Energy Futures At Fourth Straight Day Of Losses
Energy futures are looking at a fourth straight day of losses, but RBOB gasoline futures have just moved into the green after trading lower overnight, putting a brief hold on the selling. Most futures and cash market prices are trading near 1 month lows as demand concerns and seasonal influences both appear to be weighing on a market that has been flashing technical warning signs for some time.
A large drop in Chinese refining rates was also given some credit for the selling as it was seen as a sign of weakening demand in the world’s largest energy importer, rather than a sign of lower refined product supply with those plants cutting runs. In addition to the energy concerns, there are larger concerns that the recent spike in COVID rates is further complicating supply chains that have been a mess for months.
For much of the past decade refiners with advantaged crude oil could make healthy profits while those without (like most on the US East Coast) struggled to break even. We’re seeing a similar phenomenon today in the renewable fuel refinery race as the shortage of bio-mass feedstocks is making huge profits for those with flexible inputs while others who must run soybean oil are facing challenges. Relief could be on the way as the world’s largest soybean exporter has reduced domestic biodiesel blending requirements, which will allow more soybeans to reach the global market and be turned into food, tires, or perhaps renewable fuel.
The vicious cycle of drought is forcing water allocations across the South West, and in turn threatening electricity supplies in the region, which ends up being bullish for supplies like natural gas. This phenomenon is not unique to the US, as Brazil is facing shortages of both water and electricity, which is helping boost US fuel exports to supplement their supply.
Those exports are a lifeline to US refiners as they help both relieve a supply overhang as the demand recovery plateaus this summer, and avoids the Renewable Fuel obligation that tacks another 20 cents/gallon of cost to domestic sales. Citgo noted that higher export volumes from its refineries helped push the company to its first profitable quarter since 2019, when it lost access to Venezuelan crude.
There are 3 active storms in the Atlantic basin, but none look to be a supply threat. Fred moved onshore Monday with minimal disruption to the Florida panhandle, and terminal loading racks resuming liftings last night. Grace still appears headed for Mexico, staying well south of the oil production and refining zones along the Gulf Coast, and Henri is doing loops around Bermuda and doesn’t appear to be heading to the US.
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Prices To Lease Space On Colonial’s Main Gasoline Line Continue To Rally This Week
Energy markets are sliding lower again to start Wednesday’s trading as demand concerns and weaker stock markets around the world seem to be outweighing any supply concerns for the time being.
Rumors continue to swirl about an “imminent” response by Israel to Iran’s attacks, but so far, no news seems to be taken as good news in the hopes that further escalation can be avoided, even as tensions near the Red Sea and Strait of Hormuz continue to simmer.
Prices to lease space on Colonial’s main gasoline line continue to rally this week, trading north of 11 cents/gallon as Gulf Coast producers still struggle to find outlets for their production, despite a healthy export market. Gulf Coast CBOB is trading at discounts of around 34 cents to futures, while Gulf Coast RBOB is trading around a 16-cent discount, which gives shippers room to pay up for the linespace and still deliver into the East Coast markets at a profit.
Back to reality, or just the start of more volatility? California CARBOB basis values have dropped back to “only” 40 cent premiums to RBOB futures this week, as multiple flaring events at California refineries don’t appear to have impacted supply. The state has been an island for fuel supplies for many years as its boutique grades prevent imports from neighboring states, and now add the conversion of the P66 Rodeo refinery to renewable diesel production and the pending changes to try and cap refinery profits, and it’s easier to understand why these markets are increasingly vulnerable to supply shocks and price spikes on gasoline.
RIN prices continue to fall this week, touching 44 cents/RIN for D4 and D6 values Tuesday, their lowest level in 6 weeks and just about a nickel above a 4-year low. While the sharp drop in RIN and LCFS values has caused several biodiesel and Renewable Diesel producers to either shut down or limit production, the growth in RIN generation continues thanks to projects like the Rodeo refinery conversion, making the supply in RINs still outpace the demand set by the Renewable Fuel Standard by a wide margin.
The API reported draws in refined products, 2.5 million barrels for gasoline and 427,000 barrels for distillates, while crude oil stocks had an estimated build of more than 4 million barrels. The DOE’s weekly report is due out at its normal time this morning.
Click here to download a PDF of today's TACenergy Market Talk.
Equity Markets Have Been Pulling Back Sharply In Recent Days As Inflation And Trade Concerns Inject A Sense Of Reality Into Stocks
It’s a mixed bag for energy markets to start Tuesday’s session with gasoline prices holding small gains, while oil and diesel prices show small losses as the world anxiously debates what comes next in the conflict, we’re still hoping we don’t have to call a war in the Middle East.
An early sell-off picked up steam Monday morning with refined products down more than a nickel for a few minutes, before reports that Israel was vowing to respond to Iran’s attack seemed to encourage buyers step back in an erase most of the losses for the day.
Equity markets have been pulling back sharply in recent days as inflation and trade concerns inject a sense of reality into stocks that had been flying high earlier in the year. The correlation between gasoline and crude oil prices had been fairly strong for the past couple of months but has since weakened as the weakness in stocks hasn’t yet trickled over into the energy arena. Both asset classes are seeing a tick higher in their volatility (aka Fear) indices this week however, and when fear starts driving the trade, we often see these prices move together.
Diesel has been underperforming the rest of the energy complex for most of the year so far, and those hoping for lower diesel prices got more good news when the Dangote refinery in Nigeria began loading diesel for domestic use Monday, in the latest milestone for the giant project that will have a major influence on Atlantic basin supply. Naturally, local lawmakers are already complaining that the refinery’s prices are too high.
The EIA this morning highlighted the record amount of crude oil China imported in 2023 after reopening the country post-COVID and after completing numerous new refinery builds in the past few years. Russia accounted for the largest increase in shipments to China last year, as China is one of the few countries that doesn’t mind ignoring sanctions. Speaking of which, the US House is expected to take up a new vote this week on sanctioning Chinese imports of Iranian crude, which the EIA notes are often hidden by relabeling the crude to make it appear as if it originated in Malaysia, Oman or the UAE.
We’re just 2 weeks away from the startup of Canada’s long-awaited Transmountain pipeline expansion that will bring roughly 600,000 barrels/day of capacity to the Pacific basin. That new outlet is great news for Canadian producers long restricted by takeaway capacity, and bad news for Midcontinent refiners who have grown accustomed to the discounted Canadian grades. A Bloomberg article Monday noted that Iraq’s Basrah Heavy crude is most likely to be displaced by West Coast US refiners who can now buy much closer to home.
Click here to download a PDF of today's TACenergy Market Talk.