Large Inventory Draws Under Pressure

Market TalkFriday, Oct 16 2020
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Large inventory draws helped energy prices recover from a heavy wave of early selling Wednesday, but they’re under pressure again to start Thursday’s session as doubts linger about the sustainability of those improving fundamentals.  

There’s no doubt that hurricane Delta had a large impact on last week’s numbers reported by the DOE as nearly 20% of refining capacity and essentially all of the oil production in the Gulf of Mexico were in the storm’s path. Now that Delta has passed and damage appears to be minimal (P66 confirmed restart of its Lake Charles facility yesterday) there seems to be much more to worry about with demand than there is with supply. 

Diesel inventories saw their biggest weekly decline in 17 years as refiners made sharp cuts in output thanks to both weak margins and a major hurricane, while consumption held steady thanks in large part to harvest demand peaking across the Midwest.  That was some good news for refiners, and helped ULSD prices erase the heavy selling from earlier in the morning.  The bad news is inventories are still closer to record highs than to average levels, and the cuts in distillate yield aren’t easily sustainable. 

U.S. diesel production reached its lowest level since the aftermath of Hurricane Harvey three years ago. While some of the decline is due to shutdowns ahead of Delta, there is also a real concern that the glut of distillates will continue to weigh on refiners for some time. As the charts below show, refiners are already stretching their product mix to levels we haven’t seen in 20 years as gasoline demand and margins have rebounded, while distillates languish, and there’s not much else they’ll be able to do besides cut run rates completely.

Gasoline inventories are back in a normal pattern, holding below 2019 levels and their five year seasonal average for a second week, even though demand pulled estimates dipped and remain nearly one million barrels/day below where they should be this time of year. Refiners are stretching to maximize gasoline yields just in time for the seasonal demand slowdown, which might make for a sloppy market this winter. 

The refinery formerly known as Hovensa, which used to have a strong influence on NYH prices before being shuttered in 2012 due to weak economics, has been struggling to restart for a variety of reasons after new owners took over. A Reuters report this morning suggests that those new owners are now stuck between needing to start the facility this year to avoid losing its crude supplier, and an oversupplied market that would mean operating at a loss.

One of the two storm systems being watched by the NHC is slightly better organized today and is given 40% odds of developing, but is in a location that suggests it will stay offshore and not threaten the U.S. coastline. The other system is in a more dangerous position in the Caribbean that could move north into the Gulf of Mexico, but it’s still only given 20% odds of developing.

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Market TalkFriday, Apr 19 2024

Gasoline Futures Are Leading The Way Lower This Morning

It was a volatile night for markets around the world as Israel reportedly launched a direct strike against Iran. Many global markets, from equities to currencies to commodities saw big swings as traders initially braced for the worst, then reversed course rapidly once Iran indicated that it was not planning to retaliate. Refined products spiked following the initial reports, with ULSD futures up 11 cents and RBOB up 7 at their highest, only to reverse to losses this morning. Equities saw similar moves in reverse overnight as a flight to safety trade soon gave way to a sigh of relief recovery.

Gasoline futures are leading the way lower this morning, adding to the argument that we may have seen the spring peak in prices a week ago, unless some actual disruption pops up in the coming weeks. The longer term up-trend is still intact and sets a near-term target to the downside roughly 9 cents below current values. ULSD meanwhile is just a nickel away from setting new lows for the year, which would open up a technical trap door for prices to slide another 30 cents as we move towards summer.

A Reuters report this morning suggests that the EPA is ready to announce another temporary waiver of smog-prevention rules that will allow E15 sales this summer as political winds continue to prove stronger than any legitimate environmental agenda. RIN prices had stabilized around 45 cents/RIN for D4 and D6 credits this week and are already trading a penny lower following this report.

Delek’s Big Spring refinery reported maintenance on an FCC unit that would require 3 days of work. That facility, along with several others across TX, have had numerous issues ever since the deep freeze events in 2021 and 2024 did widespread damage. Meanwhile, overnight storms across the Midwest caused at least one terminal to be knocked offline in the St. Louis area, but so far no refinery upsets have been reported.

Meanwhile, in Russia: Refiners are apparently installing anti-drone nets to protect their facilities since apparently their sling shots stopped working.

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

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Market TalkThursday, Apr 18 2024

The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days

The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.

The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.

An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.

Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.

In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.

The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.

Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.

Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.

PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.

Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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