Market Talk - 2023 december
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It’s The Last Trading Day For 2023, Energy Markets Are Still Searching For Direction With Small Gains For Gasoline And Crude Oil Futures
It’s the last trading day for 2023, and energy markets are still searching for direction with small gains for gasoline and crude oil futures, while diesel sees small losses in the early going. We saw heavy selling Wednesday after US oil output held at a record high, and refinery runs continued to increase and push inventories higher, but prices still appear range-bound for now.
Looking ahead to 2024, shipping chokepoints will be a major story with the Panama Canal still reduced to roughly 50% of its capacity, which was forcing more ships to transit through the Suez Canal before attacks in the Red Sea diverted many of those shipments. The world’s two other key shipping straits are thankfully quiet for now, but Iran just last week attacked a tanker off of the Indian coast so the Strait of Hormuz could certainly soon come back into the forefront, and it’s not too hard to imagine China could see these canal blockages as the perfect time to take action in the South China Sea which could end up disrupting movements through the Malacca strait.
New refining capacity also looks to be a major needle mover this coming year with the huge new Dangote refinery in Nigeria beginning operations this month, but not yet making on-spec products. Whether that facility and Mexico’s new Dos Bocas refinery can come online in a meaningful way will have a heavy influence on the supply condition of the entire Atlantic basin and could create even bigger swings in the US export market than we saw this year.
The return of contango in oil markets after nearly two years of backwardation will also influence markets around the world as shippers are once again incentivized to store barrels. Note the steady increases in Cushing OK inventories in the charts below for an example of this phenomenon at work. With US exports surging and OPEC struggling to keep its production limited, storage capacity could once again command a premium this year.
In other words, there seems to be plenty of oil production and refining capacity in 2024, but the ability to transport that supply to where it’s needed is much less certain.
Those challenges in transportation are evident within the US as well, with both PADD 2 and 3 showing swelling inventories as refiners crank up run rates, while PADD 1 inventories remain low as the options to ship products to the population centers on the East Coast are limited by pipeline capacity and Jones Act vessel restrictions. The ability for refiners to ship barrels out of the center of the country in whatever way they can continue to be a major story for next year and will likely determine whether or not some facilities are forced to cut runs, particularly if the new refining capacity in Africa starts pushing more barrels from Europe to the East Coast.
So far, facilities in the Mid Con don’t seem intimidated as PADD 2 refinery runs surged to a record high last week, at a time of year when we typically see things slow down. PADD 4 saw a sharp reduction in run rates after yet another operational upset at Suncor’s beleaguered refinery outside of Denver, which is facing new challenges to its air permits that could eventually lead to that facility closing for good.
Week 52 - US DOE Inventory Recap
Energy Futures Are Ticking Lower For A 2nd Day As The Search For Direction Continues Heading Into Year End
Energy futures are ticking lower for a 2nd day as the search for direction continues heading into year end. ULSD futures are now trading 15 cents below the highs reached last week but are still 14 cents above the lows set 2 weeks ago. That back and forth is indicative of the neutral technical outlook we’re in near term, while longer term charts still given slight favor to lower prices ahead.
The DJIA reached a new record high Wednesday at 37,656, while the S&P 500 is just half of a percent from a new record of its own. Energy and equity prices had a strong positive correlation early in 2023 but have moved independently of each other the past few months, so the pull higher from stocks just isn’t there. Likewise, the US dollar influence on energy futures, which is often cited as a daily driver of price action, has been essentially non-existent of late, so the big drop in the US dollar coinciding with a huge rally in US treasuries, isn’t pushing up oil prices as it has in years past.
An attack on a container ship in the Red Sea Tuesday was repelled by the US Navy, which said it shot down 12 drones and 5 missiles heading for the ship and suggests that the coalition forces are up to the task of protecting ships in the region.
RIN prices have dropped near a 3-year low this week and are on the verge of a technical breakdown that could send prices sharply lower if they break and hold below $.75/RIN. RIN prices have dropped nearly $1/RIN this year as the rapid influx of renewable diesel (which creates 1.7 RINs/gallon vs 1.5 for biodiesel and 1.0 for ethanol) brought a huge increase to the RIN supply pool, while the EPA’s increase in bio-mass mandates wasn’t enough to offset that new supply. With the upcoming changes to the Blenders Tax Credit that will soon require bio-fuel producers to prove the environmental benefit of their product to receive a credit, vs today’s $1/gallon for everyone, and stagnate prices for LCFS credits, subsidy revenue for bio-producers looks like it will be a headwind in 2024.
San Francisco basis values continued their recent rally, following a surprise inspection of PBF’s refinery in Martinez Wednesday, following multiple upsets the week prior. Prompt values for CARBOB gasoline traded up to a 60-cent premium to futures in San Francisco yesterday, compared to discounts of 15-30 cents/gallon in the Gulf Coast and Mid-West. Bay Area prices are expected to remain volatile this year as the 2nd of 5 local refineries is in the process of converting to renewable production, leaving the region more vulnerable to supply shocks.
The API reported a build in crude oil stocks of 1.8 million barrels last week, while diesel saw a small increase of 270,000 barrels, and gasoline stocks saw a small decline of 480,000 barrels. The DOE’s weekly report is due out at 10am central today and will be on the same delayed schedule next week for the New Year’s holiday and in 3 weeks for MLK day.
Polls Are Predicting A Draw In Crude Oil National Inventories Of About 2.6 Million Barrels
Oil futures are dipping on the lack of any new attacks in the Red Sea this morning and news of the resumption of shipping from some of the larger carriers in the market. Brent and WTI futures are down around 1% to start the second day of one of the slowest trading weeks of the year.
The Department of Energy has delayed the release of their weekly inventory report until tomorrow due to the holidays. Polls are predicting a draw in crude oil national inventories of about 2.6 million barrels, while refined products built an unnamed amount. The American Petroleum Institute will publish their estimates this afternoon.
Premiums for shipping gasoline and diesel from the Gulf Coast to the New York Harbor market have dropped precipitously this month, going from as high as 18.5 cents over the published tariff to just 2 cents yesterday. While that price dislocation has mostly healed, it may take a little more time for supply in the markets along the Colonial corridor to return to normalized levels.
General tensions in the Middle East seems to be what most traders are keeping an eye on this morning, from aforementioned attacks on shipping vessels by Iran (directly or indirectly) to Israel ratcheting up raids on Gaza refugee camps. The war in Ukraine continues to grind on but its effects on the energy industry are likely fully realized, especially given this morning’s comments from Moscow that Russian crude has found homes in China and India after the West sanctioned its exports.
The End-Of-Year Trading Week Is Kicking Off With Healthy Gains For Energy Contracts
The end-of-year trading week is kicking off with healthy gains for energy contracts, wiping out Friday’s losses with tensions over shipping lanes seeming to drive the stronger price action with little other news to focus on so far.
Iran appears to have opened a new front in the drone wars, reportedly targeting a tanker ship in the Indian Ocean over the weekend. The location of that attack and Iran’s direct involvement (compared to its indirect support of Hamas and Yemen’s Houthi rebels) suggests it’s possible that the Strait of Hormuz, which is the oil market’s most important shipping lane and a frequent Iranian target, could soon see more disruptive activity. Despite the new geographical escalation, the world’s 2nd largest shipping company is preparing to return ships to the Red Sea thanks to the US Navy and its coalition’s protection.
Can we have a do-over? After compiling large short positions in oil contracts at the end of a multi-month sell-off, money managers were forced to cover a huge amount of those positions as prices bounced. The 25-30% reduction in shorts in just 1 week drove a 50% increase in speculative length and the snowball effect of short covering may still be in play this morning. ULSD was the only contract to see a decrease in the net length held by money managers last week as a reduction in long positions was big enough to offset the short covering.
Baker Hughes announced a decline of 3 oil rigs drilling in the US last week, marking a 3rd straight week of declines for oil drilling, while natural gas rigs increased by 1 on the week. US producers reached record high output last week, even though the number of active oil rigs is down more than 120 (roughly 20%) in the past year as ongoing efficiency gains and a change in the EIA’s accounting methods both seem to be driving stronger-than-expected figures.
Back And Forth Trading Continues For Energy Contracts
Back and forth trading continues for energy contracts as traders wind down positions ahead of the holidays and liquidity quickly runs dry. Thursday’s session featured a 4-cent bounce from ULSD off of its morning lows, and already overnight we saw 3.5 cent gains erased, only to bounce once again just before 8am. RBOB futures dropped 4-cents Thursday but are up almost 4-cents this morning.
Oil futures came under a bit of selling pressure Thursday after Angola announced it was leaving OPEC in a dispute over the cartel’s quotas. While the west African nation makes up just 3.5% of OPEC’s production, it’s yet another sign that the group has problems ahead as it tries to limit output. Don’t worry about the cartel disbanding anytime soon however, as Brazil is set to join OPEC next month.
The Red Sea has been relatively quiet since the US announced its coalition to combat attacks on ships in the region, but shipping companies appear to be content to take the long way around Africa for now.
The most notable cash market action Thursday came in San Francisco as spot gasoline continued to see a strong rally following a weekend upset at the PBF Martinez refinery that led to citations and ongoing protests outside the facility.
While refined products appear to be stuck in neutral short term, ethanol prices continue to slide, approaching 3-year lows this week as a bumper corn crop and slight hope for new mandates in the US puts downward pressure on the 198-proof alcohol turned fuel.
Futures will be completely closed to trading the next two Mondays as Christmas and New Years are two of only 3 holidays each year when the Nymex completely closes its electronic trading platform. That means prices set tonight will carry through Tuesday without concern with what could happen in electronic trading.