Is A Collapse Imminent?
Just a few days after pushing six month highs, energy futures are hitting multi-month lows this morning, and threatening a technical breakdown that could bring product prices back below one dollar/gallon. A rising dollar, softer equities and concerns for fall demand all taking credit for the early selling. While the drop has been significant – gasoline prices in some markets are down more than 20 cents in a week - we have seen multiple similar moves this summer only to bounce each time technical support gets tested, so it’s still too soon to say a collapse is imminent.
The disruptions to the energy operations along the Gulf Coast from Hurricane Laura are easy to see in the DOE charts below, but you’ll also notice how most operational issues pale in comparison to what we saw from Harvey in 2017, which provides some insight into why the industry had a huge sigh of relief when the storm shifted east.
Oil imports reached their lowest level in 28 years as ships stayed out to sea to ride out the storm, crude oil output dropped by more than 10 percent to its lowest in three years, as Gulf of Mexico platforms were shuttered temporarily and refinery runs dropped by one million barrels per day. This all added up to substantial inventory draws. The fact that most of these operations are already returning to normal within one week after landfall helps explain why the market sold off following the report, as concerns quickly shifted to issues with demand rather than a threat to supply.
The exception to that rule is the refinery output number. Early reports suggest it could be several weeks before the two Lake Charles area facilities operating before the storm might be able to attempt a restart, and with the fall turnaround season about to kick off, we could see more declines in run rates over the next several weeks.
In addition to the storm-related issues, demand and margins aren’t encouraging a resurgence in refinery runs either. The weekly estimate from the DOE showed total U.S. petroleum demand dropping to a 13 week low, and the flush in product prices this week has crack spreads pushing multi-year lows. A WSJ article this morning suggests that European refiners are most likely to see the next wave of closures and conversions as the industry deals with a glut of refining capacity, while U.S. facilities will benefit from their outlets to central and south America.
Speaking of central America, Hurricane Nana made landfall in Belize overnight, while Omar continues tracking out to sea. There are three more potential systems being tracked by the NHC, one of which has 70 percent odds of further development, making it likely we’ll see Paulette named just in time to hit the peak of the season.
Click here to download a PDF of today's TACenergy Market Talk.
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Refined 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.