Energy Prices Pause After Furious Rally
A slow warmup in temperatures, and a cool down in U.S. equity markets has energy prices pausing after a furious rally that has pushed gasoline prices to 1.5 year highs.
While electricity has been restored to the majority of homes taken offline by the extreme weather this week, power is still a major bottleneck for fuel distribution at the terminal level as the orders to (justifiably) focus on getting supply to those at risk of freezing over industrial demand mean that many fuel supply locations can’t yet load trucks, just as those trucks are starting to get back on the road. Fuel outages at retail stations across the state of Texas are growing, and are likely to spread for at least a couple of days as the restart races for businesses of all varieties begin.
A Bloomberg report Thursday suggests that four of the largest refineries in TX could take weeks to restart, and if those estimates are accurate, it’s likely other plants in the region could face similar challenges as damage done by frozen pipes and instruments could become a complicated theme of repair work. A handful of refineries are already attempting to restart units over the past 24 hours, but we won’t know until Monday how those efforts are progressing.
Cash markets don’t seem too fazed by those reports, as gains in basis values continue to be fairly small despite the widespread refinery upsets. Gulf Coast gasoline transitioned to March cycles this week, meaning they’re trading against the summer-spec April RBOB contract. Don’t be surprised to see RVP waivers granted by the EPA to try and alleviate supply bottlenecks in the coming weeks.
Colonial pipeline continues to report that it’s operations are ongoing without shutdowns due to the power issues, although it appears the schedules may have slipped a few days as the main origin points in Houston/Pasadena/Pt Arthur/Beaumont and Lake Charles are all struggling with refinery closures and other power/freezing challenges.
The DOE weekly report showed a large crude oil inventory and a tick up in product demand that helped limit the selling in Thursday’s session, just as it was beginning to snowball. The crude decline was driven almost entirely by a large increase in exports of more than 1.2 million barrels/day, while refinery runs were close to flat (up just 26mb/day) on the week. With refinery runs estimated to be down 20% or more this week, shipping lanes frozen and Permian oil output estimated to be down 40% or more, we should see some record setting figures in next week’s report.
The EIA published a closer look at the supply & demand of electricity in Texas over the past week, detailing how almost all sources of power in the state saw output reduced right as demand was peaking. The charts they provided are a stark reminder of the challenges each form of electricity generation faces, and suggests the lofty plans to run all cars on electric power in the next 20 years is going to be easier said than done.
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Energy Markets Are Holding Steady To Start Tuesday’s Session
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Energy Markets Are Holding Steady To Start Tuesday’s Session
Energy markets are holding steady to start Tuesday’s session after oil prices had their biggest rally of the year Monday.
Reports that Iraq had halted shipments on the Ceyhan pipeline through Turkey, which removed 400,000 barrels/day of exports from the world market temporarily were given much of the credit for the big move higher. The rally in oil came just a week after large speculators reduced their bets on higher prices to the lowest level in 7 years, providing yet another reminder of why the moves made by hedge funds is often seen as a contrary indicator of market direction.
Refined products touched a 2-week high overnight before pulling back to modest losses this morning but remain in the middle of their March trading range, which sets the stage for more choppy back and forth action as markets around the world search for direction and worry about what’s coming next.
California approved the bill that will create a new committee within the state’s energy commission that will oversee oil refiners and potentially levy penalties on them if they’re deemed to be making too much money on consumers. The state has already had a handful of refineries close down in the past 6 years, with another scheduled to close and convert to an RD facility in early 2024, and there’s no doubt that this new law may be yet another reason for the remaining facilities to consider closing their doors as well, which many will see as a victory.
The Dallas FED’s manufacturing Survey showed a small increase in production in March, after February showed a contraction for the first time since the COVID lockdowns. The business outlook remains mixed however as many noted uncertainties around the banking situation, along with continued supply chain and labor challenges as factors hindering growth.
New competitor for feedstocks? A moose breached the security gates at the refinery in Sinclair Wyoming Monday. No word if the animal was just lost, or searching for the soybeans that are now being used to make renewable diesel at that facility.
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Energy Futures Rebound to Start the Week
Energy futures are bouncing to start the week, following through on a recovery rally that saw Friday’s early losses wiped out and salvaged weekly gains.
Money managers have been bailing out of their bets on higher energy prices in recent weeks, and as the CFTC’s data is finally catching up after 2 months of delays, we can finally see those figures the same week they’re compiled. The past two weeks alone have seen a reduction of more than 100,000 WTI contracts held by large speculators, bringing the total net length to the lowest level since January 2016.
The COT data also shows large reductions in producer hedging during this latest selloff in a sign that the industry may believe that prices won’t stay this low for long.
A WSJ article over the weekend highlighted how the options traders may have exacerbated the push lower over the past two months and could help spark a recovery rally later in the year.
Baker Hughes reported an increase of 4 oil rigs drilling in the US last week, snapping a 5-week slide that had pushed drilling activity to a 9-month low. The Permian basin accounted for 3 of the 4 rigs added last week.
Iraq won a 9-year lawsuit against Kurdish oil shipments, and that result has temporarily halted shipments of oil from the autonomous Kurdish region via the Turkish Ceyhan pipeline system.
Saudi Arabia announced an expansion of its partnership with China, increasing its multi-billion investment in new refining infrastructure in the world’s largest oil buyer. We’ve already seen multiple new refinery projects come online in both countries over the past two years, and this new agreement will continue the trend of additional capacity in the eastern hemisphere while the west continues to see declines.
Click here to download a PDF of today's TACenergy Market Talk.
Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
Oil prices are leading a slide lower to end the week after the US government walked back plans to buy oil since it’s dropped below $70, and the latest ripples in the banking crisis push stocks lower and the dollar sharply higher after it touched a 2-month low Thursday.
Even though the correlation between energy prices and stocks or currencies has been weak lately, or even opposite of normal in the case of the dollar, there still seems to be more influence lately as the fear trade has funds flowing back and forth between markets depending on whether or not risk-taking is in style that day.
The US Energy Secretary told congress that the agency won’t be refilling the SPR this year, despite previous pledges by the White House to buy oil when it dropped to $70, since the agency is still working through congressionally mandates sales of oil from the reserve. That news seems to be contributing to the downside in WTI and Brent prices as traders hoping to front run the DOE are now going to have to wait a while longer to do so.
Even though ULSD prices are up 17 cents from the lows set last week, they’re still on the verge of their lowest weekly settlement since January of 2022 should prices end the day near current levels. Given that this week’s recovery rally failed to take out the highs seen in previous weeks, charts continue to look bearish for distillates. Another run at $2.50 looks more likely and a break below that level, when the May contract takes the prompt position in another week, may be a foregone conclusion.
As has been the case for most of March, RBOB look as bad as ULSD on the charts, although that certainly isn’t helping so far today with gasoline futures outpacing the losses in diesel. Unless we see RBOB end the day down a dime or more (it’s down a nickel currently) the weekly trend will still be higher, and the charts will still be giving favor to another push towards $2.80-$3 this spring.
The LA spot market saw a healthy bounce in gasoline basis values Thursday following multiple refinery upsets in the area reported to local regulators. Meanwhile, the California Governors new plan to create an oversight committee to prevent price gouging – a major change from earlier proposals to levy a new tax on oil producers and refiners – passed through the Senate on Thursday. If this new bill is fully passed, it will allow the Governor to appoint that committee himself. A 1,000-page prediction of how that plan will work is available for less than $10 on Amazon.
Click here to download a PDF of today's TACenergy Market Talk.