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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Energy Futures Are Drifting Quietly Higher This Morning
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Energy Futures Are Drifting Quietly Higher This Morning
Energy futures are drifting quietly higher this morning as a new round of hostage negotiations between Israel and Hamas seem to show relative promise. It seems the market is focusing on the prospect of cooler heads prevailing, rather than the pervasive rocket/drone exchanges, the latest of which took place over Israel’s northern border.
A warmer-than-expected winter depressed diesel demand and, likewise, distillate refinery margins, which has dropped to its lowest level since the beginning of 2022. The ULSD forward curve has shifted into contango (carry) over the past month as traders seek to store their diesel inventories and hope for a pickup in demand, domestic or otherwise.
The DOE announced it had continued rebuilding it’s Strategic Petroleum Reserve this month, noting the addition of 2.3 million barrels of crude so far in April. Depending on what the private sector reported for last week, Wednesday’s DOE report may put current national crude oil inventories (include those of the SPR) above the year’s previous levels, something we haven’t seen since April of 2022, two months after Ukraine war began.
The latest in the Dangote Refinery Saga: Credit stall-out, rising oil prices, and currency exchange.
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Refined Products Holding Close To Break Even While Oil Prices Are Losing Just Under 1%
Energy markets are vacillating this morning with refined products holding close to break even while oil prices are losing just under 1%.
Negotiators are meeting in Egypt this week to try and hammer out a truce in Gaza, even as Israeli airstrikes intensify. The Red Sea has continued to be active after a few weeks of relative calm, with multiple strikes reported over the weekend and another this morning.
Ukrainian drones targeted two more Russian oil refineries over the weekend, and at least one facility was reportedly taken offline as a result which means two things: Ukraine isn’t listening to US requests to stop targeting refineries, using nets to protect refineries isn’t working yet.
The CFTC’s weekly Commitments of Traders report gave a glimpse into the speculative liquidation (AKA clowns exiting the Volkswagen) that occurred in energy contracts after the direct conflict between Iran and Israel fizzled. Money managers saw heavy long liquidation, with both Brent and WTI dropping nearly 10% on the week. The only contract to see an increase in net length in last week’s report was ULSD, which had been the weak link in the complex for most of the year. ULSD did see a healthy amount of length liquidated, but that was offset by short covering as prices reached 5-month lows to create a very small net increase.
Baker Hughes reported a drop of 5 oil rigs and 1 natural gas rig drilling in the US last week, with Louisiana accounting for the majority of the decline. Pipeline capacity continues to be a limiting factor for many producers, and an RBN energy blog this morning suggests that things are about to get worse in the Permian when major pipeline maintenance occurs in June.
A fire was reported at CVR’s Wynnewood Oklahoma refinery over the weekend, although it’s unclear if the deadly storms that swept through the region played a role in that event.
Marathon’s Galveston Bay refinery reported an upset Friday that knocked a coking unit offline, but said operations were already resuming. That facility was the most-frequent TCEQ reporter last year but has been relatively quiet over the past couple of months.
Today’s interesting read courtesy of the Financial Times: How Europe solved its Russian gas crisis.
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Markets Rallying To End The Week, Diesel Prices Lead The Way For Energy
Energy markets are rallying to end the week, with diesel prices leading the way up 2.5 cents in the early going. Equity markets are also rallying after a big Thursday selloff as strong tech earnings seem to be outweighing the FED’s favorite inflation gauge remaining stubbornly high.
RBOB gasoline futures are trading higher for a 4th straight day, but despite bouncing nearly 14 cents from Tuesday’s low, they still need to rally another nickel to break the downward sloping pattern forming on the weekly charts. Seasonal factors could go either way for gasoline for the next few weeks as we’re in the Spring peaking window, and while the high set April 12th would fit the annual pattern nicely, a May price peak is certainly not unusual, and if $2.85 is broken it seems like RBOB will run to $3 in a hurry.
Diesel prices have bounced 7 cents after touching a 5-month low on Monday but need to climb back above $2.60 to reduce the chance of a slide to $2.20 or lower should the chart support around $2.50 break down.
Back to the shadow war: After a relatively quiet few weeks in the Red Sea, Houthi attacks on ships have started again over the past few days, although so far, no major damage has been reported.
ExxonMobil reported another strong quarter in Q1 with more than $10 billion in free cash flow generated, even though earnings in its refining segment were down 67% from the first quarter of last year. The company noted the success of its Beaumont refinery expansion that came online last year and marked the only major refinery expansion in the US in over a decade. It's worth noting that within the refining segment, international earnings suffered more than domestic facilities did, with non-US refining earnings down 77% from a year ago as crack spreads came back to reality after the record-setting quarters in 2022 and 2023.
Chevron followed a similar pattern (as expected) in its Q1 report, noting strong operating cash flows of $6.8 billion in total, despite downstream earnings falling more than 56% for the quarter.
The company also highlighted its expanding marketing network along the US West and Gulf Coast markets encompassing more than 250 retail stations and highlighted its new solar-to-hydrogen project in California.
Phillips 66 continued the trend, reporting a “strong” quarter in which earnings were 63% lower than a year ago. The company highlighted the conversion of its Rodeo refinery which is now producing roughly 30mb/day of RD and is expected to ramp up to 50mb/day in the 2nd quarter. That facility had a capacity of more than 120mb/day prior to its conversion, and it used to produce gasoline along with its diesel. The company also noted its ongoing plans to sell assets that no longer fit its strategy, highlighting retail assets in Germany and Austria as being on the chopping block, while not mentioning any of its US refining assets that have long been rumored to be for sale.
Delek reported another upset at its Alon Big Spring refinery Thursday, which has become another one of the TCEQ’s frequent fliers after suffering damage from the cold snaps in both 2021 and earlier this year.
A harsh reality sinking in: Mexico’s President has made plenty of headlines with fictitious claims of energy sovereignty in the past few years, but not only is the country’s new Dos Bocas refinery still not producing finished products on any sort of meaningful scale, two of its other facilities have suffered fires recently forcing the country to import even more product from the US. This phenomenon continues to help US Gulf and West coast refiners who would be struggling (even more) to move their excess with sluggish domestic demand.
Click here to download a PDF of today's TACenergy Market Talk.