Back And Forth Continues
The back and forth continues after Thursday’s early sell-off was rejected and prices have trickled higher overnight. With the latest bounce we’re just 1 strong day away from the December highs, and if those levels are broken, we could see another 10% increase in short order.
The IEA released its monthly oil market report this morning, and is holding both its supply and demand forecasts steady for the next year. The agency is suggesting that the OPEC & Russia cuts have put a “qualified” floor under the oil market, but recognizes that, “…the journey to a balanced market will take time, and is more likely to be a marathon than a sprint.” That’s a good reminder why it pays to watch weekly charts, rather than just shorter term charts, to avoid getting caught up in the noise.
While the IEA is projecting the US will take the crown of the world’s largest oil producer this year it’s monthly highlights end on a bit of an ominous note. The agency is expecting the largest increase in global refining capacity in 40 years amid already weak gasoline margins, soft demand, and uncertainty over the IMO’s diesel specs. “By the end of the year, all industry players, upstream and downstream, may feel as if they have run a marathon.”
Another headwind for several US refiners: Their built in head-start from cheap Canadian imports seems to be going away.
Western Canadian crude prices have stormed back from a $13/barrel quagmire 2 months ago, to trading around $43/barrel this week, marking the smallest discount to WTI in nearly a decade. The mandatory output cuts announced by Alberta and additional rail outlets are getting credit for the increase, although the high run rates by US refiners in the mid-continent are no-doubt helping the rally as well.
Another factor that helping drive up the price of Canadian heavy grades are the potential sanctions on Venezuela that is reported to have Gulf Coast refiners scrambling to find similar grades to keep their refineries running as planned.
Keep an eye on the FERC investigation announced this week into 3 natural gas pipelines. While this won’t have any impact on crude or refined products near term, the long-term implications for pipeline operators could continue to shake up the midstream industry.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.