Energy Futures Are Seeing A Modest Pullback This Morning After 2 Strong Days Of Gains

Market TalkTuesday, Nov 21 2023
Pivotal Week For Price Action

Energy futures are seeing a modest pullback this morning after 2 strong days of gains. The buying spree seemed to stall out Monday afternoon, and left ULSD and RBOB futures hovering near their weekly trend-lines, but so far lacking the conviction to make a break-out to the upside and put an end to the bearish patterns that have been in place since the summer. 

Many headlines are suggesting the reason for the recent recovery is expectations that OPEC and Friends will extend their output cuts at their meeting on Sunday. The IEA this morning suggested that even if the cartel extends cuts, the world is likely to still see a supply surplus next year. 

More than a million gallons of crude oil appears to have leaked from an off-shore oil pipeline roughly 25 miles off the Louisiana coast before operators shut down the pipe last Friday. So far the cause of the leak, and the exact amount spilled, is unknown, but at least the oil slick is not moving towards shore at this point. The pipeline in question moves roughly 80mb/day of crude oil, and given the variety of options in the region, this shutdown should not cause major supply disruptions for refiners nearby.

Meanwhile, a cargo ship was hijacked in the Red Sea, by Yemen’s Houthi rebel group, who said they took the ship due to connections to Israel, and would continue targeting ships in international waters until the war in Gaza ends. Despite the links between Iran, Hamas and the Houthi’s, and previous attacks on oil tankers by Iranian forces, so far there have been no apparent concerns that oil supplies may be impacted by these events. The US already has several naval ships in the area to protect the shipping routes and has downed several Houthi missiles since the war broke out, so it seems like the market is satisfied they can keep things from getting too out of hand.

That route plays a key role in European fuel supplies from the Middle East, which have seen a sharp increase since the Ukrainian war, and the startup of Kuwait’s new Al Zour refinery last year. That refinery has run into trouble in the past month however, headlines regarding its progress seem to be having some influence on the daily moves in ULSD futures. While the status of the refinery’s current operations are unclear, a weekend note from an analyst urging that the state oil firm take over control of the facility suggests a lack of confidence in its current ability to remain a stable supplier.

Chinese exports to Europe have dropped this year after setting records last winter, so it seems as though there’s some flex capacity available on the global markets, IF the government quotas allow for it to be sent overseas.

Opposite day:  After a weekend fire at the Martinez Renewable Diesel refinery, diesel basis values in the San Francisco market plunged more than 20 cents/gallon Monday, far outpacing a recent slump in the neighboring LA spot market. 

That’s not the only RD producer facing challenges these days.  A month after a judge halted construction on the P66 Rodeo refinery conversion project (which may ironically force traditional refining operations to continue for longer than planned) a Southern California facility looks like it may be running into a legal wall that could halt its expansion plans.  Add these legal challenges to the big drop in credit values and Panama Canal issues and the outlook for rapid growth in the renewables arena is looking pretty rough near term.

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

Market Talk Update 11.21.2023

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, Dec 1 2023

“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week

“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year. 

Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports. 

Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.

Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.  

Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums. 

Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.

The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.

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

Pivotal Week For Price Action
Market TalkThursday, Nov 30 2023

No Official Word From OPEC Yet On Their Output Agreement For Next Year

Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.   

There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move. 

We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.

It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.

Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.

Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.

The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver. 

The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.  

Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.

More refineries ready to change hands next year?  With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.

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