Challenges Coming This Winter
Energy futures continue to hold near 9-month highs in spite of more weak fundamental data as the market seems to continue to care more about the chance of economic recovery 6-12 months down the road, and less about the challenges to be overcome this winter.
There is some doubt creeping in to the market, as we saw early gains in Monday’s session wiped out mid-day, which could be a sign that the bulls have outkicked their coverage with a 40% price rally when demand was on the decline. Whether or not prices can punch through last Thursday’s highs this week, which should spark another technical rally, should determine if we end the year in rally mode, or with a downward correction.
OPEC’s monthly oil market report revised its demand estimates slightly lower for 2020 and 2021, as the U.S. & Europe saw weaker than expected fuel consumption, offset largely by better than predicted demand in China and India. The report also highlighted the recovery in diesel margins for gulf coast refiners in recent weeks as inventories have drawn down and production has slowed, whereas gasoline margins continue to struggle in most regions. The cartel’s output rose by more than 700mb/day during November, almost all of which was due to Libya’s rapid resurgence, adding more than 1 million barrels/day of output in the past 2 months since a truce agreement allowed production to resume.
The IEA’s monthly report also had a small downward revision in its global oil demand forecasts from last month’s report, largely due to weak jet/kerosene demand. The report also highlighted the change in forward curves for oil from contango to backwardation due to stronger Asian demand and OPEC’s output cuts, which won’t help refiners that are expected to face a long winter.
A few interesting refinery-related headlines this week:
The refinery formerly known as Hovensa sold its first products in the past week after nearly a year delay in startup.
Shell completed the permanent shutdown of its Convent LA refinery.
Exxon and P66 both outlined their intentions to improve on environmental sustainability. Exxon’s GHG reductions are focused on lowering methane flaring and other upstream avenues, while P66 laid out its reduced spending plan including the conversion of its Rodeo, CA refinery to renewable production in 2024.
Last, Marathon is starting a new program to deter birds from its Robinson, IL facility (you’ll need a subscription to access that article).
Click here to download a PDF of today's TACenergy Market Talk.
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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.