Energy Markets Reeling On FED and EIA News

Market TalkWednesday, Mar 8 2023
Pivotal Week For Price Action

Energy markets got hammered Tuesday following comments from the FED president that suggested interest rates may go higher than previously forecast, and a monthly report from the EIA that suggested fuel supplies are going to heal faster than previously expected.

Within a few seconds of Jerome Powell beginning his congressional testimony we saw a harsh reaction in energy futures that moved quickly and sharply lower.  It was interesting to note that equity markets took longer to build up momentum to the downside, and were actually following energy contracts, not leading them. Prior to that testimony, Fed fund futures showed the market split 50/50 on whether rates would go up more than 75 points by July, and today 86% are betting that rates will be increasing by 100 points or more in that time.

The selloff certainly took the wind out of gasoline’s sails after reaching a 4-month high earlier in the day and looking poised to make a run at the $3 mark in March. That said, the slide hasn’t yet changed the technical outlook on the weekly charts, leaving the door open for the spring gasoline rally to continue if RBOB can hold above the $2.60 range. The technical outlook for distillates remains neutral at best and may be reliant on a pull higher from gasoline to avoid another test of support at $2.66, that could lead to a bigger move lower if it fails to hold.

The EIA thinks it figured out why they’ve had more than 2 million barrels/day of crude oil inventory show up in their weekly reports the past few weeks. EIA administrator Joe DeCarolis took to Twitter Friday to awkwardly spell out the reason why their reporting has had so many issues of late in a string of 140-character notes. They said that crude oil blending and under-reported oil output were the two key reasons for the huge builds in inventories, over the past few weeks, even though the other figures suggested we should see inventories decline. 

The blending factor is certainly a real issue, as many refiners have reported that due to the high levels of condensates blended in gathering systems, aka “Hydrocarbon Soup” that “WTI” isn’t WTI anymore, which has created challenges for processing that oil which has more light ends than many plants are configured to handle and makes them more valuable in the export market than at home, particularly when many other countries have less complex facilities and less strict pollution controls.

The report also notes that those condensates are not yet reportable in the EIA’s data, which is why their net effect ends up as an adjustment factor. The tweet storm ended with a note that suggests the agency will soon change their weekly reporting forms to better account for the extra liquid production and blending, with their plans to be laid out on March 22. 

Speaking of data not reported by the EIA, you may wonder why west coast diesel markets have been trading at a discount to futures even though PADD 5 diesel inventories look tight.   Part of the answer, besides the horrible weather to start the year that’s ground trucking and industrial demand to a standstill, is that the EIA does not yet count Renewable diesel inventories in their weekly report, so the rapidly increasing RD simply isn’t showing up in the figures. As RD continues to become more available, it’s likely we’ll see the EIA add this to the weekly figures, either on a standalone basis or as part of the total ULSD pool. We saw a similar phenomenon about 15 years ago as the EIA had to adjust their reporting to account for the steady increase in ethanol blending after congress declared grain alcohol had to be blended into fuel.

Perhaps next week the EIA can tweet why their latest short term energy outlook reduced the forecast for vehicle miles traveled over the next 2 years but increased its estimate for gasoline consumption. The monthly report also forecast that US gasoline inventories will have a counter-seasonal build this spring after refineries return from a heavy maintenance schedule in March. The forecast also says that the demand for US product exports, particularly diesel, will diminish this year as new refinery capacity comes online elsewhere in the world.

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Market Talk Update 03.08.2023

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Pivotal Week For Price Action
Market TalkFriday, Feb 23 2024

The DOE Report Sparked A Solid Rally In Energy Futures Thursday, But That Upward Momentum Proved Short-Lived

The DOE report sparked a solid rally in energy futures Thursday, but that upward momentum proved short-lived as prices gave back those gains overnight, despite US equity markets surging to all-time highs.

The weekly inventory report showed US refiners are struggling to come back online from a busy maintenance season that was further complicated by January’s cold snap and the unexpected shut down at BP Whiting. Refinery utilization held near 80% on the week, which helped pull gasoline inventories lower despite sluggish demand and a surge in imports along the East Coast. Diesel demand showed a big recovery from last week’s ugly estimate, and when you factor in the missing 4-5% that doesn’t show up due to RD not being included in the reports, actual consumption looks much healthier than the report suggests.

Based on reports of restarts at several major refineries this week, we should see those utilization numbers pick up in next week’s report.

The EPA Thursday approved year-round E15 sales in 8 corn-growing states, despite the fact that the extra ethanol blends have been shown more to pollute more in the warm times of the year. The effective date was pushed back a year however in a show of election-year tight rope walking, which the EPA couched as ensuring that the move wouldn’t lead to a spike in fuel prices this summer.

Of course, the law of unintended consequences may soon be at play in a region that tends to be long gasoline supply for large parts of the year. Removing 5% of the gasoline demand could be another nail in some of the smaller/less complex refineries’ coffins, which would of course make fuel supply less secure, which contradicts one of the main arguments for making more 198 proof grain alcohol and selling it as fuel. Ethanol prices meanwhile continue to slump to multi-year lows this week as low corn prices continue to push unusually high production, and the delayed effective date of this ruling won’t help that.

While Nvidia’s chip mania is getting much of the credit for the surge in equity prices this week, there was also good news for many more companies in reports that the SEC was planning to drop its requirements on Scope 3 emissions reporting which is particularly useful since most people still can’t figure out what exactly scope 3 emissions really are.

In today’s segment of you can’t make this stuff up: The case of chivalry gone wrong with the BP/TA acquisition, and a ketchup caddy company caught spoofing electric capacity.

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

Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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