Another Green Day For Energy Futures

Market TalkTuesday, Dec 17 2019
Week 44 - US DOE Inventory Recap

It’s another green day for energy futures as prices continue to ride the bullish wave of OPEC cuts and the Phase-1 US/China trade deal. The move higher has been fairly small however (it took 2 full weeks to make up for just the Black Friday losses) which could mean traders are skeptical of the staying power of this rally, or simply that they’re focusing elsewhere as the holidays approach.

ULSD futures are starting to look particularly bullish with a trifecta of technical, fundamental and regulatory factors all favoring higher prices near term. If there’s any sort of major winter cold snap along the East Coast in the next few months, conditions are ripe for a 30+ cent price increase in short order. The first test on the charts looks to be the highs around $2.10 that were set in the wake of Iran’s attacks on Saudi oil infrastructure in September.

Gasoline prices are struggling to keep pace with the rest of the complex as we enter the seasonal demand slowdown, with US inventories at elevated levels, compared to distillate stocks that are at the bottom end of their seasonal range.

Values to ship gasoline on the main line of Colonial pipeline’s system rose to their highest levels in more than 3 years Monday as Gulf Coast basis values dropped to double digit discounts to RBOB futures amidst several refineries ramping up gasoline production. The loss of the PES refinery earlier this year along with the Tier 3 gasoline & IMO diesel spec changes for 2020 could make values along Colonial more consistently valuable vs recent years when they’ve spent the majority of their time in negative territory. As the chart below shows however, values for space along the line seem to be following a seasonal pattern, and won’t be a game changer unless they last into the spring.

The giant spending package working its way through congress is reported to include the $1/gallon biodiesel blenders credit retroactively from Jan 1 2018, through the end of 2022. If passed, that may well save numerous US biodiesel producers that were on the verge of insolvency without the credit, and give the industry a rare period of extended certainty after many years of having to wait for the credit to be reinstated retroactively.

The Dallas FED’s energy indicators report for December suggests that the slowdown in oil drilling has cost more than 8,000 job losses in TX this year, more than double the official federal estimate, as bankruptcies in the oil patch rose throughout the year. The report also notes that OPEC may have handed producers an early Christmas present with their output cuts that have propped up prices.

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Pivotal Week For Price Action
Market TalkFriday, Feb 3 2023

Weakness in Diesel Prices, Soft Demand in Focus

ULSD futures have dropped 80 cents in 9 days as the market has acted as if it’s only worried about a slowdown in demand, and not so much the lingering concerns about supply. After the January lows acted like nothing more than a speed bump this week, the next target on the charts is the December lows around $2.78, roughly 10 cents below the lows set this morning. That is about the only thing on the charts standing in the way of a drop to the $2.50 range, although we’re set up for at least a short-term bounce after this latest wave of selling.

It’s worth noting that the big physical players aren’t figuratively buying the selling in futures, and are instead literally buying up prompt barrels, and keeping cash prices for distillates above their January lows so far. The relaxation of backwardation seems to be playing a part in the stronger basis differentials in the front of the curve, and markets in the Midwest that had been trading 40-50 cents below futures during the winter doldrums are now only seeing single digit discounts. 

A record-setting cold snap in the Northeast US would typically be cause for at least a brief jump in diesel futures, but the severe weather forecast this weekend is apparently seen as too little, too late, and too short to offset the much warmer than normal winter that has curbed heating demand and alleviated so many concerns about another supply crunch last fall. That doesn’t mean this storm won’t come without challenges, as vessel delays, freezing equipment and power outages are all still a possibility, but since temps will be back in the 40s by Sunday, that may be an afterthought by Monday morning.

The January payroll report smashed most expectations, with more than 517,000 jobs added during the month. That good news for the economy could end up being bad news for markets that had rallied the past couple of days in hopes that the FED might take it easy on the tightening. 

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

Pivotal Week For Price Action
Market TalkThursday, Feb 2 2023

Diesel Prices Collapse, Return To December Levels

Diesel prices led another big wave of selling to start February trading Wednesday and are following through with lower prices again this morning. A combination of bearish technical and fundamental factors seem to be at play with the plunging diesel prices that have wiped out half of the impressive gains in refining margins since prices bottomed out 2 months ago.

The move also came despite a big drop in the US dollar and surging equity prices after the Fed Chair’s press conference Wednesday which was apparently viewed through rose colored glasses by the easy money crowd. 

It took 12 trading days for ULSD prices to rally from $2.92 to $3.58 in January, but just 6 to give all 66 cents back. Sellers wasted little time once the weekly trendlines broke Wednesday completing the cycle and pushing prices right back to the $2.92 range. This sets up a potentially pivotal test for the balance of the week, with a break and hold below the January lows setting the stage for a run at the December lows of $2.76, while a hold here could set up a period of sideways trading within the confines of the January range. 

B100 prices have also dropped around 70 cents/gallon over the past week as bio blends race lower to stay competitive with the sudden drop in diesel prices.  Adding to the challenge for bio-blenders that sell a $6 fuel in a $3 diesel market are RIN values that have seen their first significant selling in 2 months, lowering the subsidy for blending those fuels, while LCFS credits remain stuck in the low $60s which is less than 1/3 of where they were 2 years ago. 

Speaking of government subsidies influence on bio-fuels, the largest renewable diesel producer in the US announced plans to shift direction and make its next major investment in Sustainable Aviation Fuels as the latest blenders tax credit package offers up to a 75 cent advantage for SAF blenders vs RD and Biodiesel, while all 3 fuels will be competing for the same feedstocks. 

Refinery runs dipped last week as a large reduction in PADD 5 (west coast) runs offset a large increase in PADD 2 (Midwest). The PADD 5 run rate fell to a 2 year low following several unplanned events coinciding with the annual spring maintenance season as facilities tool up to produce summer grade gasoline. We had already seen San Francisco spot gasoline differentials jump nearly 40 cents/gallon over the past week, and LA spots followed suit Wednesday, jumping to a 3-month high north of 36 cents over futures.

The DOE’s weekly report showed inventories continuing to build despite the dip in refinery runs, with distillate demand the ugly number on the week. Even though diesel inventories remain uncomfortably low across most regions, days of supply are approaching average levels thanks to a very weak start to the year for diesel consumers. There’s no doubt that unseasonably warm winter weather on the East Coast (prior to this weekend anyway) has contributed to that weak demand, and the weeks of rain on the West Coast certainly didn’t help, but gauging the market’s reaction, there’s also some fear that the slump in diesel demand is an indicator of slowing economic activity. 

Gasoline demand meanwhile saw a healthy increase for a 3rd straight week, but continues to hold below the 5-year average, and has only outpaced 2022 numbers 1 out of 4 weeks so far this year. Gasoline exports remain near the top end of their 5-year range, while distillate exports have been steady near the 5-year average so far this year. The severe weather that swept the gulf coast refinery zone may have limited the exports over the past two weeks however, so don’t be surprised to see a big drawdown if there’s a backlog of ships that clears in February. 

More bad news for Colorado. Yesterday the Suncor refinery reported a leak, which is impressive considering it hasn’t been operating since the Christmas blizzard, which will no doubt add time and headaches to their repair process. Then overnight the P66 refinery in Borger TX, which has pipeline access to supply Colorado, was said to shut units for at least the 3rd time since being damaged by that same storm. 

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

Pivotal Week For Price Action
Market TalkWednesday, Feb 1 2023

New Month Sees New Downward Pressure, Market Awaits EIA Report & OPEC Meeting

After a week of heavy selling, refined products had an emphatic recovery rally to end January’s trading, only to start February off on their heels once again. ULSD prices bounced 15 cents off of Tuesday’s low trade, earning back roughly 20% of the losses seen in the previous 5 sessions, and keeping the upward trendline started back in December intact. 

Both products pulled back in the overnight session after the API reported more inventory builds across the board last week. Oil inventories were said to increase by 6.3 million barrels, while gasoline stocks were up 2.7 million and distillates were up 1.5 million. The rise in oil inventories is likely a sign that refinery runs remain below expected levels for a 6th week following the Christmas blizzard and several other unplanned maintenance events. The fact that refined products continue to build despite those slower refinery runs is likely a sign that demand remains in the winter doldrums, although it’s impossible to say how much is caused by the parade of winter storms, and how much is a sign of a slowing economy.

The EIA’s weekly report is due out at its normal time this morning, and should give us a good update on the status of refinery output. Speaking of which, Exxon noted in its earnings call that the Beumont refinery expansion is on pace to bring another 250mb/day of output online in Q1, which is the largest increase in capacity in a decade for the US, and the first of more than 200mb in 4 years. That’s great news for those hoping to see some relief in the supply network this year, but the bad news is that we’re expected to lose another 250mb/day later this year when the Houston Refining facility is shuttered, and another 130mb/day early in 2024 when P66 converts its Rodeo CA facility to RD production 

OPEC & Friends are meeting today to discuss their output quotas. That meeting has been largely dismissed by many in the market since it’s being held virtually, which has become a symbol that the cartel is not planning to make any changes to its agreements. In addition OPEC’s president is making it clear that they want to see more data on production and consumption before deciding on a policy change.

San Francisco gasoline prices were already the most expensive in the country after a basis rally last week to a 30 cent premium vs futures as the West Coast begins the spring RVP transition. Bay Area basis values jumped again Tuesday after reports of a fire at the Martinez refinery, although later it was suggested that fire would not impact operations at the plant as it occurred out equipment that was no longer in service.   

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