After Another Big Rally Wednesday, Energy Prices Are Seeing A Quiet Start To Trading Thursday
After another big rally Wednesday, energy prices are seeing a quiet start to trading Thursday, with little news so far to give us the expected 20 cent swings we’ve become accustomed to in March. There are multiple summits taking place in Europe this week that will decide the next steps in the efforts to end the war in Ukraine, and the (relative) lack of price movement so far today seems to be the market taking a wait and see approach to those meetings.
Yesterday’s DOE report continued to provide evidence that there simply is not a good short term solution to the global supply crunch, but also that the US is in a much better position than most other countries these days.
Gulf Coast refiners are doing their part to make up for a lack of refined products in other markets, increasing run rates for a 5th straight week, and surpassing 8.7 million barrels/day for just the third time since the COVID lockdowns forced plants to reduce rates, and helped drive the biggest decrease in refining capacity in 40 years. How many would like to ask for a do-over on shuttering those plants in light of recent events? The other notable phenomenon is that PADD 3 run rates surpassed 55% of total US throughput rates as the Gulf Coast states continue to grab market share from those that have declared war on their refiners and are now paying a huge price as a result.
Speaking of which, take a look at the huge drop in diesel imports over the past two weeks in the charts below to see a good graphical representation of the scramble for importers to find distillates on cargo ships to replace barrels coming from Russia, regardless of their original destination. The US still produces 10-15% more diesel than it consumes every day, but domestic markets have to compete with international buyers in the coastal markets, and for the Gulf Coast refiners, it often is more cost effective to send diesel to parts of Europe and South America than it is to some parts of the US thanks to the Jones Act and CARB regulations.
Damage assessments are underway at the Black Sea Oil port that transports roughly 1% of global supply after Russian officials claimed it was shuttered after a storm. It’s hard to know (even before they invaded Ukraine) what’s real and what’s propaganda, but there are signs that the pipeline feeding the port is still operational.
An EIA note this morning predicts that US renewable diesel production will surpass biodiesel production this year, as new plants come online, and the feedstock wars are won by RD as it is not only a drop-in replacement for ULSD, but also commands more environmental subsidies. The report also shows that production growth for both RD and Bio is expected to slow dramatically after the race to convert during the aforementioned COVID refinery shuttering, and the combined total of the two products will only reach 8% of total distillate output in 2050, vs 6% today. So much for Net Zero.
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View AllEnergy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
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The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.