Energy Futures Are Moving Sharply Lower To Start The Last Trading Day In The Most Volatile Month On Record
After another strong rally Wednesday, energy futures are moving sharply lower to start the last trading day in the most volatile month on record. Reports that the White House would be announcing a major release of oil from the SPR is getting most of the credit for the early selloff, while the inverted yield curve and COVID lockdowns are also easy targets any time prices pull back.
It’s the last day for April RB and HO contracts, so watch the May futures (RBK/HOK) for price direction today if your region hasn’t already made the move to the new month. So far, despite a 15 cent drop, the April HO contract has not done anything too wild today, but given all the records that contract has already set in March, don’t be surprised to see some fireworks before today’s settlement.
If the rumored/reported SPR release of up to 1 million barrels/day for 6 months happens, it would be by far the largest drawdown in history, making previous releases such as during Gulf War 1, barely show up on the chart in comparison (see chart below). This move – IF all 180 million barrels of it happens – would also draw down SPR inventories to a 40 year low by the end of the year.
US refiners are running hard, increasing output past 92% of nameplate capacity last week, which is at the top end of the seasonal range. While these refiners are seeing the best margins in nearly a decade, after many barely survived the COVID/ESG combo the past two years, there is also a bit of a warning here that plants are reaching the top end of their sustainable output levels, while domestic demand may still be far from peaking this year unless there’s an economic slowdown.
Domestic oil output did tick higher for the first time in two months, but the DOE’s estimate was only up 100mb/day on the week, putting it on par with where the year started, and proving once again that restarting shuttered operations, and overcoming natural well decline, takes a lot longer than many would like. Still, with oilfield hiring and spending reaching new records in some markets, the supply increase does seem to be coming later in the year, and the big questions are just how long will it take to add back the 1.4 million barrels/day that were taken out of service during the COVID lockdowns, and will those barrels come back online just in time for the world not to need them, especially if the SPR release happens, and lead to the next bust in prices?
We don’t often talk about jet fuel prices in this note, but it’s worth mentioning that NY Harbor saw a new record for Jet A prices Wednesday with basis values getting close to $1/gallon over April futures, and more than $1.25/gallon over its Midwestern counterparts. Inventory charts at the end of the DOE chart list below show that PADD 1 inventories are well below their 5 year range, while PADD 2 stocks are above average, in another sign of how coastal markets are being influenced by the cargo chaos in response to the war in Ukraine, while inland markets are insulated.
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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.
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