Inflation Reaches A 13-Year High

Market TalkThursday, May 13 2021
Traders Torn As Opposing Trend Lines Converge

Colonial pipeline began restarting operations Wednesday night, and products futures dropped a nickel. Now that the headlines will move on to other stories, traders can no longer shrug off the big selloff in equity markets this week as inflation has reached a 13 year high, and will also consider the looming drop in demand as consumers will (hopefully) stop filling plastic bags with gasoline. Although the media attention will quickly fade once there are no longer lines of cars outside of gas stations to take pictures of, this situation may have changed perception of the refined fuel industry that many were prepared to cancel just a few weeks ago.  

While it may take another couple of weeks for the supply network to truly get back to “normal” as long as product starts flowing again the outages will quickly start to fade. Colonial had not been running at capacity for more than a year prior to this shutdown, so there’s room for extra supply to start moving up the line as operations ramp back up. Values for space on the main gasoline line (Line 1) went positive this week for the first time in over a year as shippers of all varieties wait in the starting blocks to begin the resupply race.

Just as we turn the page on one transportation bottleneck, another one showed up as the I-40 bridge in Memphis was forced to shut after a crack was discovered, disrupting a busy trucking corridor and promising to make an already tight freight market even worse. No word yet if consumers are lining up around Graceland to hoard Elvis memorabilia due to this temporary outage. The good news is that trucks heading to the Valero refinery in Memphis to help supplement supplies across the Southeast during the Colonial downtime don’t have to cross that bridge, but Arkansas suppliers will struggle with this situation.

The DOE’s weekly report Wednesday gave a dose of reality to those expecting demand to hit pre-COVID levels this summer. Total petroleum demand had its biggest weekly drop since stay at home orders smashed all records last year. While gasoline and diesel estimates did see minor declines, most of the huge drop came in the “other oils” category and doesn’t reflect a drop in consumer activity. 

U.S. refining capacity dropped another 50mb/day last week, as the permanent closures announced last year continue to make their way into the official numbers. The drop from 19 million barrels/day two years ago to 18 million today is the worst decline in capacity in nearly 40 years.

Adding fuel to the 200 proof fire: U.S. ethanol inventories dropped to a four-year-low last week, even though ethanol production ticked up by 25mb/day. There’s still another 50mb/day or so of production that hasn’t returned since the pandemic started.

RIN Values continue their parabolic move. D6 ethanol RINS were trading around $.36/RIN this time last year, hit $.80 to start 2021, were at $1.31 a month ago and then shot to $1.90 yesterday. D4 values are approaching the $2 mark.  With ethanol, grain and refined products appearing to be topping out and the demand for imports looking like it will subside thanks to the Colonial restart, the stage is set for a pullback, but the big question is will it be of the collapse variety that the wild RIN market has seen in years’ past or a more modest correction since the refiner obligation for the year is still unknown? 

The best cure for high prices is high prices: Eight companies – Tesla being one of them – have petitioned to be allowed to generate RINs via their electric vehicle production. While it could be years before congress can even get around to reviewing those proposals, and more years before they’d be implemented if signed into law, it’s a good reminder that at $2/RIN there will be no shortage of new producers trying to take advantage of the RFS program. 

Crying uncle: Carl Icahn’s attempt to takeover Delek via a proxy & media battle has failed and CVR announced it would distribute the Delek shares it had accumulated as a special dividend as a result. 

The last straw? The refinery FKA as Hovensa was forced to shut again this week after yet another disruption that rained oil on the surrounding neighborhoods. With the EPA already investigating the facility for permit violations, it seems like the efforts to restart this facility that was closed in 2012 may ultimately fall flat.   

Click here to download a PDF of today's TACenergy Market Talk, including all charts for the weekly DOE report.

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Pivotal Week For Price Action
Market TalkThursday, Feb 29 2024

It's Another Mixed Start For Energy Futures This Morning After Refined Products Saw Some Heavy Selling Wednesday

It's another mixed start for energy futures this morning after refined products saw some heavy selling Wednesday. Both gasoline and diesel prices dropped 7.5-8.5 cents yesterday despite a rather mundane inventory report. The larger-than-expected build in crude oil inventories (+4.2 million barrels) was the only headline value of note, netting WTI futures a paltry 6-cent per barrel gain on the day.

The energy markets seem to be holding their breath for this morning’s release of the Personal Consumption Expenditures (PCE) data from the Bureau of Economic Analysis (BEA). The price index is the Fed’s preferred inflation monitor and has the potential to impact how the central bank moves forward with interest rates.

Nationwide refinery runs are still below their 5-year average with utilization across all PADDs well below 90%. While PADD 3 production crossed its 5-year average, it’s important to note that measure includes the “Snovid” shutdown of 2021 and throughput is still below the previous two years with utilization at 81%.

We will have to wait until next week to see if the FCC and SRU shutdowns at Flint Hills’ Corpus Christi refinery will have a material impact on the regions refining totals. Detail on the filing can be found on the Texas Commission on Environmental Quality website.

Update: the PCE data shows a decrease in US inflation to 2.4%, increasing the likelihood of a rate cut later this year. Energy futures continue drifting, unfazed.

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 TalkWednesday, Feb 28 2024

It’s Red Across The Board For Energy Prices So Far This Morning With The ‘Big Three’ Contracts All Trading Lower To Start The Day

It’s red across the board for energy prices so far this morning with the ‘big three’ contracts (RBOB, HO, WTI) all trading lower to start the day. Headlines are pointing to the rise in crude oil inventories as the reason for this morning’s pullback, but refined product futures are leading the way lower, each trading down 1% so far, while the crude oil benchmark is only down around .3%.

The American Petroleum Institute published their national inventory figures yesterday afternoon, estimating an 8+ million-barrel build in crude oil inventory across the country. Gasoline and diesel stocks are estimated to have dropped by 3.2 and .5 million barrels last week, respectively. The official report from the Department of Energy is due out at its regular time this morning (9:30 CST).

OPEC’n’friends are rumored to be considering extending their voluntary production cuts into Q2 of this year in an effort to buoy market prices. These output reductions, reaching back to late 2022, are aimed at paring back global supply by about 2.2 million barrels per day and maintaining a price floor. On the flip side, knowledge of the suspended-yet-available production capacity and record US output is keeping a lid on prices.

How long can they keep it up? While the cartel’s de facto leader (Saudi Arabia) may be financially robust enough to sustain itself through reduced output indefinitely, that isn’t the case for other member countries. Late last year Angola announced it will be leaving OPEC, freeing itself to produce and market its oil as it wishes. This marks the fourth membership suspension over the past decade (Indonesia 2016, Qatar 2019, Ecuador 2020).

The spot price for Henry Hub natural gas hit a record low, exchanging hands for an average of $1.50 per MMBtu yesterday. A rise in production over the course of 2023 and above average temperatures this winter have pressured the benchmark to a price not seen in its 27-year history, much to Russia’s chagrin.

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