How Long Until Power Comes Back On?

Market TalkThursday, Feb 18 2021
Market Talk Updates - Social Header

How long until the power comes back on? That’s the big question being asked by millions of people across the U.S. and Mexico, and a huge proportion of the energy industry as the remnants of a brutal stretch of winter weather moves East, and the thawing out process begins. In addition to the direct impact, the trickle down effects of the collapse in oil, refined products, natural gas and ethylene production are being felt around the world

The refining hubs along the Gulf Coast from Corpus Christi to New Orleans have temperatures above freezing this morning, and should stay that way for the next week, except for a few hours tonight. If that thaw allows most plants to resume operations by the weekend, the impact of this chaotic event should be short-lived. Of course, the warm up also means that more drivers are about to hit the road, while terminals and stations that have been closed for a few days may or may not be able to come back online with supply, power and/or intact pipes to meet demand. 

If you remember the panic buying in the wake of Hurricane Harvey, it’s not hard to imagine that the next few days could create a demand spike as news of the refinery shutdowns hits the mainstream just in time for people to start leaving their homes again, and could create a preventable panic phenomenon which could create supply shortages all on its own.

The Houston ship channel was able to resume limited operations after the ice blocking shipping lanes started to break up, a most unusual occurrence that may have some Texans reluctant to use the phrase “When Hell Freezes over” ever again. 

We did see some heavy selling for about an hour Wednesday morning after a WSJ report that said Saudi Arabia was going to increase its oil output now that prices had recovered. That wave of selling wiped out the early gains for crude and product futures, but was fairly short lived and the march higher picked up later in the morning.

Basis markets continue to show strength for both gasoline and diesel grades across most U.S. spot markets, but those moves are still relatively minor compared to disruptions we’ve witnessed over the past two decades, a testament to the excess capacity in the U.S. and the softer-than-normal demand environment. In addition to stronger spot prices, numerous rack markets stretching from Arizona to Maryland have switched from seeing suppliers having to offer steep discounts to move product during the winter doldrums, to enforcing strict allocations as resupply options become questionable.

The API reported large draws in oil and diesel stocks last week, while gasoline stocks had another large build. The DOE’s weekly report is due out at 10 a.m. central today, and should give some glimpse into the impact on gasoline demand caused by the winter storms that battered the East Coast two weeks ago, that now appear quaint in comparison. Don’t expect the report to move the market much as last Friday’s data doesn’t mean much after almost 1/3 of the country’s refining capacity was forced to cut back this week.

In other non-frozen refinery news this week, Calumet laid out plans to convert part of its Great Falls Montana facility to Renewable Diesel production this week in an SEC filing, joining a long list of refiners looking to jump on the BTC/RIN/LCFS and new Canadian CFS programs that combined can offer more than $4.50/gallon in subsidies for RD production. The company also closed on the sale and leaseback of its Shreveport facility in an effort to save enough cash to survive the weak margin environment that was hammering refineries before the storms hit.

Great Falls Renewable Diesel Opportunity:

We believe Great Falls, which connects western agriculture with West Coast and Canadian clean product markets, presents one of the most compelling opportunities for Renewable Diesel production in North America. We estimate the oversized hydrocracker built in 2016 can be reconfigured to process 10-12,000 BPD renewable feedstock at the lowest capital cost per barrel of any announced industry project.   Hydrocracker conversions are typically faster to market, cheaper, and less technically challenging. In addition, the planned configuration could retain 10-12,000 BPD low-cost Canadian crude processing, providing Montana customers with clean energy and our unique specialty asphalt.  Future dual train operations are currently estimated to generate $220 to $260 million of Adjusted EBITDA assuming mid-cycle market prices and existing environmental market structure (BTC, RINs, LCFS). 
Given strong investor interest in renewables, Calumet expects to utilize third party equity for this unique opportunity, without expending Calumet funds.

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

TACenergy MarketTalk 021821

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, Dec 9 2022

Energy Futures Are Seeing Modest Gains To Start Friday’s Session

Energy futures are seeing modest gains to start Friday’s session, limping towards the finish line of a week that’s pushed prices to their lowest levels of the year, and cut 20-30 cents off of refined products. 

WTI futures have had a fairly muted reaction to news that the Keystone pipeline was forced to shut after more than ½ million gallons reportedly spilled into a Kansas creek this week. A timeline for restart is still unclear, but so far the price action suggests refiners aren’t panicking about where they’ll find replacement barrels, and those north of the spill may be rewarded with discounted barrels that now find themselves stranded, such as Western Canadian Select which is now trading down to $50/barrel.  

If RBOB can finish in the green today, it would mark the first trading day so far in December where the gasoline contract didn’t end lower, after 6 straight losing sessions. Cash markets are also looking weak, as the spread between gasoline prices in New York and the Gulf Coast dropped to its lowest level since early October this week, putting downward pressure on the price to lease space on Colonial’s Line 1. With refiners running full out to capture huge diesel margins, gasoline is becoming an unwelcome byproduct in many markets, and could become oversupplied in some regions in the near future, which could force some plants to reduce run rates. 

Distillate prices are seeing a similar convergence with the spread between Gulf and East coasts now less than 30 cents/gallon, which is more than $1/gallon lower than it was a month ago. Softer demand for both products due to the seasonal slowdown in gasoline and unseasonably warm weather limiting Heating Oil consumption are both getting credit for these cash markets suddenly returning to something more closely resembling what we’re used to seeing. 

Bad news is good news for stock markets as any negative data points may give the FED reason to slow their interest rate hikes.  Yesterday we saw stocks rally after an increase in jobless claims in the US. Today we’re seeing stocks give back some of yesterday’s gains after the PPI report showed inflation is remaining stubbornly high and above many forecasts, giving the FED another reason to continue with its tightening. Energy contracts continue to have a weak correlation to daily moves in equity prices, so it’s not too surprising we are seeing a small rally today even though stocks are pulling back.

Chinese refiners are racing to take advantage of liberal quotas this year and are expected to reach a record level of refined fuel exports this month.  Those supplies have provided a much needed supplement for a world short on distillates, but there are many questions and few answers about what they’ll look like next year.

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

Pivotal Week For Price Action
Market TalkThursday, Dec 8 2022

Refined Product Prices Are Bouncing Moderately This Morning After Selling Off Heavily For A Fifth Consecutive Trading Session Yesterday

Refined product prices are bouncing moderately this morning after selling off heavily for a fifth consecutive trading session yesterday. Heating oil futures have dropped over 50 cents per gallon since the beginning of the month as traders reconcile rebounding national distillate inventories, a warmer-than-expected European winter, dismal Chinese demand outlook, and the execution of the ban on Russian oil exports. Gasoline futures have dropped just over 25 cents so far in December while the West Texas Intermediate crude oil contract has fallen just $5 per barrel since last week.

The Department of Energy reported a 5.2 million barrel draw in crude oil inventories last week, marking the fourth consecutive week of stockpile drawdowns. On the flip side, national gasoline and diesel stocks likewise grew for the fourth week in a row, which makes sense given refineries are running near their 5-year seasonal high. Total refined product demand continued to sink, as typical of this time of year before everyone jumps in their cars to drive to grandma’s for Christmas.  

Oil futures have fallen below the $80 mark this week and have now given up all gains seen since Russia invaded Ukraine. While China’s relaxation of their pandemic policy should provide some upward pressure on oil prices, in theory, it seems most aren’t convinced the lack of restrictions will translate to increased petroleum demand.

Premiums to ship gasoline and diesel on the Colonial Pipeline (the main US’s petroleum artery going from Houston to New York) have dropped significantly over the past few days. Shippers can now move gasoline up the Eastern seaboard for “only” 9 cents above the pipeline’s tariff, which is the lowest its been since October. Moving diesel to the Northeast will run you 7 cents over costs.

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

Pivotal Week For Price Action
Market TalkWednesday, Dec 7 2022

The Downward Price Action Seen In Monday’s Trading Session Continued Into Tuesday

The downward price action seen in Monday’s trading session continued into Tuesday and energy futures charts are poised to test some significant resistance levels. Most notably, the prompt month ULSD futures contract is set to test its 100-week moving average at the ~$2.80 level, beyond which the path is open for prices to fall down to the $2.20s.

WTI crude oil futures face a tough test these next couple months as it bears down on its 200-month moving average which, if broken, could lead prices down to the $65 range. The energy complex is bouncing this morning, albeit moderately, on the news that China is abandoning its COVID testing and quarantine protocols. The mild upward price action suggests traders are hesitant to believe that will translate to a return of energy demand.

The Energy Information Administration published its monthly Short Term Energy Outlook yesterday, highlighting its higher-than-expected global oil inventory level estimate for 2023. The EIA also noted that the execution of the ban on Russian seaborne petroleum products by the European Union has rendered the future of distillate remarkedly hazy. Price direction for diesel’s home-heating counterpart seems a little easier to forecast: moderately higher prices are expected through January as winter sets in and demand ramps up.

The American Petroleum Institute reported a sizeable 6.4 million barrel draw in US crude oil inventories last week, along with builds in refined product stocks of 5.9 million barrels and 3.6 million barrels of gasoline and diesel, respectively. The official report published by the Department of Energy is due to come out at its regular time this morning (9:30am CST) and its confirmation or contradiction of the API’s estimate will likely determine the day’s trading sentiment.

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