Energy Futures Had A Big Rally On Friday
Energy futures had a big rally on Friday, and are following through with higher prices to start the short week as a pair of major supply disruptions, one actual and another potential, grip the market. ULSD continues to lead the move higher and came within striking distance of setting a new high for December overnight, marking a rally of more than 60 cents/gallon since bottoming out 2.5 weeks ago.
Russia threatened to cut its oil output in retaliation for sanctions on Friday, which sounds scary but may actually have to do more with limited options to sell and transport some of the nation’s production than a strategic plan to strike back at nations participating in the embargo.
Numerous refineries were knocked offline by the winter storm last week, including several of the largest in the country. Refineries accounting for approximately 18% of total US capacity had units reported offline over the weekend, although the total number of facilities impacted is likely to be much higher, which could place this event in the top 5 all time for disruptions. The steady stream of reports of refineries dropping had basis values for gasoline and distillates rallying in addition to the strong move higher in futures on Friday as the big physical shippers were scrambling to find replacement barrels.
Much warmer temps are sweeping the country allowing damage to be assessed and restarts to begin. While there’s never a good time for a mass refinery disruption, the week between Christmas and New Years typically has the weakest demand of the year, so may limit the impact of these shutdowns on the market. The timing is also likely to encourage some of those facilities to move up maintenance to take advantage of units already being offline and demand being weak. Oil and natural gas output was also hit by the huge storm, but it appears that the electric grids held up well in most cases, unlike what we experienced in early 2021.
The disruptions weren’t limited to production and refining facilities. Numerous terminals and pipelines across the country were reporting various issues, and vessel traffic in and around the NY Harbor was temporarily halted as the storm passed. Here too the impacts may have been much worse if they hadn’t happened just after the pre-holiday rush and just before Christmas day, which marks the slowest day for terminal loadings of the entire year.
Money managers were jumping back on the energy bandwagon last week with large percentage increases in net length seen across the board. While the percentage increases are large, the starting positions were fairly small, so the actual number of contracts added was less impressive. New length and short covering were consistent for crude and products, while open interest continues to hover near 6 year lows.
Baker Hughes reported 2 more oil rigs and 1 more natural gas rig drilling in the US last week, after both counts had declined in the prior 2 weeks. Drilling activity in the US has stagnated over the past couple of months as lower prices and various supply chain and labor shortages continue to have producers acting conservatively.
Keystone pipeline received approval to restart its shuttered line on Friday, with flows to the Cushing OK hub expected to resume this week.
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View AllWeek 48 - US DOE Inventory Recap
The API Reported Gasoline Inventories Dropped By 898,000 Barrels Last Week
Gasoline and oil prices are attempting to rally for a 2nd straight day, a day ahead of the delayed OPEC meeting, while diesel prices are slipping back into the red following Tuesday’s strong showing.
The API reported gasoline inventories dropped by 898,000 barrels last week, crude inventories declined by 817,000 barrels while distillates saw an increase of 2.8 million barrels. Those inventory stats help explain the early increases for RBOB and WTI while ULSD is trading lower. The DOE’s weekly report is due out at its normal time this morning.
A severe storm on the Black Sea is disrupting roughly 2% of the world’s daily oil output and is getting some credit for the bounce in futures, although early reports suggest that this will be a short-lived event.
Chevron reported that its Richmond CA refinery was back online after a power outage Monday night. San Francisco spot diesel basis values rallied more than a dime Tuesday after a big drop on Monday following the news of that refinery being knocked offline.
Just a few days after Scotland’s only refinery announced it would close in 2025, Exxon touted its newest refinery expansion project in the UK Tuesday, with a video detailing how it was ramping up diesel production to reduce imports and possibly allow for SAF production down the road at its Fawley facility.
Ethanol prices continue to slump this week, reaching a 2-year low despite the bounce in gasoline prices as corn values dropped to a 3-year low, and the White House appears to be delaying efforts to shift to E15 in an election year.
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Values For Space On Colonial’s Main Gasoline Line Continue To Drop This Week
The petroleum complex continues to search for a price floor with relatively quiet price action this week suggesting some traders are going to wait and see what OPEC and Friends can decide on at their meeting Thursday.
Values for space on Colonial’s main gasoline line continue to drop this week, with trades below 10 cents/gallon after reaching a high north of 18-cents earlier in the month. Softer gasoline prices in New York seems to be driving the slide as the 2 regional refiners who had been down for extended maintenance both return to service. Diesel linespace values continue to hold north of 17-cents/gallon as East Coast stocks are holding at the low end of their seasonal range while Gulf Coast inventories are holding at average levels.
Reversal coming? Yesterday we saw basis values for San Francisco spot diesel plummet to the lowest levels of the year, but then overnight the Chevron refinery in Richmond was forced to shut several units due to a power outage which could cause those differentials to quickly find a bid if the supplier is forced to become a buyer to replace that output.
Money managers continued to reduce the net length held in crude oil contracts, with both Brent and WTI seeing long liquidation and new short positions added last week. Perhaps most notable from the weekly COT report data is that funds are continuing their counter-seasonal bets on higher gasoline prices. The net length held by large speculators for RBOB is now at its highest level since Labor Day, at a time of year when prices tend to drop due to seasonal demand weakness.
Click here to download a PDF of today's TACenergy Market Talk.