Chinese Power Shortage Partially Blamed For Refinery Output Dropping
There’s a saying that market-based prices don’t go straight up, but if you just looked at the chart of energy prices over the past several weeks, you might think otherwise. The steady march higher continues this morning as the world remains without a short term solution to the energy supply crunch, and the big 3 NYMEX contracts all reached fresh 7 year highs again overnight, with refined products up 45 cents in the past month, and more than $2/gallon over the past 18 months.
While the bulls clearly have control of this market for a time being, there’s also a saying that energy prices like to take the stairs up and the elevator down, so it would not be surprising to see a big price drop when the upward momentum finally wanes.
(Not) adding fuel to the fire: The Chinese power shortage was partially blamed for refinery output dropping to a 15 month low, showing how a lack of one fuel can lead to less production of another. It’s not a completely fair comparison because the country’s quota system on oil imports is also playing a big role, but it is indicative of the challenges faced in the near term as the world tries to get back to normal.
It’s not just fossil fuels that are seeing big rallies. Ethanol prices have been surging alongside gasoline, with spot prices in the New York harbor surpassing the $3 mark last week. Note the unusually large spread between Chicago and New York ethanol prices in the chart below as a sign of the ongoing logistical challenges for delivering fuel via rail and truck around the country.
Not buying it? It wasn’t too surprising to see money managers continue jumping on the petroleum bandwagon last week, adding to their net length in WTI and ULSD contracts. Brent crude meanwhile saw a 9% decrease in the bets on higher prices held by large speculators, which suggests that some of the big money bettors think this rally is getting a overextended. RBOB contracts saw a small reduction as new shorts were added, which seasonally looks like a solid bet as gasoline demand is heading towards the winter doldrums.
Baker Hughes reported 12 more oil rigs were put to work last week, the largest weekly increase in 6 months, as the race to increase production at these lofty levels accelerates. Half of the additional rigs put to work last week were in the “other” basin category, suggesting that smaller operators are outpacing the bigger operators in the major US shale plays.
Today’s interesting read: This WSJ article taking a deeper look at the energy supply crunch and the impacts on both fossil fuels and renewables.
Click here to download a PDF of today's TACenergy Market Talk.
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View AllEnergy 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.