Many In The Market Caught Off-Guard

Market TalkFriday, Mar 5 2021
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Oil prices have spiked $5 a barrel, and refined products are up 12 cents/gallon since early Thursday morning after OPEC & friends announced they would not change their output cut agreement, which caught many in the market off-guard. The rally has propelled each of the big 4 petroleum futures contracts to their highest levels in more than a year, just a couple of days after it looked like the four month old trend might be breaking down.

The big rally in energy contracts comes in spite of a large selloff taking place in equity markets, which continue to act spooked by interest rates higher than 1%. You can make a strong argument that the two agencies most capable of moving energy prices with their policy are OPEC and the U.S. Federal reserve. Yesterday, we saw both in action with OPEC surprising the market to the upside, while the FED Chair apparently didn’t do enough to calm the stock markets. Given the two asset classes have had a strong positive correlation for most of the past year, this recent divergence could end up creating more volatility for energy contracts in the weeks to come, while a strong rally in the U.S. Dollar could finally pop the energy balloon.

Looking past the headlines of the OPEC announcement, there is some reason to pause given that the Saudi’s are still not convinced demand globally is capable of handling normal production levels. Then again, there is certainly a political angle to everything the cartel does, and it’s also possible that the U.S. reaction (or what critics call a lack of reaction) to the Saudi leadership’s role in the killing of Jamal Khashoggi could have played into this decision as well. A Bloomberg note this morning suggests that the move by the Saudi’s is a bet that U.S. oil producers will behave differently this time, even though they’ve behaved the same way for the past 150 years which has helped create the epic boom and bust cycles this market is famous for.  

The refinery recovery efforts continue to progress with additional units coming online daily, but hiccups are common, and re-supply is not coming fast enough for those still scrambling to find allocation across Texas and neighboring states. The impacts on rack prices are spread much further however with markets from Arizona to Virginia all feeling the trickle down impacts of the heart of refining country shutting down for two weeks. Group 3 diesel differentials continue to stand out, spiking to premiums north of 30 cents Thursday morning before trading lower to end the day. That market has 20 cents of backwardation between now and the end of March, as traders bet that resupply should largely be complete by April, even though supplies continue to tick lower in the region this week.

Chicken or the egg: RIN values continue to set new multi-year highs this week, which is either helping drive the rally in refined products, or being driven by that rally depending on who you ask. There’s little news over the RFS program or the various legal challenges to it, and grain prices have been fairly flat, so it seems this rally could simply be the market betting that this new administration is unlikely to do anything that would help lower this de-facto tax on refiners. 

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Market TalkFriday, May 24 2024

Selling Continues In Energy Markets After Thursday's Reversal Rally Ran Out Of Steam In The Afternoon

The selling continues in energy markets after Thursday’s reversal rally ran out of steam in the afternoon, following the lead of U.S. equity markets which had a big sell-off on the day. Prices haven’t yet fallen below the multi-month lows we saw early last week, but we’re just a couple of cents away from those levels, and the potential technical trapdoor that could lead to sharply lower values over the next couple of weeks.

We did see a brief spike in gasoline futures after the settlement Thursday following reports that Colonial had shut down Line 4 due to an IT issue, but those gains were short-lived as the pipeline was restarted without issue a few hours later. Those who remember the chaos of May 2021 after Colonial was hacked are breathing a sigh of relief, particularly on one of the busiest demand days of the year, while others are no doubt disappointed we won’t get to see the rash of fake photos of people filling up plastic bags with gasoline.

OPEC & Friends (AKA the DoC) announced they’re moving June’s policy meeting to a virtual-only affair, which the market is taking as a signal of the status quo being held on output cuts.

Chicago being Chicago: Tuesday’s 60-cent basis spike was officially wiped out by Thursday afternoon, suggesting the short-lived rally was just short covering in an illiquid market rather than a meaningful supply disruption.

RIN values continued their rally this week, touching a 4-month high at 59 cents/RIN for both D4 and D6 values Thursday. If you believe in technical analysis on something like RINs, you can see a “W” pattern formed on the charts, suggesting a run to the 80-cent range is coming if prices can get above 60. If you are more of a fundamentalist, then you’ll probably think this rally is probably more short-term short-covering by producers of RD who have changed their schedule buying back their RIN hedges for volume they’re no longer planning to produce.

NOAA issued its most aggressive Hurricane forecast ever Thursday, joining numerous other groups that think a La Nina pattern and record warm waters will create more and bigger storms this year. With the activity level seeming to be a foregone conclusion at this point, now it’s all about where those storms hit to know if this busy season will be a huge factor in energy supplies like we saw in 2005, 2008, 2012 and 2017. With the Houston area already being bombarded by floods and deadly wind this year, the refinery row across the U.S. Gulf Coast seems even more vulnerable than normal to the effects of a storm.

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

Pivotal Week For Price Action
Market TalkThursday, May 23 2024

Gasoline Prices Have Finally Found A Bid, Trading Up 3 Cents On The Day

Gasoline prices have finally found a bid, trading up 3 cents on the day after coming within a penny and a quarter of the multi-month lows set last week overnight. ULSD prices are also up a couple of cents in the early going after wiping out the gains they made last week. Both contracts are once again threatening a technical breakdown that could push prices another 20-30 cents lower if the current bounce isn’t sustained.

The EIA’s estimate for gasoline demand surged to a 7-month high last week, capping off a 4th straight week of gains that puts total consumption near the top end of the seasonal range after a very sluggish start to the year. AAA estimates that travel this Memorial Day weekend will approach a 20 year high with nearly 44 million people hitting the roads.

The EIA also published a note this morning showing average US gasoline prices are up 1% from last year, accompanied by a chart showing that average prices are down 7 cents/gallon from this time last year. The spread between retail gasoline prices on the West Coast vs the rest of the country continues to grow and is shown to be over $1.20/gallon thanks to Oregon and Washington’s Californication of their energy policies in recent years.

The EIA still seems to be struggling to figure out its accounting methods for crude oil inventories, with the adjustment factor that’s been creating all sorts of confusion the past couple of years flipping from a negative 200,000 barrels/day last week, to a positive 1.4 million barrels/day this week. You could give the EIA compilation crew a break and say that this reflects just how large and complex the US crude oil supply network is, or you could ask how did they suddenly “find” 10-million barrels of oil that they didn’t see last week.

Refiners are cranking up run rates, exceeding the levels we’ve seen this time of year in either of the past 2 years. Those higher run rates are added to the glut of diesel products that’s hanging over the majority of the country, and pushing rack spreads to levels we haven’t seen since the COVID lockdown in several markets.

The export market for US crude and refined products remains very busy with nearly 10 million barrels shipped out of the country every day. Refinery throughput was 16.2 million barrels/day last week, and more than 6 million barrels/day was exported even though gasoline and diesel exports have stagnated this year. The anticipated tick higher in US diesel exports following the rash of Russian refinery attacks has not materialized, which is no doubt contributing to the negative sentiment for diesel prices over the past month. The busy and growing export market for crude and other products also creates an interesting dynamic as we prepare for a busy hurricane season to kick off in a week as any disruption to infrastructure along the Gulf Coast could limit product going out of the country almost as much as it disrupts products flowing inland.

Basis values for RBOB in Chicago dropped 30 cents Wednesday after Tuesday’s 60 cent spike. It’s still unclear what if any impacts the confirmed fire at Exxon’s Joliet refinery, or the rumored upsets at BP’s Whiting facility have had on actual supply in the region, but the quick pullback suggests this is a flash in the pan rather than the start of a prolonged supply shortage.

Exxon reported a leak at its Beaumont TX Chemical plant, but it appears that upset isn’t impacting the operations at its adjacent refinery.

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