Equity Markets Rallied To Fresh Record Highs Wednesday After The FED Increased Its GDP Estimates For The US
Energy futures are moving modestly lower for a 2nd day as the attacks on Russian refineries seem to have subsided. ULSD futures are once again leading the move lower and are now down more than 12 cents since Monday, while RBOB and WTI are still acting like this pullback is just a brief consolidation during a larger move higher.
Equity markets rallied to fresh record highs Wednesday after the FED increased its GDP estimates for the US, and stuck to its outlook that it would likely cut interest rates 3 times later in the year. Even though the correlation between equity price moves and gasoline and crude oil prices have strengthened lately, and those prices did end the session off the lows, it doesn’t seem like the enthusiasm in the stock market is carrying over as much into the energy arena as it’s done in years past. ULSD prices meanwhile continue to have essentially no relationship to moves in stocks and continue to look weak even though the rest of the complex looks like it wants to push higher for a real spring rally.
The DOE’s weekly report echoed the sentiment that gasoline and oil prices have some momentum while diesel has plenty of headwinds.
Gasoline inventories continued to follow their seasonal pattern and declined for a 7th straight week as we pass the half-way point of the spring RVP transition. While domestic demand for gasoline is average-at-best, export demand for gasoline remains strong at north of 1 million barrels/day which is helping keep inventories in check and preventing margin erosion for refiners. Roughly half of all US gasoline exports go to Mexico, who despite outlandish claims by its President is nowhere near reaching refined fuel sovereignty based on the actual data since its existing refineries are operating at less than 50% of capacity (vs 90% for the US) and its new Dos Bocas refinery still isn’t producing fuel despite many claims to the contrary.
Diesel inventories increased for a 2nd week, with low PADD 1 stocks probably the only thing preventing a more dramatic drop in futures. PADD 3 diesel inventories are above average, PADD 4 is close to a record high and PADD 5 stocks are severely understated due to Renewable Diesel not showing up in the stats. PADD 2 inventories did pull back again from near record levels, but with BP whiting back up to full rates, that trend may soon reverse. Exports have not yet come to the rescue of sluggish domestic diesel demand, but that’s expected to change in coming weeks as international buyers have to replace barrels that Russia has lost to the drone attacks on its refineries.
Speaking of which, the expected shift of Russian exports from refined product to crude oil thanks to the successful drone campaign damaging facilities is already seeing logistical complications due to the change in tankers needed, and the sanctions on the fleet. While there’s no doubt the big trading houses will eventually find loopholes to work around this issue like they did in 2022, but those changes will take time.
PADD 2 refinery runs show the impact of the BP restart, with throughput rates going from below average to above the 5-year range in just one week. PADD 3 run rates dipped after 4 straight weeks of gains as another rash of unplanned upsets kept the Gulf Coast total throughput in check.
Natural Gas to gasoline is alive. Next Wave Energy announced the start of commercial operations of its Houston facility that’s been in the works for more than 5 years. The plant turns natural gas liquids into 96 octane alkylate that can then be further blended into the gasoline pool, particularly the premium grades. Next up the company is looking at options to make renewable diesel and SAF at the facility, but they may want to wait a couple years on that one given the current challenging economics of renewables.
News & Views
View AllEnergy 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.