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

Market TalkFriday, Feb 2 2024
Pivotal Week For Price Action

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.

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Market Talk Update 2.22.24

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Market TalkFriday, Jun 21 2024

Charts Continue To Suggest We’re In For A Period Of Sideways Trading

It’s another quiet start for energy markets that seem to have entered the summer doldrums where peak gasoline demand for the year meets peak disinterest as many in the industry start taking vacations. Charts continue to suggest we’re in for a period of sideways trading now that the big June recovery bounce seems to have run out of steam.

Tropical storm Alberto dissipated over Mexico Thursday, but not before its far-stretching thunderstorms upset another refinery in the Corpus Christi area. Flint Hills reported a boiler was knocked offline at its East Corpus refinery, a day after Citgo reported an upset at its East facility as well. Large parts of Texas have been swimming in supply most of the year as neighboring markets to the North and West have been long, backing up barrels into the Lonestar state so these small upsets are unlikely to move the needle in terms of prices or allocations in the area, but they are a good reminder of how vulnerable these facilities are to the weather. The NHC is still tracking 2 more systems with coin-flip odds of being named in the next few days, but neither one looks like it’s headed for the oil production and refining zones in the Gulf Coast at this point.

Ukraine continues to pound Russian energy infrastructure, with 4 different refineries reportedly struck overnight, following attacks on multiple export facilities earlier in the week. The global market continues to largely shrug off the attacks, as excess refining capacity in Asia seems more than capable of picking up any slack in the supply network that may be caused by a loss in Russian output, which is a very stark contrast to what we were experiencing 2 years ago.

Another dip in capacity: The EIA reported a drop of 103mb/day of refining capacity in the US last week, the first reduction in capacity reported since before Russia invaded Ukraine. A general drop in capacity came as no surprise as the conversion of the P66 Rodeo refinery in the San Francisco Bay area earlier this year was well documented. The surprise in the figures was that the East Coast made up 40% of the total decline, which may suggest those facilities which are generally disadvantaged due to labor costs and limitations in crude oil sourcing, are once again knocking on death’s door after a 2-year reprieve.

With the conversion of Rodeo, PADD 5 now has the least amount of refining capacity since the EIA started tracking that stat 40 years ago. Right on cue, the DOE also reported PADD 5 gasoline imports surged to the highest level in over 3 years last week, offering a glimpse of what lays ahead as the region will now be more dependent on shipments from across the Pacific to meet local demand.

Speaking of which, lobbying groups are filing responses to California Energy’s workshop proposals on new refinery rules to cap profits, using the forum to tout the advantages of whatever product they’re selling, and highlighting the risks of the state making itself a fuel island dependent on imports from overseas.

Another one bites the dust? BP “is pressing pause” on its biofuel project at its Cherry Point WA refinery this week, the latest in a line of biofuel producers to rethink plans to make diesel from soybeans and waste oils as subsidies have plunged. On top of plummeting LCFS and RIN values that have cut nearly $2/gallon out of the credit values of the fuel that costs $3-$4/gallon more than traditional diesel, the new Clean Fuel Production Credit is replacing the $1/gallon Blender’s Tax credit that’s been the lifeline to many producers over the past decade. The new program (which is part of the Inflation “Reduction” Act) sets a higher bar to clear before producers can get their handout, which means some domestic facilities will see another loss in credit values from 50-80 cents/gallon vs the BTC, while importers won’t qualify for any credit under the new program.

For real this time? Mexican officials continue to make up stories about when their new Dos Bocas refinery will begin producing fuels, kicking the can further down the road this week saying the facility will start up in the back half of the year. This is at least the 10th time officials have moved back the start date of the facility over the past few years and given that the back half of the year starts in 10 days, I’ll take the over on this bet. Refiners along the US Gulf Coast are no doubt celebrating anytime another delay is announced as they’re facing more competition than they have in the past two decades for their exports.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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Market TalkThursday, Jun 20 2024

Energy Futures Giving Back Yesterday's Holiday Shortened Session Gains

Energy futures are giving back almost all of the gains made during yesterday’s holiday-shortened session as a search for direction begins to emerge after crude oil and diesel prices reached 7-week highs. Charts suggest we may be in for a few weeks of sideways trading unless buyers can push prices up another 5-10 cents before the month's end.

A reminder that since futures didn’t settle yesterday, the price change you’re seeing today is relative to Tuesday’s close. Spot markets weren’t assessed yesterday. The DOE’s weekly status report will be released at 11 am Eastern.

Tropical storm Alberto was finally named Wednesday after a couple of days of a “potential tropical cyclone” label. While the storm is already moving inland over Mexico, it is having widespread impacts with parts of Texas already declaring states of emergency to deal with flooding.

Yesterday we mentioned that the heavy rains brought by this system may interfere with restart efforts at Citgo’s Corpus Christi West refinery, but it was actually their East Corpus Christi plant that reported flaring due to the “heavy rainfall event.” No units were reported to be shut from that upset, and if the refiners in the area can make it another 12 hours, they’ll have dodged their first storm bullet of the year.

Although the forecasts all said this would be an extremely busy year for storms, Alberto was actually the latest named storm in the Atlantic basin for a season in 10 years. Don’t worry though, it looks like we’ll quickly make up for lost time with two more systems being tracked. One on Alberto’s heels is given 50% odds of being named as it moves into the Gulf of Mexico this weekend, while the other lingering off the SE coast is only given 40% odds, but is still set to bring heavy rain to Florida, Georgia and the Carolinas.

The treasury and IRS published guidance on the Prevailing Wage and Apprenticeship (PWA) requirements for renewable fuel facilities to qualify for the new Clean Fuel Production Credit (CFPC) that will replace the blanket $1/gallon Blender’s Tax Credit next year. Without reaching the PWA standards, producers can get a maximum of $.20/gallon for Biodiesel and RD, and $.35/gallon for SAF. If a producer meets the PWA guidelines, they can theoretically earn 5 times the base amount, for a maximum of $1/gallon for RD and Bio and $1.75 for SAF. The actual amount will be calculated by multiplying the maximum credit times the fuel’s emissions factor, meaning many producers will earn much less than the current $1/gallon credit. It’s also worth noting again that importers will not qualify for the CFPC after many years of earning the BTC, which may shake up the supply outlook later this year as anyone who can, will race to dump their barrels into a US market before the credit goes away.

Click here to download a PDF of today's TACenergy Market Talk.