Energy Complex Teeters On Edge Of Technical Breakdown

Market TalkThursday, May 28 2020
End To A Choppy Week For Energy Prices

Rising inventories are checking demand optimism this week as the energy complex teeters on the edge of a technical breakdown that could knock another 10 to 20 cents off of refined products, despite a strong rally in U.S. equity markets.

The API was reported to show a large build in U.S. crude oil inventories of 8.7 million barrels last week, which sent the complex on an immediate selling spree after the report was released. However, Cushing, OK saw another large draw down of 3.3 million barrels, which has helped WTI prices recover most of their overnight losses. Gasoline inventories were said to increase by 1.1 million, while distillates continue their recent trend as the weakest link in the energy chain, as inventories had another large build of 6.9 million barrels last week.

The relative weakness for diesel is an unusual phenomenon that hasn’t been experienced in more than a decade. In fact, diesel started the year in the strongest position fundamentally, with many concerned that IMO 2020 marine specs would create a run on low-sulfur grades that refiners wouldn’t be able to keep up with. Two months ago, diesel was once again looking strong in the early stages of stay-at-home orders, as a surge in distribution demand kept distillate demand high while gasoline consumption collapsed. That pendulum has swung to another extreme. Distillate inventories are reaching extreme levels as demand stagnates and the export market isn’t strong enough to balance the equation for U.S. producers.

The DOE’s weekly status report is due out at its holiday-delayed time of 10 a.m. Central time, with the “unaccounted for” crude oil figure perhaps the most interesting number to watch.

PADD 2 diesel stocks are also worth watching in today’s report, as evidence mounts that inventories in the Midwest may be swelling to record levels as the typical post-planting demand slowdown hit just in time for April Arbitrage barrels to arrive from the Gulf Coast. Group 3 ULSD basis values have collapsed to record lows in recent days as inventories along the local pipeline systems reach new all-time highs, and collapsing basis values in Chicago-area pipelines suggest those inventories are rapidly rising as well.

D6 RIN values have reached multi-year highs this week, as refineries start to ramp up production – increasing their RFS obligation – and concerns are mounting that next year could create another structural shortage in RIN availability as U.S. gasoline demand won’t recover enough to clear the mandated bio-fuel blending requirements.

The EIA marked another milestone in the changing landscape of U.S. energy consumption, noting that renewable fuel usage surpassed coal for the first time in 130 years, when firewood was the country’s main source of heating fuel. It’s interesting to note that according to this report, the EIA can apparently approximate fuel consumption from 1776 but they still don’t know how much oil is being produced in 2020.

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Energy Markets Are Ticking Modestly Higher Heading Into The Easter Weekend With Crude Oil Prices Leading The Way Up About $1.25/Barrel Early Thursday Morning

Energy markets are ticking modestly higher heading into the Easter Weekend with crude oil prices leading the way up about $1.25/barrel early Thursday morning, while gasoline prices are up around 2.5 cents and ULSD futures are about a penny.

Today is the last trading day for April HO and RBOB futures, an unusually early expiration due to the month ending on a holiday weekend. None of the pricing agencies will be active tomorrow since the NYMEX and ICE contracts are completely shut, so most rack prices published tonight will carry through Monday.

Gasoline inventories broke from tradition and snapped a 7 week decline as Gulf Coast supplies increased, more than offsetting the declines in PADDs 1, 2 and 5. With gulf coast refiners returning from maintenance and cranking out summer grade gasoline, the race is now officially on to move their excess through the rest of the country before the terminal and retail deadlines in the next two months. While PADD 3 run rates recover, PADD 2 is expected to see rates decline in the coming weeks with 2 Chicago-area refineries scheduled for planned maintenance, just a couple of weeks after BP returned from 7 weeks of unplanned repairs.

Although terminal supplies appear to be ample around the Baltimore area, we have seen linespace values for shipping gasoline on Colonial tick higher in the wake of the tragic bridge collapse as some traders seem to be making a small bet that the lack of supplemental barge resupply may keep inventories tight until the barge traffic can move once again. The only notable threat to refined product supplies is from ethanol barge traffic which will need to be replaced by truck and rail options, but so far that doesn’t seem to be impacting availability at the rack. Colonial did announce that they would delay the closure of its underutilized Baltimore north line segment that was scheduled for April 1 to May 1 out of an “abundance of caution”.

Ethanol inventories reached a 1-year high last week as output continues to hold above the seasonal range as ethanol distillers seem to be betting that expanded use of E15 blends will be enough to offset sluggish gasoline demand. A Bloomberg article this morning also highlights why soybeans are beginning to displace corn in the subsidized food to fuel race.

Flint Hills reported a Tuesday fire at its Corpus Christi West facility Wednesday, although it’s unclear if that event will have a material impact on output after an FCC unit was “stabilized” during the fire. While that facility isn’t connected to Colonial, and thus doesn’t tend to have an impact on USGC spot pricing, it is a key supplier to the San Antonio, Austin and DFW markets, so any downtime may be felt at those racks.

Meanwhile, P66 reported ongoing flaring at its Borger TX refinery due to an unknown cause. That facility narrowly avoided the worst wildfires in state history a few weeks ago but is one of the frequent fliers on the TCEQ program with upsets fairly common in recent years.

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

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Most Energy Contracts Are Ticking Lower For A 2nd Day After A Trickle Of Selling Picked Up Steam Tuesday

Most energy contracts are ticking lower for a 2nd day after a trickle of selling picked up steam Tuesday. ULSD futures are down a dime from Monday’s highs and RBOB futures are down 7 cents.

Diesel prices continue to look like the weak link in the energy chain, with futures coming within 1 point of their March lows overnight, setting up a test of the December lows around $2.48 if that resistance breaks down. Despite yesterday’s slide, RBOB futures still look bullish on the weekly charts, with a run towards the $3 mark still looking like a strong possibility in the next month or so.

The API reported crude stocks increased by more than 9 million barrels last week, while distillates were up 531,000 and gasoline stocks continued their seasonal decline falling by 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning.

RIN values have recovered to their highest levels in 2 months around $.59/RIN for D4 and D6 RINs, even though the recovery rally in corn and soybean prices that had helped lift prices off of the 4 year lows set in February has stalled out. Expectations for more biofuel production to be shut in due to weak economics with lower subsidy values seems to be encouraging the tick higher in recent weeks, although prices are still about $1/RIN lower than this time last year.

Reminder that Friday is one of only 3 annual holidays in which the Nymex is completely shut, so no prices will be published, but it’s not a federal holiday in the US so banks will be open.

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