EU & China Continue To Grapple With Energy Shortages

A sixth straight day of gains pushed ULSD and Brent contracts to fresh 3 year highs overnight as the EU & China continue to grapple with energy shortages, and short term solutions seem to be in short supply. RBOB gasoline continues to lag behind the rest of the energy complex as the seasonal headwinds of the end of the US driving season helps alleviate concerns of shortages on that side of the barrel.

Try plastic bags instead? As we saw during the Colonial shutdown last spring, consumers are losing their minds during the fuel supply crunch in the UK, prompting pleas to avoid filling old water bottles with gasoline.

Something worth noting about this latest rally since the big selloff last Monday is that it’s pushed up the entire forward curve, not just the prompt months (see charts below) which suggests at least some traders don’t see this as a short term supply bottleneck, but a longer term structural supply shortage.  

So far OPEC & friends have remained disciplined in sticking to their gradual increases in supply despite the higher prices, with some countries in the cartel struggling to meet their quotas, proving once again that pumping oil is slightly more complicated than flipping a light switch on and off. Ultimately, the Saudi’s ability to return spare capacity to the market and an increase in US Production should be the limiting factors in this rally, but, the lingering labor shortages and damage done by Ida are going to slow the pace of those increases domestically. 

Shell’s Norco refinery, one of the two remaining refineries shut by Hurricane Ida (and one of the few refineries Shell hadn’t already shuttered or sold) is tentatively planning to begin restart in 2 weeks. The other refinery still shut, P66 Alliance, looks more like it may never reopen as reports surface that a potential buyer intends to convert it to a crude oil terminal.   

Hurricane Sam still looks like no threat to the US beyond dangerous rip currents, while the 2 other systems churning off the coast of Africa are still given high odds of development.  

So far energy and equity markets seem to be taking news of 2 FED governors’ resignations in the wake of (relatively mild seeming) stock trading controversy in stride. The US Federal reserve is arguably the most influential force in equity pricing, putting it second to only OPEC for oil market power, so it’s possible this story could still end up roiling our markets.

Today’s interesting read: An argument to change the biofuel tax credits to favor second generation technologies over “old school” biofuels that are running short on feedstocks.  If last week’s leaked RVO volumes are to be believed, the EPA may already be leaning this direction. 

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