Big Reversal Underway In Energy Futures

Market TalkMonday, Mar 8 2021
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A big reversal is underway in energy futures that are trading lower this morning after an overnight price spike. So far, the selling is relatively minor, and hasn’t threatened the upward-sloping trend lines that have held this rally for more than four months. While a pullback is warranted given the markets’ overbought condition, we saw multiple similar selloffs fail to pick up steam in last week’s big rally, and we’ll need to see product prices dip another nickel or more before we can say this time is different.

News that the Houthi rebels had launched another coordinated missile and drone attack on Saudi Arabian oil assets Sunday had the market spiking overnight, with oil prices up $2/barrel and products up more than 4 cents/gallon. All contracts reached new 12+ month highs in the overnight session, with WTI trading at its highest level since October 2018 and RBOB reaching its highest since April of 2019. The gains proved short lived however as the Saudi facilities are reportedly continuing to operate with minimal disruption, giving buyers reason to doubt the sustainability of current prices after the furious rally in recent weeks.

The great refinery recovery is progressing, with multiple units reported to be initiating restart over the past few days, but supplies remain tight across the gulf coast, causing some slowdowns in pipeline batches that is causing more markets across the country to feel the impact of February’s polar plunge. Rare shipments of gasoline from Europe to the U.S. Gulf Coast are in route, and should help keep the runouts contained.

Money managers are starting to build short positions in WTI and RBOB, cutting the net length held in those contracts modestly on the week. ULSD is a different story with a large increase in new length added last week, betting on higher prices even though diesel values have already nearly doubled in the past four months. The CFTC’s report data is compiled on Tuesday, which means the new shorts got a rude welcome from the huge rally in the back half of the week while the diesel buyers were rewarded.

Baker Hughes reported a net increase of one oil rig drilling in the U.S. last week, with the Permian basin adding three rigs, the Barnett adding one (its only active oil rig) while Williston declined by one and other smaller basins declined by two. The total U.S. count at 310, is at its highest level since the first week of May 2020, but remains 540 rigs lower than where it was 2 years ago, even as oil prices are 10% higher today than they were then.

The Dallas FED released a study last week with projections for Permian production following the anticipated restrictions on Federal lands. The report projects that total output will likely decline by 230mb-490mb per day, most of which will hit New Mexico drillers since all of Texas’ fields are on private or state land.

The EIA this morning reported on the growing role of U.S. Propane exports, which surpassed total diesel exports in 2020. Most of the propane exports are heading to Asia to meet growing demand for heating and petrochemicals, a reminder that the expected growth in petroleum in the coming decades is not likely to be from transportation. 

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Market TalkFriday, May 17 2024

The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

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

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Market TalkThursday, May 16 2024

Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

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

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