Huge Draws In Refined Product Inventories

Market TalkWednesday, Mar 3 2021
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The four-month-old bullish trend that’s nearly doubled prices for oil and refined products is coming under pressure this week, but so far buyers have been willing to step in each time the chart support is tested. We saw another attempted selloff overnight that pushed WTI below $60, only to see another recovery this morning. This is similar to the back and forth pattern we saw Tuesday morning, which turned into a wave of selling just before the close in the afternoon.    

If the bullish trend line finally breaks, we could easily see a $8-10 drop in oil prices and 20-25 cent drop in products over the next month in what could be considered nothing more than an ordinary correction of a major bull market move. If the trend holds however, there’s still a decent fundamental argument for products to rally above $2 this spring and for oil to test $70.

The API’s weekly report was said to show huge draws in refined product inventories last week, as demand recovered faster from the Polar plunge than refineries. Both gasoline and diesel inventories were estimated to be down by more than 9 million barrels/day according to the reports, while crude supplies increased by more than seven million barrels as plants were struggling to restart their processing units. The DOE’s weekly report will be out at its normal time this morning.

Those inventory drawdowns are tangible in markets across the South West and Mid Continent regions, with basis values and rack spreads continuing to spike in several markets this week, with Group 3 ULSD continuing to find itself in the most unusual position as the most expensive diesel in the country, trading at a 20+ cent premium to futures this week. (Charts below) The near term supply situation is getting worse across parts of Texas and the Southwest as refiners continue to struggle with lingering damage that’s slowing restart attempts, and short term outages continue to pop up in New Mexico, Texas, Oklahoma, Arkansas and Louisiana.

For the most part, outages have been limited to diesel and premium gasoline, while regular grades are benefitting from the temporary RVP waivers and relative ease of production they bring. Coastal markets don’t seem to be feeling the squeeze, even though allocations are still not as wide-open as they might normally be this time of year. One thing to watch out for in the coming weeks is premium gasoline supply, which often runs out during the RVP transition given its relatively low demand, and promises to be even more of a challenge this year with refinery output slipping.

RIN prices reached their highest levels since 2013 in Tuesday’s session on the back of stronger grain prices, and expectations for stricter standards to come from the new administration.   

The House Committee on Energy and Commerce introduced a new bill that intends to set the U.S. on a path towards zero emissions by 2050, in accordance with the Paris climate agreement. The thousand-plus page bill covers a wide variety of topics, and essentially all sectors of the energy industry, including some tweaks to the RFS. Grant programs to fund various waste-to-fuel programs will be a key topic as the race to produce renewables is setting up a feedstock shortage in the coming years. The bill also includes provisions that refineries requesting exemptions from the Renewable Fuel Standard must share their information publicly. 

Meanwhile, the API is reportedly preparing a statement to endorse setting carbon emissions pricing as a way to set a viable economic path towards reaching the Paris agreement. Needless to say, the oil industry group’s plan is expected to look quite a bit different than the one being floated in the House.

OPEC & Friends hold their official meeting tomorrow, so expect the rumor mill to be cranked up over the next 24 hours and keep the oil & product markets on edge. 

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Market TalkFriday, Dec 1 2023

“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week

“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year. 

Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports. 

Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.

Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.  

Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums. 

Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.

The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.

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

Pivotal Week For Price Action
Market TalkThursday, Nov 30 2023

No Official Word From OPEC Yet On Their Output Agreement For Next Year

Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.   

There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move. 

We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.

It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.

Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.

Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.

The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver. 

The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.  

Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.

More refineries ready to change hands next year?  With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action