Debate Over Economic Restarts Face Off Against Fears

Market TalkWednesday, May 13 2020
Traders Torn As Opposing Trend Lines Converge

The holding pattern continues for oil prices this week as a debate over signs of economic restarts, both domestically and abroad, face off against fears of a second-wave of the coronavirus. WTI and ULSD futures are both holding in their recent trading range, while RBOB futures are breaking their upward trend, and threatening a larger selloff.

We’re in the data-deluge week with the EIA, OPEC and IEA all releasing their monthly reports, in addition to the weekly API and DOE data. The first three of those reports have been released already and show a common theme of slowly improving fuel demand, spread unevenly across the various refined products.

OPEC’s oil output rose by 1.8 million barrels/day in April, as Saudi Arabia made good on its threat to flood the global market right as the world was experiencing the largest demand drop in history. That story should flip in May as the price war has ended, and country’s slowly reopen for business.

The API was reported to estimate that U.S. oil inventories built by 7.5 million barrels last week, which was larger than most published forecasts.

The industry group also estimated another gasoline inventory draw-down of 1.9 million barrels, while distillates were up by 4.7 million barrels. You’d be forgiven if you thought the API showed the opposite build/draw in inventories based on the price reaction overnight with RBOB down two cents and ULSD up one, which suggests the early action may have more to do with the charts after RBOB’s trend line broke Tuesday.

Wheels off the charts: The EIA’s monthly short term energy outlook showed how the wild action of the past two months has broken the mold. The front page of that report typically shows a price forecast for WTI, including 95 percent confidence intervals for those projections. This month the EIA is “unable to construct” those intervals because of “data issues” surrounding the extreme volatility and lack of liquidity in options markets it created. In other words, given the two standard deviation from the mean calculation of a confidence interval, and prices doing what they’ve done, the price estimate is around 30 dollars for WTI, but the confidence would be somewhere in the range of plus or minus $50/barrel from that mark.

The STEO was able to estimate that global energy consumption will start outpacing production in the back half of this year, and that energy related CO2 emissions would fall by 11 percent, the largest drop in over 70 years of data.

The DOE’s weekly report is due out at its regular time this morning. Watch the refinery yield and export figures to see how refineries are reacting to their undesirable transition from an excess of gasoline inventory to a glut of diesel. While it may take a few weeks for plants to shift gears, and longer still to show up in the data, the increased complexity and flexibility of many U.S. refineries seems to be more capable of solving the demand puzzle than ever before.

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

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Market TalkFriday, May 17 2024

The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

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

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Market TalkThursday, May 16 2024

Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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