Market Talk - 2024 january
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Week 4 - US DOE Inventory Recap
More Choppy Action For Energy Contracts To Start The Last Day Of January, Which Will Be Highlighted By The Weekly Inventory Report
More choppy action for energy contracts to start the last day of January, which will be highlighted by the weekly inventory report, and a decision from the FED. Tuesday saw early morning selling largely erased in afternoon trading, with ULSD futures the only contract to end the day in the red. This morning ULSD futures are the only ones trading green, while RBOB and WTI see modest losses in the early going. Tuesday’s bounce keeps the bulls in control for now despite this week’s pullback in prices, with a strong spring rally still looking possible despite the weakness in many cash markets to start the year.
A glimmer of hope for peace? In addition to ongoing ceasefire talks in Gaza, one of Iran’s puppet armies announced it was backing down from attacks on US troops, as they try to avoid meeting the US Air Force the hard way following the deadly attacks on a base in Jordan.
European Gasoil futures which are closely tight to ULSD (HO) futures in the US are trading lower for a 3rd straight day as traders seem to be betting that the supply disruptions caused by the re-routing of ships around the violence won’t become major.
The FOMC will announce the latest in monetary policy at 1pm central today. Pretty much nobody believes the FED will be changing rates today, with the CME’s Fedwatch tool showing just 2% probability of a 25-point rate reduction today. The big question for today’s whether or not the FED will signal plans to start lowering rates in March, with nearly half of the Fed Fund futures bets expecting the start of the easing then, down from 73% odds of a March cut bet a month ago.
The API estimated crude oil and diesel stocks both declined by more than 2 million barrels last week, while gasoline stocks had a small build of around 600,000 barrels. The DOE’s weekly report will be out at its normal time this morning, and we’ll get to see how quickly refiners are coming back online after the cold snap. Don’t expect a complete bounce back in run rates this week however as there is plenty of scheduled maintenance occurring, as most refiners have been noting a busy turnaround schedule for Q1 in their earnings releases this week.
Marathon noted two noteworthy projects in its Q4 earnings release Tuesday. The Galveston Bay facility, who earned frequent flier miles with the TCEQ in 2023 with nearly weekly upset reports, is going to install a new 90,000 distillate hydro-treater, with an expected completion in 2025. Their LA-area refinery meanwhile will be undergoing a modernization plan to improve its energy efficiency and reduce NOx emissions to meet California’s ever-changing regulations. The company did not specifically note anything about its renewable operations in the earnings release but did note in the analyst call that its converted facility in Martinez is running at less than half of its nameplate capacity after last year’s fire. For those who have been experiencing how suddenly long California is on RD this winter, just imagine if that plant was producing another 25MBD.
Phillips 66 continued the trend of good, not great, earnings in its Q4 report this morning, earning more than $800 million in its refining sector the past 3 months, down from $1.7 billion in Q3. Unlike most of the others however, P66 continues to highlight its cost reduction strategies rather than its plans to grow, saying it achieved $1.2 billion in sustainable savings in 2023 which is AKA laying people off. The company’s conversion project in Rodeo CA is still scheduled to come online in the first quarter, although it remains unclear how long it will take between starting operations and reaching the new nameplate capacity of 50MBD of renewables output. The company continues to highlight plans to sell off roughly $3 billion in unnamed assets that don’t fit its long-term strategy.
Refined Product Futures Are Now Trading 12 Cents Lower From The Overnight High Set Sunday Night
Energy futures are trading lower for a 2nd day in a row as a major announcement from the world’s largest exporter seems to be outweighing both fears of the growing conflict in the Middle East and a record-setting run for stocks.
Saudi Arabia announced Tuesday that it was scrapping plans to expand the Kingdom’s output capacity from 12 to 13 million barrels/day, in what is seen as a sign that the world has more than enough spare capacity to meet demand growth in the next 5 years.
Refined product futures are now trading 12 cents lower from the overnight high set Sunday night when it looked like the US was being drawn into yet another war in the Middle East. RBOB futures led the selloff Monday, and so far it’s ULSD leading the move this morning, trading down more than 6 cents after a brief rally attempt overnight was wiped out by the Saudi news. The 200-day moving average is in play for both RBOB and ULSD today and should provide a good short-term barometer on how serious this sell-off is going to be.
Los Angeles CARBOB basis values have rallied more than 30 cents in the past week as Kinder Morgan begins its annual RVP transition, requiring 5.99 RVP CARBOB by the 2nd delivery cycle in February, more than 2 months earlier than many markets around the country will convert to summer grades. That early transition will create both issue and opportunity for the state’s suppliers as the main pipeline network will be shipping a much lower RVP than is required at the terminals for several weeks.
RINs continue their collapse, with both D4 and D6 values trading down to a fresh 3.5 year low around $.51/RIN Monday, compared to $1.60/RIN this time last year. Fundamentally there may still be room to fall as the rapid increase in RIN generation caused by new RD production far outpaces the demand set by the EPA, and technically, there’s an argument we’ll see prices continue to drop into the 30-cent range before completing their inverse flag pattern that’s been in place since prices started collapsing 6 months ago.
The drop in RIN values is welcome news for many refiners as their cost of complying with the Renewable Fuel Standard (AKA the RVO) has fallen to less than $3/barrel, from the $9-$10/barrel range that we became accustomed to over the past couple of years. On the other hand, those refiners that raced to convert facilities to renewable production over the past several years are now watching their margins collapse as the RIN and LCFS subsidies lose value.
The TransMountain pipeline announced it had run into more “technical issues” that will delay the start of that project to alleviate the bottleneck of Canadian crude supply, and opening the Pacific basin to producers. Western Canadian price differentials dropped more than $2/barrel on that news, offering another short term shot in the arm for US mid-continent refiners that are struggling under the weight of weak basis values this winter. The longer term outlook however remains challenging as US facilities that have relied on large Canadian discounts will now be competing with buyers across Asia for those barrels.
Energy Markets Are Ticking Lower This Morning After Reaching 2-Month Highs To End Last Week
Energy markets are ticking lower this morning after reaching 2-month highs to end last week. The breakthrough to the upside last week leaves the door open for higher prices in the week’s ahead, even though moves lower like we’re seeing this morning are necessary to correct the short-term overbought condition on some charts.
Friday’s session was highlighted by early weakness turning into more afternoon gains following reports that a tanker operated by Trafigura carrying Russian naphtha was hit by a Houthi missile, and a US destroyer shot down another missile shortly thereafter. That targeting of tanker with Russian fuel aboard marked a potential paradigm shift for the tanker industry that had largely shrugged off the attacks, particularly with Russian fuel making up the majority of southbound tanker traffic through the Suez Canal.
While that new attack risks higher prices near term, it could also help to bring about a long term resolution as Iran’s proxies are turning the country into an international pariah, with China, Russia and the US all now having a vested interest in stopping the attacks on shipping even if their other interests are not aligned.
Buyers jumped back in when trading resumed Sunday night following the attacks on a US military outpost in Jordan that killed 3 and injured dozens more, but those gains didn’t last long as the market continues to discount the threat to physical supplies despite the continuous ramping up of violence in the region.
The White House on Friday announced a pause in the permitting process for new LNG export facilities.
A WSJ article over the weekend argues why this policy is actually worse for the environment, and the chart below from FERC data of existing projects shows why it’s probably nothing more than a political stunt in an election year with capacity set to more than double in the next few years via projects already approved and under construction, while even more projects are already approved.
Money managers continue to be conflicted in their energy contract positioning, with large speculators reducing their net length in ULSD and Brent contracts last week, while increasing their bets on higher WTI, RBOB and Gasoil prices. A large wave of short covering in WTI was perhaps the most notable change on the week as the big bettors seemed to throw in the towel on getting lower US crude values after WTI touched a 2-month high.
Baker Hughes reported a net increase of 2 oil rigs working in the US last week, while natural gas rigs decreased by 1.
Refined Products Are Ticking Lower By A Penny To Start Friday’s Session
Refined products are ticking lower by a penny to start Friday’s session after a big Thursday rally once prices broke out of their sideways trading range.
ULSD led the charge Thursday, closing the gap left behind at the end of November when the DEC futures contract expired. The diesel contract is currently holding above its 200-day moving average, which gives another technical reason for prices to make a run at the $3 mark in the coming weeks. RBOB futures also reached their highest level since the end of November, and although some short term indicators are flashing overbought signals, suggesting a corrective pullback is due, longer term the charts are set up for a spring rally that should at least threaten the $2.50 mark in the coming weeks.
The ongoing attacks in the Red Sea continue to be a convenient option for headline writers anytime the market rallies, which seems to ignore the fact that Saudi Arabia is still moving oil and products through the region, and Qatar said that diverting LNG carriers may delay some shipments but would not have a major impact on its ability to supply customers.
Adding to the fervor Thursday were reports that one of Russia’s largest refineries was on fire after Ukrainian drone attacks, even though Russian exports are no longer heading towards Europe or the US, so any impacts on supplies will be indirect at most.
The sell-off continues for Mid-continent product differentials, with ULSD basis in both the Group 3 and Chicago markets trading below a 50 cent discount to futures this week.
RIN values continued their plunge, dropping to 60 cents for both D4 and D6 values, marking a 3.5 year low for D6 (ethanol) contracts and a 4 year low for D4s.
Energy Futures Are Off To A Strong Start Thursday, With ULSD Leading The Push Higher Trading Up Nearly 6 Cents In The Early Going
Energy futures are off to a strong start Thursday, with ULSD leading the push higher trading up nearly 6 cents in the early going vs 3 cent gains for RBOB. Despite being stuck in the midst of the winter demand doldrums, and plenty of morning head-fakes early in the year, both ULSD and RBOB futures are looking bullish on the charts, with a strong spring rally looking possible IF they can hang on to their current gains and press through the high end of their winter range this week.
As expected, last week’s storms had a noticeable impact on refinery runs across the middle of the country with PADDs 2 and 3 accounting for roughly 1 million barrels/day of declines. We also get to see why cash markets around the country have been unimpressed by the refinery run reductions as despite the cold snap, refiners are still producing at about the same rate as they were the past 2 years at this time, and since most facilities are already getting back to normal operations, the supply overhang in many regions looks set to continue near term.
That excess is most notable in distillate markets, where for the first time in nearly 14 months all 6 of the major US spot markets have prompt ULSD differentials trading at a discount to prompt HO futures. The Group 3 market is getting the worst of it at the moment, falling to a 50-cent discount to futures Wednesday, knocking $20/barrel off of the diesel crack for local refiners. The 40-cent discount to USGC prices has flipped some inland rack markets like DFW on their head as those with trucks can take the trip north to Oklahoma to save $3-4k per load.
It wasn’t just oil refineries that felt the impact of the cold weather last week. US ethanol production dropped by more than 20% on the week as facilities across the middle of the country struggled with Winter’s wrath. Ethanol prices continue to hold near 3-year lows despite the drop in output suggesting that production won’t stay offline for long.
Oil production also took a million barrel/day hit last week as wells froze in parts of the country, most notably North Dakota’s Bakken fields. State officials estimate it will take 3 more weeks to bring most wells back online, but increased imports from Canada seem to be enough to eliminate any fears of shortages during the downtime.
Valero led off the Q4 earnings releases for major refiners this morning with the expected decline in margins due to rapidly shrinking crack spreads after 2 phenomenal years. The traditional refining segment saw earnings of $1.6 billion, vs $4.3 billion in Q4 of 2022. The company’s RD earnings were slashed by 2/3’s despite (or perhaps because of) volumes increasing by roughly 50% during the year. One bright spot came from the company’s ethanol facilities that earned nearly $190 million, up from close to break-even a year ago as lower corn prices more than offset the drop in ethanol values. The company also noted its SAF project at its Port Arthur RD facility was on pace to be completed Q1 of 2025, which could convert half of its current RD production to SAF and would go a long way to help clear the glut of RD being experienced in some west coast markets.