It’s The Last Trading Day For 2023, Energy Markets Are Still Searching For Direction With Small Gains For Gasoline And Crude Oil Futures
It’s the last trading day for 2023, and energy markets are still searching for direction with small gains for gasoline and crude oil futures, while diesel sees small losses in the early going. We saw heavy selling Wednesday after US oil output held at a record high, and refinery runs continued to increase and push inventories higher, but prices still appear range-bound for now.
Looking ahead to 2024, shipping chokepoints will be a major story with the Panama Canal still reduced to roughly 50% of its capacity, which was forcing more ships to transit through the Suez Canal before attacks in the Red Sea diverted many of those shipments. The world’s two other key shipping straits are thankfully quiet for now, but Iran just last week attacked a tanker off of the Indian coast so the Strait of Hormuz could certainly soon come back into the forefront, and it’s not too hard to imagine China could see these canal blockages as the perfect time to take action in the South China Sea which could end up disrupting movements through the Malacca strait.
New refining capacity also looks to be a major needle mover this coming year with the huge new Dangote refinery in Nigeria beginning operations this month, but not yet making on-spec products. Whether that facility and Mexico’s new Dos Bocas refinery can come online in a meaningful way will have a heavy influence on the supply condition of the entire Atlantic basin and could create even bigger swings in the US export market than we saw this year.
The return of contango in oil markets after nearly two years of backwardation will also influence markets around the world as shippers are once again incentivized to store barrels. Note the steady increases in Cushing OK inventories in the charts below for an example of this phenomenon at work. With US exports surging and OPEC struggling to keep its production limited, storage capacity could once again command a premium this year.
In other words, there seems to be plenty of oil production and refining capacity in 2024, but the ability to transport that supply to where it’s needed is much less certain.
Those challenges in transportation are evident within the US as well, with both PADD 2 and 3 showing swelling inventories as refiners crank up run rates, while PADD 1 inventories remain low as the options to ship products to the population centers on the East Coast are limited by pipeline capacity and Jones Act vessel restrictions. The ability for refiners to ship barrels out of the center of the country in whatever way they can continue to be a major story for next year and will likely determine whether or not some facilities are forced to cut runs, particularly if the new refining capacity in Africa starts pushing more barrels from Europe to the East Coast.
So far, facilities in the Mid Con don’t seem intimidated as PADD 2 refinery runs surged to a record high last week, at a time of year when we typically see things slow down. PADD 4 saw a sharp reduction in run rates after yet another operational upset at Suncor’s beleaguered refinery outside of Denver, which is facing new challenges to its air permits that could eventually lead to that facility closing for good.
News & Views
View AllEnergy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
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WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.