A February Futures Flop Is The Theme In Energy Markets After A Big Mid-Day Reversal Thursday Sent Prices Sharply Lower To Start The Month

A February futures flop is the theme in energy markets after a big mid-day reversal Thursday sent prices sharply lower to start the month. The big slide Thursday was a head-scratcher for many, with the only guess for a cause circulating being fake reports of a cease-fire in Gaza.  While prices did rebound from the lows of the day, they still ended with heavy losses and continued to sell off overnight, suggesting there’s more to the liquidation than just a bit of fake news.

Futures and cash markets continue to see the world differently most days in 2024, with a solid January rally in futures coming despite many physical markets showing weakness, only to see February selling in futures as cash markets are rallying.

The big story in physical markets Thursday was a 30-cent rally in Chicago basis values following news that BP’s Whiting IN refinery was evacuating and shutting down following a power outage. The evacuation of more than 200 employees created some nervous moments as the company has become somewhat notorious for deadly explosions over the past 2 decades, but fortunately no injuries are being reported. 

The Chicago-metroplex refinery is the largest in the Midwest (PADD 2) and the 8th largest in the country and has a reputation for creating outsized influence on cash markets when it’s had issues in the past. The entire Midwest has been drowning in product throughout the winter as high run rates and soft demand push inventories to levels we haven’t seen since the COVID lockdowns 4 years ago. The panicked reaction in both cash prices, and terminal allocations across the region suggest that this may soon change. Drone footage of the scene is noteworthy in that it shows significant flaring as would be expected from an unplanned shutdown, but most likely no other damage. It’s also a good reminder of how big and complicated these facilities are. One other piece of good news is that unlike an unfortunate incident at that refinery in 2012, no monkeys were reported to be injured. 

Meanwhile, Ukrainian drone attacks on Russian refineries appear to be having a material impact on Russia’s refined product exports, although those impacts don’t appear to be influencing prices in the US or Europe as those regions haven’t been buyers for the past 2 years.  

Exxon and Chevron rounded out the earnings season this morning confirming the theme we’ve seen from just about everyone else: 2023 wasn’t the best year ever for petroleum producers and refiners, it was the 2nd best, trailing only 2022, which helps explain the buying spree we’ve seen in recent months.   Improving efficiency in on-shore fracking operations (wells are producing more than ever despite a big decline in rigs) and some major off-shore successes continue to drive the upstream growth, while refined product markets are finally losing the tailwinds, they enjoyed for nearly 2 years following Russia’s invasion of Ukraine.

One of Chevron’s 2023 business highlights was completing a conversion of its El Segundo CA hydro treater so it can now process either 100 percent renewable or traditional feedstocks, which is certainly going to have others who chose to convert refineries instead of co-process wishing they’d thought of that.

Exxon has been quiet on the Renewable Fuels front ever since its partner in California failed last year, but did highlight the launching of its new lithium business, which will leverage the company’s extensive geology expertise to produce new supply from deposits in southwest Arkansas. 

Good news is bad news for stocks: The January payroll report showed an increase of 353,000 jobs during the month, more than double most estimates, and unlike almost every month last year, the report also increased the job increases for both December and November. Hourly earnings were also up more than the “official” predictions, adding to the concerns about sticky inflation. Combined, that report should give the FED more than enough justification to hold off on cutting rates quickly, something the market has been struggling to come to terms with. Refined products dipped further following the report, although the moves were minor and continue to suggest that energy and equity prices will do their own thing more often than not.

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