Energy Markets Rally: Bulls Charge Ahead Amidst Ceasefire Rejection and Strong US Earnings

Market TalkThursday, Feb 8 2024
Pivotal Week For Price Action

Energy markets are rallying for a 4th straight day, with refined products once again leading the charge after some bullish inventory data Wednesday. Adding to the bullish fervor this week are reports that a Gaza cease fire plan has been rejected, and strong earnings from US businesses have the S&P 500 within a few ticks of reaching the 5,000 mark.

RBOB futures came within 3 points of reaching a 3-month high overnight, and charts continue to favor a strong move higher as we move towards spring. The DOE’s weekly report added a fundamental argument for the spring rally, with lower refinery runs and a big increase in estimated gasoline demand last week. The official diesel demand estimate remains at the low end of the seasonal range as it has been for most of the past 2 years, but when you factor in the missing consumption that’s going to Renewable Diesel, the true value looks much closer to the 5-year seasonal average.

Gulf Coast refinery runs dropped for a 3rd straight week and were down more than 1.5 million barrels/day over that stretch. We should see run rates start to increase next week as multiple large refineries are starting to return from their maintenance activity this week, most notably Motiva’s Port Arthur facility that’s had its largest crude unit down on planned turnaround for a month. 

Mid Continent refiners are seeing the opposite pattern, as run rates surged back above their 5-year range last week as facilities seem eager to maximize output before their Canadian crude discount shrinks later in the year. PADD 2 run rates are expected to drop sharply in next week’s report following the unplanned downtime at BP Whiting, the largest refinery in the region, with this week’s restart efforts appearing to be mediocre at best, driving a healthy rally in basis values.

The difference in refinery runs between the Midwest and Gulf Coast regions remains painfully obvious in the inventory charts, with PADD 2 stocks holding at the top end of their seasonal range, while PADD 3 stocks have plunged to the low end of theirs. The challenge with this of course is that PADD 2 facilities are largely land-locked and can’t rely on exports to ease their glut and may instead end up relying on refinery run cuts, planned or otherwise to balance the equation.

US Crude oil producers only needed two weeks to recover from the January freeze, with total output returning to an all-time high (for any country in the world) of 13.3 million barrels last week. The EIA still appears to be figuring out its accounting system however, as the Crude Adjustment factor dropped to a negative 1.6 million barrels last week, suggesting 11 million barrels of oil just vanished from their figures. If you’re hoping for lower prices, you may note that despite 11 million barrels of oil going missing last week, the official estimate of inventory still increased.

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Market Update 2.8.24

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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Pivotal Week For Price Action
Market TalkWednesday, Feb 21 2024

It’s A Mixed Start For Energy Markets To Start Wednesday’s Session After A Heavy Round Of Selling Tuesday

It’s a mixed start for energy markets to start Wednesday’s session after a heavy round of selling Tuesday. RBOB gasoline futures are clinging to modest gains in the early going while the rest of the complex is moving lower.  

WTI is pulling back for a 2nd day after reaching a 3.5 month high just shy of $80. The pullback pushes prompt values back below the 200-day moving average, reducing the likelihood of a breakout to the upside near term.

ULSD values are down nearly 10 cents for the week and are down more than 26 cents from the high trade set February 9th. That pullback leaves ULSD in neutral territory and could act as a headwind for gasoline prices that still seem poised to at least attempt a typical spring rally that adds roughly 20-30% from winter values.

RIN prices continue their slide this week, with D6 and D4 values reaching new 4-year lows around $.41/RIN Tuesday, which is down just slightly from the $1.62/RIN they were going for a year ago.

HF Sinclair reported a loss for Q4 this morning, with its refining and renewables segments each losing roughly $75 million for the quarter. The change from a year ago in the refining segment is a harsh reminder of the cyclical nature of the business as earnings dropped more than $800 million year on year, with inventory cost adjustments accounting for roughly ¼ of that decline.   

While it wasn’t mentioned in the press release, HFS has the most direct exposure to New Mexico’s recent approval of a clean fuel standard that will start in 2026. That law will no doubt help the company’s struggling Renewables assets in the state but will also create extra costs for their traditional refining operations.

The EIA this morning noted that conditions in the Panama Canal improved slightly in January, allowing Gulf Coast exports to Asia, primarily of Propane and ethane, to increase. While transit capacity is still far below levels we saw before the drought reduced operations in the canal, any improvement offers welcome relief to shippers as they can avoid going the long-way around to avoid the violence in the Red Sea.

France’s navy didn’t waste any time getting into the Red Sea action, shooting down a pair of Houthi Drones less than a day after joining the EU’s official mission to assist in clearing the shipping lanes. It’s not yet clear whether this marks the first official military victory by the French since Napoleon. 

Reminder that the weekly inventory reports are delayed a day due to the holiday Monday.

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