Energy Markets Are Off To Another Quiet Start Thursday

Energy markets are off to another quiet start Thursday with modest losses in the early going after some bullish data points from the DOE helped push prices higher on Wednesday.

Stock markets have reacted negatively to the FOMC chair’s press conference Wednesday in which he made it clear that a pivot is not coming and that rates will go higher than previously expected to stomp out inflation. The correlation between daily moves in equity and energy prices has ticked higher in the past couple of weeks so some of that negative outlook seems to be spilling over into the energy arena as well. 

Coastal Extremes: While the East Coast has received plenty of attention for tight diesel supplies (and a particular panicked supplier’s color coding) over the past few weeks, and ULSD basis values in NYH are north of 80 cents over December futures, the West Coast is seeing the opposite phenomenon as diesel basis values plummeted to a 50 cent discount Wednesday.   Less than a month ago we saw LA spots at a 50 cent premium to November futures, that set cash prices above $4.55/gallon vs values around $3.20 this morning. Will we see a similar drop in East Coast values over the next month?

PADD 1 (East Coast) refining rates actually surpassed 100% of nameplate capacity last week, reaching the highest run rates since the PES refinery exploded and shut down in 2019. You may be wondering how refineries can physically run above 100% of capacity, and the simple answer is it’s just like football players giving 110% on every play. Actually, the reason is that when PBF shut units at its Paulsboro refinery at the end of 2020 to try and survive the brutal demand environment that knocked several refineries out of business, 70mb/day of refining capacity was taken off the DOE’s ledger, but hasn’t yet been added back now that those units have restarted.  Given the tight state of supplies in PADD 1, that incremental production could not come at a better time, and helps explain how that particular refiner went from knocking on the door of insolvency 2 years ago, to making more than $1 billion last quarter.

Demand is bad, supply is worse: US gasoline stocks dropped to an 8 year low last week, and soft demand that remains near levels we saw in 2020 may be the only thing preventing widespread outages as a result. 

Total US gasoline imports dropped to their lowest levels of the year, led by a big decline in PADD 1 imports caused by a combination of a temporarily closed arb window from Europe during the French refinery strikes, refinery maintenance at a Canadian refinery that’s a major supplier to the region, and various vessel delays. That drop in imports was a key driver in the various short term outages plaguing terminals across the region in the past few weeks, and if we don’t see a recovery in those imports soon, expect those shortages to continue.   Then again, the next few months are typically the slowest period for imports as US driving demand slows, and gasoline supply increases thanks to the butane blending that’s becoming more prevalent across the country, so we may not see as big of a snap back as we would if this drop had happened 2 months ago.

The diesel import/export flow also continues to have an outsized influence on prices. We did see diesel exports decline last week, and PADD 1 imports start to tick higher in what could be the early wave reacting to the $1/gallon premiums for diesel in the region, both of which helped inventories increase modestly, although days of supply still ticked lower thanks to a healthy increase in the DOE’s demand estimate. Note the drop in PADD 5 diesel imports below as the market reacts just as strongly to the drop in West Coast basis values as it did to the spike in September. The billion dollar question for the months ahead is whether or not the Atlantic basin is capable of that type of a reaction to the high prices in New York. 

Hurricane Lisa made Landfall over Belize Wednesday, and most models now have the storm emerging in the Gulf of Mexico tomorrow after crossing the Yucatan peninsula. Those models don’t currently have the storm redeveloping into a hurricane as it approaches refinery row, but it will need to be watched for another few days. Meanwhile Martin has also reached Hurricane status as it churns through the North Atlantic, far from being a threat to land, and the NHC is tracking two more potential systems off the SE US that are given low odds of being named.

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