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