Demand Fears Are Outpacing Supply Fears To Start Tuesday’s Trading As China Has Initiated Yet Another Round Of COVID Crackdowns
Demand fears are outpacing supply fears to start Tuesday’s trading as China has initiated yet another round of COVID crackdowns, shutting down markets and cities across the world’s largest oil importer. Gasoline prices are down a dime in the early going, and crude oil prices have already erased most of Monday’s big gains.
Diesel prices are resisting the big pull lower from crude and gasoline today – after dropping by a dime Monday – following reports that Russia is cutting more natural gas deliveries, this time to France, as Moscow continues to use its most powerful weapon in its war on Europe.
Speaking of which, a WSJ article this week highlights that even though Russia may be fumbling in its shooting war in Ukraine, its energy revenue has continued to grow as the world has shifted to find new ways to get their oil and products to market as creative traders find no shortage of loopholes in the current sanctions.
European leaders agreed to meet next week to come up with emergency plans to deal with runaway electricity prices that are pushing households across the continent to the brink of bankruptcy or worse. Price caps for natural gas are one of main ideas being floated to deal with this issue temporarily, even though price caps can be counterproductive as they remove the incentive for some producers to rush to bring more output online.
BP’s Whiting refinery outside of Chicago has initiated restart, and could be back up and running by the weekend if all goes well, which is easing concerns of a regional supply crunch that prompted the EPA to waive summer RVP specs a few weeks early.
While refinery capacity losses have justifiably grabbed many headlines over the past year, ExxonMobil has been quietly expanding one of its facilities, in Beaumont TX, and is ready to bring 250,000 barrels/day of new capacity online early next year. That additional capacity is the equivalent of one above-average size refinery, and will effectively replace the 260,000 barrels/day facility that was killed by Hurricane Ida last year.
There are very good odds we’ll have a named storm heading towards the US by Labor day, with the NHC still giving 80% odds of development for a system moving across the Atlantic. The good news is that forecast models suggest there are low odds that this storm will hit the US, and will more likely stay out to sea as it moves north parallel to the East Coast next week. A 2nd system is currently given 40% odds of development in the next 5 days as it moves out to the Atlantic, and long range models suggest we should expect a new system every few days for the next several weeks as conditions for development improve.
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Energy Markets Rally Again Thursday After A Choppy Wednesday Session
Energy markets are trying to rally again Thursday after a choppy Wednesday session. RBOB gasoline futures are leading the push higher, on pace for a 3rd consecutive day of gains after finding a temporary floor Tuesday and have added 12 cents from those lows.
Equity markets are pointing sharply lower after a weak Q1 GDP estimate which seems to have contributed to a pullback in product prices over the past few minutes, but don’t be surprised if the “bad news is good news” low interest rate junkies start jumping in later on.
The DOE’s weekly report showed sluggish demand for gasoline and diesel, but inventory levels in most markets continue to follow their typical seasonal trends. Refinery runs held fairly steady last week with crude inputs down slightly but total gross throughputs up slightly as most facilities are now back online from a busy spring maintenance season and geared up for peak demand this summer.
Propane and propylene exports spiked to a record high north of 2.3 million barrels/day last week, which demonstrates both the US’s growing influence on global product markets, and the steady shift towards “other” products besides traditional gasoline and diesel in the level of importance for refiners.
The EIA acknowledged this morning that its weak diesel consumption estimates reflected the switch to Renewable Diesel on the West Coast, although they did not provide any timeline for when that data will be included in the weekly survey. The agency acknowledged that more than 4% of the total US consumption is now a combination of RD and Biodiesel, and that number is expected to continue to grow this year. This morning’s note also suggested that weak manufacturing activity was to blame for the sluggish diesel demand across the US, while other reports suggest the freight recession continued through Q1 of this year, which is also contributing to the big shift from tight diesel markets to oversupplied in several regions.
Valero kicked off the Q1 earnings releases for refiners with solid net income of $1.2 billion that’s a far cry from the spectacular earnings north of $3 billion in the first quarter of 2023. The refining sector made $1.7 billion, down from $4.1 billion last year. That is a pattern that should be expected from other refiners as well as the industry returns to a more normal market after 2 unbelievable years. You wouldn’t guess it by looking at stock prices for refiners though, as they continue to trade near record highs despite the more modest earnings.
Another pattern we’re likely to see continue with other refiners is that Renewable earnings were down, despite a big increase in production as lower subsidies like RINs and LCFS credit values sting producers that rely on those to compete with traditional products. Valero’s SAF conversion project at its Diamond Green joint venture is progressing ahead of schedule and will give the company optionality to flip between RD and SAF depending on how the economics of those two products shakes out this year. Valero also shows part of why refiners continue to disappear in California, with operating expenses for its West Coast segment nearly 2X that of the other regions it operates in.
Week 16 - US DOE Inventory Recap
Energy Markets Trading Quietly In The Red As Ethanol Prices Rally To Five-Month High
Energy markets are trading quietly in the red to start Wednesday’s session after a healthy bounce Tuesday afternoon suggested the Israel-Iran-linked liquidation had finally run its course.
There are reports of more Ukrainian strikes on Russian energy assets overnight, but the sources are sketchy so far, and the market doesn’t seem to be reacting as if this is legitimate news.
Ethanol prices have rallied to a 5-month high this week as corn and other grain prices have rallied after the latest crop progress update highlighted risks to farmers this year, lower grain export expectations from Ukraine, and the approval of E15 blends this summer despite the fact it pollutes more. The rally in grain and renewables prices has also helped RIN values find a bid after it looked like they were about to test their 4-year lows last week.
The API reported small changes in refined product inventories last week, with gasoline stocks down about 600,000, while distillates were up 724,000. Crude oil inventories increased by 3.2 million barrels according to the industry-group estimates. The DOE’s weekly report is due out at its normal time this morning.
Total reported another upset at its Port Arthur refinery that’s been a frequent flier on the TCEQ alerts since the January deep freeze knocked it offline and damaged multiple operating units. This latest upset seems minor as the un-named unit impacted was returned to normal operations in under an hour. Gulf Coast basis markets have shrugged off most reports of refinery upsets this year as the region remains well supplied, and it’s unlikely we’ll see any impact from this news.
California conversely reacted in a big way to reports of an upset at Chevron’s El Segundo refinery outside of LA, with CARBOB basis values jumping by more than a dime. Energy News Today continued to show its value by reporting the upset before the flaring notice was even reported to area regulators, proving once again it’s ahead of the curve on refinery-related events. Another industry news outlet meanwhile struggled just to remember where the country’s largest diesel seller is located.
Click here to download a PDF of today's TACenergy Market Talk