A February Futures Flop Is The Theme In Energy Markets After A Big Mid-Day Reversal Thursday Sent Prices Sharply Lower To Start The Month
A February futures flop is the theme in energy markets after a big mid-day reversal Thursday sent prices sharply lower to start the month. The big slide Thursday was a head-scratcher for many, with the only guess for a cause circulating being fake reports of a cease-fire in Gaza. While prices did rebound from the lows of the day, they still ended with heavy losses and continued to sell off overnight, suggesting there’s more to the liquidation than just a bit of fake news.
Futures and cash markets continue to see the world differently most days in 2024, with a solid January rally in futures coming despite many physical markets showing weakness, only to see February selling in futures as cash markets are rallying.
The big story in physical markets Thursday was a 30-cent rally in Chicago basis values following news that BP’s Whiting IN refinery was evacuating and shutting down following a power outage. The evacuation of more than 200 employees created some nervous moments as the company has become somewhat notorious for deadly explosions over the past 2 decades, but fortunately no injuries are being reported.
The Chicago-metroplex refinery is the largest in the Midwest (PADD 2) and the 8th largest in the country and has a reputation for creating outsized influence on cash markets when it’s had issues in the past. The entire Midwest has been drowning in product throughout the winter as high run rates and soft demand push inventories to levels we haven’t seen since the COVID lockdowns 4 years ago. The panicked reaction in both cash prices, and terminal allocations across the region suggest that this may soon change. Drone footage of the scene is noteworthy in that it shows significant flaring as would be expected from an unplanned shutdown, but most likely no other damage. It’s also a good reminder of how big and complicated these facilities are. One other piece of good news is that unlike an unfortunate incident at that refinery in 2012, no monkeys were reported to be injured.
Meanwhile, Ukrainian drone attacks on Russian refineries appear to be having a material impact on Russia’s refined product exports, although those impacts don’t appear to be influencing prices in the US or Europe as those regions haven’t been buyers for the past 2 years.
Exxon and Chevron rounded out the earnings season this morning confirming the theme we’ve seen from just about everyone else: 2023 wasn’t the best year ever for petroleum producers and refiners, it was the 2nd best, trailing only 2022, which helps explain the buying spree we’ve seen in recent months. Improving efficiency in on-shore fracking operations (wells are producing more than ever despite a big decline in rigs) and some major off-shore successes continue to drive the upstream growth, while refined product markets are finally losing the tailwinds, they enjoyed for nearly 2 years following Russia’s invasion of Ukraine.
One of Chevron’s 2023 business highlights was completing a conversion of its El Segundo CA hydro treater so it can now process either 100 percent renewable or traditional feedstocks, which is certainly going to have others who chose to convert refineries instead of co-process wishing they’d thought of that.
Exxon has been quiet on the Renewable Fuels front ever since its partner in California failed last year, but did highlight the launching of its new lithium business, which will leverage the company’s extensive geology expertise to produce new supply from deposits in southwest Arkansas.
Good news is bad news for stocks: The January payroll report showed an increase of 353,000 jobs during the month, more than double most estimates, and unlike almost every month last year, the report also increased the job increases for both December and November. Hourly earnings were also up more than the “official” predictions, adding to the concerns about sticky inflation. Combined, that report should give the FED more than enough justification to hold off on cutting rates quickly, something the market has been struggling to come to terms with. Refined products dipped further following the report, although the moves were minor and continue to suggest that energy and equity prices will do their own thing more often than not.
News & Views
View AllEnergy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
Click here to download a PDF of today's TACenergy Market Talk.
WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.