Hurricane Lee Stirring Up Buying Interest From Traders As It Could Threaten Demand Along the East Coast

Market TalkFriday, Sep 8 2023
Pivotal Week For Price Action

Refined product prices are rallying sharply this morning with both RBOB up 7 cents and ULSD up 9 in the early going as category 5 hurricane Lee looks like it will move too close for comfort along the East Coast next week. While forecast models keep this huge storm offshore as it moves past the major population centers along the coast, the slow movement and sheer size of the system make it seem inevitable that there will be disruptions to vessel traffic in and around the New York Harbor delivery hub, which seems to be stirring up buying interest from traders who aren’t willing to go short into the weekend with this type of threat looming.  The latest models also suggest that the Irving refinery in St John New Brunswick, which is a major importer to the Northeastern US, is still in the cone of uncertainty so a direct hit can’t yet be ruled out. 

In addition to the supply threats, the storm will have widespread impacts on demand along the East Coast as it moves slowly north next week. We’re already seeing some modest levels of prepping spurring more demand in the region, which could turn into all out panic buying if the forecast models move slightly west, and then we’ll see a big drop-off in demand as the storm passes as heavy rains are expected to hit the major population centers across the I95 corridor. The fall RVP transition adds another layer of complication to this event as retailers and terminals would normally try to run inventories down ahead of the move to winter-grade supply but will now be shifting gears and trying to fill up as the delays in vessel traffic will no doubt cause some terminal supply issues in the region which has been sitting on low inventory levels for most of the year.  

Away from the East Coast, gasoline inventories remain near the low end of the seasonal range for most markets according to the DOE’s weekly status report, and it’s no surprise to see premiums for CARBOB in California surge to close to $1/gallon premiums vs futures as those markets will continue trading 5.99lb RVP for a few more weeks even while the rest of the country shifts to winter grades. CARBOB differentials are still a far cry from the huge levels we saw last year that prompted a new state committee to monitor all trading activity, but there’s still time to see another big jump in values as summer barrels become scarce.  

The big surprise this week has come from the typically sleepy Group 3 market that saw gasoline differentials spike to $1/gallon premiums Thursday morning before trading around a 70-cent premium at days end.  A short squeeze on remaining summer gallons seems to be at play here with inventories on the Magellan system dropping nearly 1.5 million barrels (almost 20%) the past 2 weeks, and multiple refineries across the Midwest are preparing for planned fall maintenance, which takes incremental barrels off the market as well. Don’t worry about a gasoline shortage in the Midwest though, refiners continue to run at near-record rates, and we’ve already seen the EPA and state agencies issue RVP waivers in markets like Phoenix, El Paso and Florida in the past 2 weeks to deal with potential supply issues so a swipe of the pen could send those values tumbling in short order.

So far the threat of rolling blackouts in Texas does not appear to be causing refinery disruptions, with the only new report to TCEQ yesterday coming from the Valero McKee facility that experienced a hiccup while trying to restart one of its units that’s been offline for several weeks. Extreme heat has impacted several facilities over the past couple of months and capped output, but relief is on the way with a 30-degree temperature drop in the forecast next week, without even needing a hurricane to cool things down.

Tropical Storm Margot has formed behind Lee and is forecast to become a hurricane next week but will stay far out to sea in the Atlantic and not threaten land.

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Market Talk Update 09.08.2023

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Pivotal Week For Price Action
Market TalkFriday, Feb 23 2024

The DOE Report Sparked A Solid Rally In Energy Futures Thursday, But That Upward Momentum Proved Short-Lived

The DOE report sparked a solid rally in energy futures Thursday, but that upward momentum proved short-lived as prices gave back those gains overnight, despite US equity markets surging to all-time highs.

The weekly inventory report showed US refiners are struggling to come back online from a busy maintenance season that was further complicated by January’s cold snap and the unexpected shut down at BP Whiting. Refinery utilization held near 80% on the week, which helped pull gasoline inventories lower despite sluggish demand and a surge in imports along the East Coast. Diesel demand showed a big recovery from last week’s ugly estimate, and when you factor in the missing 4-5% that doesn’t show up due to RD not being included in the reports, actual consumption looks much healthier than the report suggests.

Based on reports of restarts at several major refineries this week, we should see those utilization numbers pick up in next week’s report.

The EPA Thursday approved year-round E15 sales in 8 corn-growing states, despite the fact that the extra ethanol blends have been shown more to pollute more in the warm times of the year. The effective date was pushed back a year however in a show of election-year tight rope walking, which the EPA couched as ensuring that the move wouldn’t lead to a spike in fuel prices this summer.

Of course, the law of unintended consequences may soon be at play in a region that tends to be long gasoline supply for large parts of the year. Removing 5% of the gasoline demand could be another nail in some of the smaller/less complex refineries’ coffins, which would of course make fuel supply less secure, which contradicts one of the main arguments for making more 198 proof grain alcohol and selling it as fuel. Ethanol prices meanwhile continue to slump to multi-year lows this week as low corn prices continue to push unusually high production, and the delayed effective date of this ruling won’t help that.

While Nvidia’s chip mania is getting much of the credit for the surge in equity prices this week, there was also good news for many more companies in reports that the SEC was planning to drop its requirements on Scope 3 emissions reporting which is particularly useful since most people still can’t figure out what exactly scope 3 emissions really are.

In today’s segment of you can’t make this stuff up: The case of chivalry gone wrong with the BP/TA acquisition, and a ketchup caddy company caught spoofing electric capacity.

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
Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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