Damage Caused By Extreme Cold Snap

Market TalkTuesday, Feb 23 2021
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WTI led the energy complex in another strong rally Monday, reaching new one-year highs as optimism for long term demand and short term disruptions to the supply network continued to encourage buyers. Prices continued marching higher overnight, but those gains were largely wiped out in the early going after WTI reached $63. 

Equity markets seem to be losing their upward momentum as interest rates rise, which could be enough to put an end to the four month old rally in energy markets now that the supply network is getting back to work.

The great refinery restart across the southern half of the U.S. is underway, with progress slow but steady. A common theme noted in restart plans Monday is that most plants are able to begin the restart process this week, but may take several weeks to reach full rates due to various damage caused by the extreme cold snap. A few plants will take more than a week to initiate restart as their damage was more extensive. The slow restart is likely to mean that allocations across large parts of the south are likely to remain for another week or two, but widespread outages at the terminal level should not occur. 

The shortages are most pronounced across West Texas, which went from one of the most oversupplied markets in the country two weeks ago, to now trading 25-30 cents over USGC spot markets as resupplies are concentrated in the major metro areas for now.

Large hedge funds have been steadily jumping on the WTI bandwagon for months, pushing the net length to multi-year highs in recent weeks, and now some of the largest trading houses Banks in the world are calling for even higher prices.  The big push in WTI prices following those reports suggests they may have encouraged more money to flow in to the oil trade.   Whether or not that allows those trading houses banks to offload their length will remain a mystery.    

RIN prices briefly spiked Monday after the new EPA administration changed its stance on the case of small refinery RFS waivers that’s soon to go before the Supreme Court. Sellers quickly emerged however as the agency’s stance doesn’t seem like it will influence the court’s decision, and based on the flip flopping of the agency depending on who is in the White House, that’s probably a good thing.

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Energy Markets Are Trying To Find A Price Floor After Gasoline And Crude Oil Staged A Healthy Bounce To Minimize The Heavy Losses

Energy markets are trying to find a price floor after gasoline and crude oil staged a healthy bounce to minimize the heavy losses we saw early in Tuesday’s session. WTI is leading the move higher early Wednesday, up nearly $.90/barrel in the early going, while RBOB prices are up just under a penny.

Diesel continues to look like the weak link in the energy chain both technically and fundamentally. Tuesday the API reported a 4.9 million barrel build in diesel stocks, while gasoline inventories were only up 365,000 barrels, and crude oil stocks declined by more than 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning and it’s likely we’ll see a reduction in oil output and PADD 3 refining runs thanks to shut ins ahead of Hurricane Beryl, but otherwise the storm appears to be a relative non-issue with only 1 notable refining hiccup, that wasn’t even as bad as a midwestern Thunderstorm.

Chicago basis values rallied Tuesday after reports that Exxon had shut down the 250mb/day Joliet refinery following severe storms that knocked out power to the area Sunday. RBOB differentials surged nearly 9 cents on the day, while diesel diffs jumped more than a nickel. With 3 large refineries in close proximity, the Chicago cash market is notoriously volatile if any of those facilities has an upset. Back in May there was a one-day spike in gasoline basis of more than 50 cents/gallon after Joliet had an operating upset so don’t be surprised if there are bigger swings this week if the facility doesn’t come back online quickly.

Moving in the opposite direction, California basis values are heading the opposite direction with the transition to August scheduling pressuring CARBOB differentials in LA and San Francisco to their biggest discounts to prompt RBOB futures in more than 18 months. Gasoline imports into PADD 5 have held well above average levels over the past 2 months, which has more than offset the loss of the P66 Rodeo refinery’s output after it completed its conversion to RD production, in another sign of how growing refining capacity in China and other Asian countries may become more influential to the US. California regulators may also pat themselves on the back that their new plans to force refineries to report their gross profit monthly, in addition to the rules requiring all bulk trades in the state be reported must be driving the lower gasoline differentials, assuming they figure out what a basis differential is.

Meanwhile, California’s Carbon Allowance values have tumbled to their lowest levels in a year after a CARB presentation last week suggested the agency would be delaying long-anticipated tightening of the Cap and Trade program until 2026.

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

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The Sell-Off In Energy Markets Continues, With Refined Products Reaching Their Lowest Levels In A Month Early In Tuesday’s Session

The sell-off in energy markets continues, with refined products reaching their lowest levels in a month early in Tuesday’s session. Reports of slowing growth in China, the world’s largest oil purchaser, is getting much of the credit for the slide in prices so far this week, although that doesn’t do much to explain why refined products are outpacing the drop in crude.

ULSD futures are leading the early move lower, trading down a nickel on the day, and marking a 19 cent drop since July 4th. There’s not much in the way of technical support for ULSD, so don’t be surprised if this sell-off continues to pick up steam.

With today’s slide, RBOB futures are down 17 cents from where they were trading on July 4th, and are just a couple of cents from testing their 200-day moving average. Should that support break, it looks like there’s a good chance to test the June lows around $2.29.

Physical markets are not offering any strength to the futures market with all 6 of the major cash markets for diesel across the US trading at a discount to ULSD futures, while only 1 gasoline market is trading at a premium to RBOB futures. That combination of weakness in futures and cash markets is going to be troubling for refiners who are seeing margins reduce during what is traditionally a strong time of year.

The EIA highlighted the energy trade between the US and Mexico in a report Monday, showing that despite so many claims of energy independence from Mexican officials, the actual amount of refined fuels and natural gas bought from the US continues to increase. That’s good news for many US refiners who have become more dependent on Mexican purchases to find a home for their output.

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