Drop In Oil Stocks And A Major Refinery Closure
A large drop in oil stocks and confirmation of a major refinery closure sent the energy complex soaring on Wednesday, but those prices are coming back a bit this morning as a less bullish fundamental picture begins to take shape.
Yesterday’s DOE report – headlined by a huge 12 million barrel decline in crude stocks - came out around the same time as reports that city & company officials were confirming that the PES refinery would be closed down next month.
While futures reacted strongly to the news, with RBOB up a dime at some points during the day, cash markets took the news in stride as it appears the Atlantic basin has enough supply available to fill in the gaps. There is also a sense that the explosions & fire at the refinery only moved up the inevitable closure of that refinery which was already struggling after emerging from bankruptcy last year, handicapped by high operating costs and a lack of favorable crude-buying economics based on its location.
The 12 million barrel drop in crude stocks was the largest weekly decline in nearly 3 years. Domestic production dropped for a 3rd consecutive week, the first such stretch of declines since the last price collapse.
The large decrease can largely be explained by a sharp decline in oil imports along with a strong increase in exports – which reached a new record high of 3.77 million barrels/day last week - making it more likely that we’ll see a correction in the next couple of weeks.
It’s not just oil exports that had a big week, both gasoline and diesel exports saw large increases as refinery production ramped up. Those export figures can go a long way to explaining why the market reaction to the PES news hasn’t been more dramatic, since the US is already producing more refined products than it can consume, this situation becomes one of logistics (shifting Gulf Coast exports to the East Coast) rather than capacity.
Speaking of which, the first two charts below show the historical refinery run rates for PADD 1 (East Coast) and total US, before and after the PES closure. As you can see, there will be a dramatic impact on the East Coast run rates, but the US total hardly changes since the Gulf Coast already produced roughly 10X the products as the East. In addition, the US had added 220mb of refining capacity in the past year, which would cover most of the expected decrease from this plant being shuttered.
So, where to from here? With OPEC and G20 meetings coming in the next week, it seems like we’re due for some sideways trading as the market goes into a short-term “wait and see” mode.
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Gasoline Futures Are Leading The Energy Complex Higher This Morning With 1.5% Gains So Far In Pre-Market Trading
Gasoline futures are leading the energy complex higher this morning with 1.5% gains so far in pre-market trading. Heating oil futures are following close behind, exchanging hands 4.5 cents higher than Friday’s settlement (↑1.3%) while American and European crude oil futures trade modestly higher in sympathy.
The world’s largest oil cartel is scheduled to meet this Wednesday but is unlikely they will alter their supply cuts regimen. The months-long rally in oil prices, however, has some thinking Saudi Arabia might being to ease their incremental, voluntary supply cuts.
Tropical storm Rina has dissolved over the weekend, leaving the relatively tenured Philippe the sole point of focus in the Atlantic storm basin. While he is expected to strengthen into a hurricane by the end of this week, most projections keep Philippe out to sea, with a non-zero percent chance he makes landfall in Nova Scotia or Maine.
Unsurprisingly the CFTC reported a 6.8% increase in money manager net positions in WTI futures last week as speculative bettors piled on their bullish bets. While $100 oil is being shoutedfromeveryrooftop, we’ve yet to see that conviction on the charts: open interest on WTI futures is far below that of the last ~7 years.
Click here to download a PDF of today's TACenergy Market Talk.
The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.