Energy Markets Are Moving Modestly Lower To Start The Week, Consolidating Near Their July Lows

Energy markets are moving modestly lower to start the week, consolidating near their July lows, and threatening a slide towards the June lows some 15 cents below current levels if the near-term chart support breaks down.

Prices did briefly jump overnight in what appears to have been a short-lived reaction to the latest escalation of violence in the Middle East, but are easing now as Israel has suggested it’s working to avoid all-out war in Lebanon.

Mean reversion: After trading at a 95 cent/gallon spread last week, the difference between RBOB in Chicago and LA CARBOB has shrunk to just 12 cents today. Chicago basis values started to collapse last week after power was finally restored to the Exxon Joliet facility, even though full restart may take another week or two. LA CARBOB meanwhile rallied more than 25 cents/gallon as trading rolled to August delivery cycles and alleviated the short term selling pressure. It’s not just LA basis values that have recovered lately, San Francisco CARBOB values are now trading at more familiar premium to RBOB futures, after prompt values were going for a 20 cent discount to the screen less than 2 weeks ago.

Money managers were decidedly bearish in the latest CFTC Commitments of Traders report, with the large speculative trading category shedding more than 100,000 contracts of net length across the big 5 petroleum contracts. The decline in speculative bets on higher energy prices came from a combination of long contract liquidation and new short positions added. While the shorts are nothing near what we saw before the big short squeeze at the end of May, this positioning will bear watching as funds are clearly betting that there’s excess refining capacity. For RBOB and ULSD, the net length held by money managers is now at its lowest level since the COVID summer of 2020.

Speaking of refining capacity, Energy News Today continues to run circles around other industry “news” outlets, reporting that PBF was planning to temporarily idle a crude unit at its Paulsboro NJ refinery due to the softer margin environment and supply overhang in the region. While we may have to wait until the company’s Q2 earnings call to get confirmation of that plan, there is certainly a chance that we may see more economic run cuts in the coming months if margins don’t improve.

Baker Hughes reported a net increase of 5 oil rigs drilling in the US last week, while the natural gas rig count declined by 1. The added oil rigs were spread evenly across 5 different basins, but the Permian rig count which makes up 62% of the US total was unchanged on the week.

RIN prices pulled back from 6-month highs Friday after a federal appeals court rejected the EPA’s decision to deny small refinery waivers to the RFS in 2022. The details of that decision were sealed, but at the very least, it will buy time for those facilities before they need to purchase RINs to meet their obligations for the years in question.

Valero kicked off the refinery earnings reports last week, noting the expected trend of softer margins as crack spreads have returned to pre-Ukraine-war levels. The company also noted the widely expected sharp decline in Renewable Diesel margins, and reduced its production by nearly 1/3 vs a year ago. That weak environment for RD will see some relief later this year however as Valero’s JV remains on pace on its project that will allow it to convert nearly half of its current production of RD to SAF by the 4th quarter.

The national hurricane center is watching a potential system moving towards Florida this week, giving 50% odds of that storm being named this morning, up from 40% odds yesterday. Meanwhile, we continue to get reminders that it doesn’t take a hurricane to upset refinery operations as the Exxon Joliet facility is joined by two of the largest facilities in the country, Marathon’s Galveston Bay and Motiva’s Pt Arthur facility, reporting weather related upsets in the past week. Citgo’s Corpus Christi refinery also reported an upset over the weekend that forced a coker to be put into circulation mode while repairs are made. A WSJ article this morning highlighted the rush to shore up the country’s power grid in the face of increasing weather threats.