Coiled Spring Effect Propels Prices Sharply Higher
Energy prices broke out of their month-long trading range Wednesday, and as is often the case when this happens, there’s a coiled spring effect that helps propel prices sharply higher once that range finally breaks. Bullish demand estimates took much of the credit for the rally that picked up strength following the DOE’s weekly report, and was able to sustain itself in spite of a pull-back in equity markets.
This is no runaway rally however as prices have pulled back modestly overnight (once again moving in the opposite direction of U.S. equity markets) setting up a big test for prices to end the week. If we stay above the range, there’s room to run another 10-12 cents higher in the back half of the month, but if we see a selloff the next two days, then Wednesday’s action looks like a bull trap.
The DOE report also showed a 243,000 barrel/day decline in refining capacity as some of the plants that closed down or converted production last year started making their way into the official numbers. The total decline from this time last year is 831,000 barrels/day, or just under 4.4%, with more declines expected in the months to come, marking the biggest declines in 40 years for U.S. refining capacity.
Ethanol prices continue to reach multi-year highs this week, benefitting from both the rally in gasoline prices and in corn, which trading north of $6/bushel overnight for the first time since 2013.
Today’s interesting read: Why a century-old technology is making a big comeback to improve power storage. For Texans wondering what might come next with the state’s energy grid, just think of what could be done with the thousands of man-made “lakes” scattered across the state.
Speaking of century old ideas: Read the WSJ’s take on the new Presidential tax plan that will remove incentives for oil and gas exploration that date back 100 years, and why one study suggests it won’t have a major impact on output.
A shortage of truck drivers that had been impacting many industries for years has grown to crisis levels in some areas as the economy picks back up. Yesterday, industry groups sent a letter to the House & Senate transportation committees urging them to act to help alleviate this shortage, with a first step of allowing drivers younger than 21 to operate vehicles across state lines.
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Energy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
Click here to download a PDF of today's TACenergy Market Talk.
WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.