Info Overflow Leaves Energy Futures Mixed
It’s a mixed bag for energy markets returning from Monday’s partial holiday as traders digest a data deluge from Davos, China, and OPEC, while the recent recovery rally faces its first significant technical resistance. Small losses in yesterday’s partial session have turned to small gains this morning for RBOB futures, while distillates have gone the opposite direction, turning yesterday’s small gains into minor losses this morning.
The world’s largest oil buyer has a major problem with demographics that is signaling the end of decades of rapid economic growth, even as near term projections show consumption rebounding as the country reopens its economy.
China’s refinery runs declined for the first time since 2001 last year, despite new facilities that added more than 500,000 barrels/day of production capacity, as the country struggled with how to deal with slumping domestic demand due to its COVID policies, while the rest of the world was clamoring for its exports. A surge in export activity to end the year and higher export quotas for 2023 have led to optimism that European fuel buyers will be able to make ends meet, although the lack of clarity and internal conflict within the Chinese regime makes it very challenging to project.
Meanwhile, 5 people were killed and 30 injured after an explosion and fire at a Chinese oil refinery and petrochemical plant Sunday. While the loss in output may not move the needle as the facility was relatively small and not running at capacity anyway, it may provide the state another reason to tighten the screws on its independent facilities in favor of the government owned plants as it did last year. OPEC’s monthly oil market report revised its economic growth forecasts higher as several key economies fared better in 2022 than previously thought. Despite the better than expected figures for last year, the report left its outlook for 2023 unchanged due to numerous uncertainties surrounding monetary policy, COVID, and geopolitical tensions. Sticking with the theme of the day, the report also highlighted how Chinese export quotas may put downward pressure on product prices and refining margins. OPEC’s oil production increased by 91mb/day during December due to increases from Nigeria, Libya and Venezuela who aren’t bound by the production cut agreements given their wild-card government status.
Exxon is reportedly 2 weeks away from starting up its new 250,000 barrel/day crude unit at its Beaumont refinery, which will make that facility the 2nd largest in the country and top 10 in the world. While that new capacity will temporarily end a string of reductions in the US that started in 2019 and took roughly 7% of capacity off the table, the increase won’t last long as Houston Refining is still scheduled to shutter its facility later in the year and offset the Beaumont gains.
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View AllRefined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.