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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View AllRefined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.