaking of delayed maintenance: Valero is reportedly delaying maintenance at its Memphis TN refinery to (presumably) have more supply to send north on its river system that supplies much of the Ohio river valley during a period of unusually tight supply caused by other refinery outages. Meanwhile, most workers at the Husky refinery in Toledo were laid off this week, in another sign that that facility won’t be coming back online anytime soon after the deadly fire last week. Note the big drop in PADD 2 refinery runs, and the low PADD 2 inventory levels to see why suppliers are continuing to scramble in that market.
Speaking of which, gasoline prices in California are now higher than they were during the summer peak, as futures rallied and basis values held at the record-setting $2.45/gallon premium to RBOB Wednesday. Take a look at the PADD 5 inventories which touched a fresh 10-year low last week.
While gasoline supplies are extremely tight, renewable energy supplies must be building rapidly as the LCFS credits that were the big reward for producers who can bring those products to California have plunged to a fresh 8 year low below $70/credit this week. Those credits are now worth less than half of what they were at the start of the year, and will provide a disappointing return to so many who raced to ramp up production (in several cases by shutting down their crude oil refineries) over the past 3 years.
Renewable diesel has led the surge in production, but that product is not yet tracked on a weekly basis like traditional diesel or even ethanol is, so it’s hard to say where actual inventories are. On the other hand, it’s clear that traditional diesel stocks are pretty low as they have rallied sharply this week, with prompt values trading near a 50 cent premium to futures, and creating another scary forward curve for shippers still trying to recover from the backwardation extremes seen earlier in the year.
Hurricane Ian continues to batter Florida after making landfall as a category 4 storm yesterday. Damage assessments around the port of Tampa should start today, and the early indications from the Ft. Lauderdale area are that those facilities escaped major damage which will aid resupply as the storm passes. The revised path takes the storm further out to sea east of Jacksonville, which “should” keep those terminals from staying out of operation for long, and there’s a chance that this huge storm may have just threaded the needle crossing the entire state without making a direct hit on any of the major fuel ports. There’s another tropical depression that could get named in the next couple of days, but the projected path keeps it far out to sea and not a risk to land.
Week 39 - US DOE Inventory Recap
Energy Markets Are Attempting To Rally For A 2nd Day
Energy markets are attempting to rally for a 2nd day after mysterious coordinated explosions caused both Nordstream pipelines to leak and be shut down Tuesday. Although the reason for such an attack remains unclear, it did succeed in turning the market’s focus back on the supply challenges caused by the shooting war in Ukraine, and less on the demand challenges that are coming along with the global currency wars and plummeting stock market.
California gasoline basis levels surged to new record highs Tuesday, with both the LA and San Francisco spot markets trading at $2.45/gallon OVER futures. That puts cash prices in those markets around $4.80/gallon, and will push retail values north of $6, while several markets in the Gulf Coast region are seeing retail values below $3. While nowhere near as dramatic as the West Coast, Chicago basis values remain elevated after reports that the Husky refinery in Ohio will remain closed until December after the fire that killed two employees last week.
Hurricane Ian is beginning its battering of Florida after knocking out power to all of Cuba yesterday. A fortunate shift in the projected path overnight keeps the huge storm well to the south of Tampa bay, which keeps that critical port on the “clean” side of the storm and should help limit the damage to the fuel terminals sitting dangerously close to the water’s edge. More than 10% of oil production in the Gulf of Mexico has been shut in as a precaution while the storm passes, but the system is far to the east of those rigs, and should not cause any damage.
Energy Futures Are Pulling Back This Morning With The Prompt Month Diesel Contract Leading The Way Lower
Energy futures are pulling back this morning with the prompt month diesel contract leading the way lower, currently down around 5.5 cents to start the day. The October gasoline contract is down just over two cents while November crude oil futures (which is prompt this late in the month), is down about 50 cents per barrel. A rising US dollar and recession fears are taking credit for today’s negative price action, driving oil prices down to levels not seen since January.
Hurricane Ian is expected to develop into a major Hurricane just before making landfall in Cuba and Jamaica early tomorrow morning and maintain that status before hitting the central west coast of Florida by Friday. The storm is expected to bring heavy rainfall, hurricane-force winds, a sizeable storm surge, and flooding to the greater Tampa Bay area late this week. While it may cause a high level of localized damage, right now it seems the majority of the Gulf Coast energy infrastructure has dodged a bullet.
Another disturbance has queued up behind Ian but looks to be staying out to sea for the next week.
Money managers trimmed their short bets on both major crude oil futures last week, showing signs of profit-taking by the speculators that have taken advantage of the bearish trend we’ve seen since June. Many market participants are still sitting out though, with open interest for both crude oil grades at 6 year lows.
Baker Hughes reported an increase in active oil production rigs last week, bringing the total of active crude platforms to 602 (+3) in the US. Natural gas plants dropped by two last week.
Risk Taking Has Fallen Out Of Favor As Markets Around The World Fall Out Of Bed With Heavy Losses To Start Friday’s Trading
Risk taking has fallen out of favor as markets around the world fall out of bed with heavy losses to start Friday’s trading. Refined product futures are seeing heavy selling this morning, down 13 cents or more in the early going, despite signs from cash markets of supply tightness in numerous spots around the country.
Diesel prices would still finish with 10 cent gains for the week if they settled at current levels, but have dropped 20 cents from Wednesday’s high just a few ticks below the $3.50 mark. That pullback keeps a downward trend line in place that started from the August 25th high of $4.11, and would set up another test of the $3.14 range in the next week or two if prices don’t rally soon. Ordinarily, those types of swings would make for a busy year, and now we’re used to it happening in a month.
Fiona looks like it will set records as one of the strongest storms to ever hit the Canadian coast this weekend, but appears like it will stay just far enough east to avoid a hit on the Irving refinery in St. John New Brunswick. Shipping in the region will certainly be impacted as the storm blows through, but the current path appears favorable to avoid significant long term damage to ports.
The storm likely to be named Hermine was upgraded to a tropical depression overnight, and is now expected to hit south west Florida as a category 2 or 3 Hurricane Tuesday or Wednesday. The Key West and Ft. Myers are looking particularly vulnerable from the path of this system, with Cuba looking like the only thing that might slow the storm’s rapid intensification as it crosses the extremely warm waters in the Caribbean this weekend. The good news for energy supplies about this forecast path is that it keeps it well east of the oil production and refining zones in the Gulf of Mexico. That won’t prevent a surge of panic buying in Florida, but it will help resupplies once the storm has passed. Some models have this storm making additional landfalls on the east coast next week.
It’s been a rough week for refineries around the world. A fire at Husky’s refinery in Ohio killed 2 workers and has sent Chicago basis values soaring. Exxon is shutting down a refinery in France after a walkout of workers, and now Argentinian oil unions are striking after refinery explosion killed 3 workers. While none of those facilities individually will create major disruptions, they are all clear reminders of both the dangers of the industry, and the vulnerability of supply with refining capacity stretched to its limits.
Speaking of which, the West Coast continues to struggle with extremely tight supplies of gasoline that have sent basis values surging $1.50-$2 above futures and most other regional markets. A rash of refinery issues, and no options from neighboring markets for summer-grade gasoline are both contributing to the extreme price action. The big question for the next two weeks is whether or not imports are available to help alleviate this tightness, or if resupplies will have to wait until the market converts to winter-grade gasoline.