Energy Futures Are Ticking Lower For A 2nd Day As The Search For Direction Continues Heading Into Year End
Energy futures are ticking lower for a 2nd day as the search for direction continues heading into year end. ULSD futures are now trading 15 cents below the highs reached last week but are still 14 cents above the lows set 2 weeks ago. That back and forth is indicative of the neutral technical outlook we’re in near term, while longer term charts still given slight favor to lower prices ahead.
The DJIA reached a new record high Wednesday at 37,656, while the S&P 500 is just half of a percent from a new record of its own. Energy and equity prices had a strong positive correlation early in 2023 but have moved independently of each other the past few months, so the pull higher from stocks just isn’t there. Likewise, the US dollar influence on energy futures, which is often cited as a daily driver of price action, has been essentially non-existent of late, so the big drop in the US dollar coinciding with a huge rally in US treasuries, isn’t pushing up oil prices as it has in years past.
An attack on a container ship in the Red Sea Tuesday was repelled by the US Navy, which said it shot down 12 drones and 5 missiles heading for the ship and suggests that the coalition forces are up to the task of protecting ships in the region.
RIN prices have dropped near a 3-year low this week and are on the verge of a technical breakdown that could send prices sharply lower if they break and hold below $.75/RIN. RIN prices have dropped nearly $1/RIN this year as the rapid influx of renewable diesel (which creates 1.7 RINs/gallon vs 1.5 for biodiesel and 1.0 for ethanol) brought a huge increase to the RIN supply pool, while the EPA’s increase in bio-mass mandates wasn’t enough to offset that new supply. With the upcoming changes to the Blenders Tax Credit that will soon require bio-fuel producers to prove the environmental benefit of their product to receive a credit, vs today’s $1/gallon for everyone, and stagnate prices for LCFS credits, subsidy revenue for bio-producers looks like it will be a headwind in 2024.
San Francisco basis values continued their recent rally, following a surprise inspection of PBF’s refinery in Martinez Wednesday, following multiple upsets the week prior. Prompt values for CARBOB gasoline traded up to a 60-cent premium to futures in San Francisco yesterday, compared to discounts of 15-30 cents/gallon in the Gulf Coast and Mid-West. Bay Area prices are expected to remain volatile this year as the 2nd of 5 local refineries is in the process of converting to renewable production, leaving the region more vulnerable to supply shocks.
The API reported a build in crude oil stocks of 1.8 million barrels last week, while diesel saw a small increase of 270,000 barrels, and gasoline stocks saw a small decline of 480,000 barrels. The DOE’s weekly report is due out at 10am central today and will be on the same delayed schedule next week for the New Year’s holiday and in 3 weeks for MLK day.
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News & Views
View AllEnergy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
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WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.