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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Gasoline Futures Are Leading The Way Lower This Morning
It was a volatile night for markets around the world as Israel reportedly launched a direct strike against Iran. Many global markets, from equities to currencies to commodities saw big swings as traders initially braced for the worst, then reversed course rapidly once Iran indicated that it was not planning to retaliate. Refined products spiked following the initial reports, with ULSD futures up 11 cents and RBOB up 7 at their highest, only to reverse to losses this morning. Equities saw similar moves in reverse overnight as a flight to safety trade soon gave way to a sigh of relief recovery.
Gasoline futures are leading the way lower this morning, adding to the argument that we may have seen the spring peak in prices a week ago, unless some actual disruption pops up in the coming weeks. The longer term up-trend is still intact and sets a near-term target to the downside roughly 9 cents below current values. ULSD meanwhile is just a nickel away from setting new lows for the year, which would open up a technical trap door for prices to slide another 30 cents as we move towards summer.
A Reuters report this morning suggests that the EPA is ready to announce another temporary waiver of smog-prevention rules that will allow E15 sales this summer as political winds continue to prove stronger than any legitimate environmental agenda. RIN prices had stabilized around 45 cents/RIN for D4 and D6 credits this week and are already trading a penny lower following this report.
Delek’s Big Spring refinery reported maintenance on an FCC unit that would require 3 days of work. That facility, along with several others across TX, have had numerous issues ever since the deep freeze events in 2021 and 2024 did widespread damage. Meanwhile, overnight storms across the Midwest caused at least one terminal to be knocked offline in the St. Louis area, but so far no refinery upsets have been reported.
Meanwhile, in Russia: Refiners are apparently installing anti-drone nets to protect their facilities since apparently their sling shots stopped working.
Click here to download a PDF of today's TACenergy Market Talk.
The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.