Energy Markets Trying To Figure Out Potential Impacts Of A Major Hurricane
It’s already been a volatile week of trading and it’s only Tuesday morning. Equity markets around the world are being roiled by trade concerns and rising interest rates, while energy markets are trying to figure out the potential impacts of a major hurricane and refinery fire.
After dropping nearly 2% to start the week, refined products rallied back to positive levels as news broke of an explosion and fire at Irving Oil’s 320mb/day refinery in St. John New Brunswick, Canada’s largest refinery, which is a major supplier of gasoline and diesel to the East Coast.
It’s unclear yet what impact that may have on fuel supplies and prices as it’s still unclear which units were effected, and how long they may be out of service. New York harbor basis values largely shrugged off the news since the largest units at the plant were already off-line for scheduled maintenance.
As the charts below show, New England (PADD 1A) may see the most impact from any downtime at the Irving refinery given its proximity to the refinery, relatively small size (only 7% of total PADD 1 gasoline stocks) and starting inventory levels that are within their seasonal range, albeit at the top end. PADDs 1B & 1C meanwhile are well above their previous 5 year ranges for gasoline inventories, and given their larger total capacity, which could explain the muted reaction in the NY Harbor trading hub.
While the East Coast of Canada was dealing with the shock of a major refinery issue, Western Canadian crude oil prices traded down to the $30/barrel mark for the first time since December 2016 as refinery maintenance in the US and a lack of pipeline capacity forces prices to record discounts of nearly $45/barrel to WTI and $55 less than Brent. For perspective, the last time WCS was trading at $30, WTI was at $44 and Brent was at $45, compared to $74 and $85 today.
Hurricane Michael is now a Category 2 storm, and is expected to become a Category 3 storm before making landfall along the Florida panhandle Wednesday. While several off-shore oil rigs have been evacuated as a precaution as the storm nears, its path keeps it far enough east that it should not have a lasting impact on energy supply infrastructure. The storm could have a larger impact on demand as it targets Florida, Georgia, and perhaps some areas of the Carolinas still recovering from Hurricane Florence.
The IEA continued with its series of analytical reports focusing on “blind spots” in the global energy system with a report on renewables Monday. The report estimated that renewables would account for 40% of total global energy consumption growth in the next 5 years, and while Solar capacity will see the largest increases, biofuels will remain the largest segment of renewable energy supply.
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Energy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
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WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.