A New Read On Inflation, That Continues To Hold Near 40 Year Highs Sparked A Wave Of Heavy Selling Pressure
Energy markets were trading higher for a 2nd day, moving the complex further away the technical support that threatened an end to the 2 month rally on Monday.
Some bullish fundamental data from the weekly DOE report and OPEC’s monthly report seemed to be encouraging buyers to continue to step in after the big selloff earlier in the week
A new read on inflation, that continues to hold near 40 year highs looks like it sparked a wave of heavy selling pressure into the complex shortly after 8am central, knocking refined products 3-4 cents below their overnight highs, which should make for some volatile action to end the week.
OPEC increased its global demand estimates for the year, and lowered its supply estimates as the end of Omicron and a tick up in industrial activity are expected to drive consumption while supply networks will need longer to sort through their logistical bottlenecks. The cartel’s oil production continued to increase, but at a slower pace than had been forecast as declines in Venezuela, Libya and Iraq offset the increases from Saudi Arabia, Nigeria and the UAE.
Cause & Effect: While the weekly moves in the DOE report weren’t particularly notable, the historical perspective makes a strong argument for the strong prices we’re seeing in several markets.
US Crude oil inventories reached a 3.5 year low last week, and production continues to be slow to return, both of which seem to be aiding the move back above $90 for WTI this morning.
Gasoline inventories made their first decline in 6 weeks as demand surged ahead of the winter storm. If in fact gasoline stocks are making the turn from winter build to spring drawdown, they’re doing so from a much lower level than the past few years, and with refining capacity much lower than it was pre COVID shutdowns, the early draw puts the supply network at risk of more challenges as we approach the driving season.
Want to see why Midwestern diesel prices have been trading 20 cents or more below their coastal counterparts? Take a look at the diesel inventory charts below where PADD 2 is the only region in the country with stocks that aren’t below their 5-year seasonal range. Midwest refiners are contributing to the excess, with run rates well above their seasonal norms, and 10% above last year’s rates.
This coming week marks the 1 year anniversary since the biggest disruption in refinery runs on record, and while we did see a handful of refinery shutdowns from last week’s storm, the impact will pale in comparison to the dramatic drops you can see on the refinery run charts below.
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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.