Energy Futures Tread Water

Market TalkThursday, Nov 19 2020
Market Talk Updates - Social Header

Energy futures are treading water to start Thursday’s trading with diesel and oil prices on the cusp of multi-month highs. So far buyers seem reluctant to keep pushing bids higher with warning signs for demand flashing around the country as shutdown orders continue to expand from coast to coast.

ULSD futures settled north of $1.26 for the first time in July, and are now threatening the $1.30 level that’s kept a lid on all rallies since March. If $1.30 breaks, next stop will be 1.38 which is where the diesel chart gapped during the price meltdown last spring when the first round of stay-at-home orders hammered prices. 

It’s no coincidence this relative strength in diesel prices coincides with an improving supply/demand balance as yesterday’s DOE report showed total U.S. inventories returned to their five year seasonal range for the first time since April. The weekly demand estimate for diesel was actually slightly above the five year average for this time of year, and just 100,000 barrels/day below year-ago levels. Steeply backwardated diesel markets into December suggests that cash traders aren’t believing this strength can last through the holidays. 

Basis values for distillates rallied in most regional markets Wednesday as the temporary tightness pushed up bids. Group 3 diffs were pushed to a multi-year high as inventories in the region reached a new eight year low. That rally was overshadowed by an even larger move by the notoriously volatile Chicago spot market, with rumors that the largest refiner in the area may soon be idling some units. The only cash markets not moving higher on the day were in Northern California and the PNW which had been trading at lofty premiums and started their seasonal return to reality.

While distillates are enjoy a resurgence, gasoline is staring at an ugly fundamental reality, as stocks look like they’ve started their annual build while demand faces the combination of the typical seasonal slowdown on top of a growing list of shutdown orders throughout the country. The DOE’s weekly gasoline demand estimate fell to a 22 week low last week, and evidence at the terminal level suggests we are likely to see more declines ahead. This diverging fundamental path for the two major refined products suggests refiners will be forced to make another shift in their production to favor distillates over gasoline, similar to what we saw in the spring.    

Total refinery runs increased last week, led by a large move higher in the Gulf Coast. Ordinarily we’d expect refinery run rates to continue moving steadily higher through the end of the year, but with two shutdowns coming in November, and so much uncertainty surrounding demand this winter, it seems like we may be seeing U.S. run rates close to peaking until spring.

Click here to download a PDF of today's TACenergy Market Talk.

TACenergy MarketUpdate 111920

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, May 17 2024

The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, May 16 2024

Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action