Global Trade Talks Continue To Dominate Market Headlines

It’s been a back and forth week for energy markets with losses Monday and Wednesday offset by gains Tuesday and this morning. Global trade talks continue to dominate the market headlines even as so many unfortunately interesting stories play out around the world.

A trade deal between the U.S. and U.K. is getting credit for today’s buying in both energy and equity markets, while the U.S. and China are set to begin trade talks this weekend. The correlation between energy and equity markets had broken down in the past few weeks after starting the year at multi-year highs, as optimism for trade deals helps stocks recover from their April beat down, while OPEC’s posture and softening demand make it clear that there’s no shortage of oil supply coming anytime soon.

Wednesday’s session started soft for refined product futures and the selling increased following the DOE’s weekly report that showed a healthy build in PADD 1 gasoline stocks and tepid demand. PADD 5 refinery runs were well below their seasonal range even before Monday’s fire at Valero Benecia and the upset at Chevron’s El Segundo refinery that have pushed basis values across the West Coast spot markets sharply higher this week. See the charts attached and commentary below for more detail.

Adding to the negative sentiment Wednesday was the latest data on shipping from the U.S. to China which has rapidly declined the past couple of weeks took hold. That drop off in shipping isn’t showing up at the U.S. ports yet with arrivals holding relatively steady, but those figures are delayed 4-6 weeks as the ships are in transit. The chart below from FDI intelligence using Vizion data shows the pace of decline since April 28.

The Federal Reserve chair seemed unfazed by previous presidential(ish) insults, ruling out any sort of preemptive rate cut to offset tariff impacts, and highlighting numerous threats to the economy from the trade wars, which of course led to more insults from the President. The CME’s Fedwatch tool shows traders shifted their bets on the first rate cut to July from June after the FOMC’s announcement and press conference.

The Hunt refinery in Tuscaloosa AL had an explosion and fire Wednesday as the company was trying to restart the facility following a power outage, presumably caused by the storms sweeping the area. 4 employees are being evaluated according to a company statement although it appears no one was seriously injured. Given the small size (72mb/day) and location (far downstream of the Colonial Gulf Coast origin points) it’s unlikely that this will stir Gulf Coast basis values, but it could cause terminals in the region to tighten up if the facility is forced to stay offline for an extended time.

The EIA Wednesday published a look at the steady increase in oil wells competed per location over the past decade, part of a rapid improvement in technology that has pushed domestic production to record highs with less than a third of the drilling rigs that had been used previously. In other words, the department of energy just explained why “drill baby drill” is an antiquated idea. The note highlights how the use of electronic frac fleets has played a crucial role in the increase of simultaneous completions vs the old way of waiting on diesel deliveries to the middle of nowhere to operate the pumps. This phenomenon, along with new pipeline capacity is why W. Texas diesel supply has become ample in recent years after numerous shortages over the previous decade.

Commentary on the DOE’s weekly report:

The decline in PADD 5 accounted for most of the 2mm barrel drop in crude stocks despite increased imports and a pop in demand last week. Refinery runs saw very little movement overall with large increases in PADDs 1 & 2 being offset by a drop in PADD 3. After an extended turnaround in PADD 1, run rates have climbed back up to a 2025 high over the past three weeks. PADD 3 is still running above its 5-year range after last week’s drop despite the loss of Houston Refining earlier this year. PADD 5 didn’t change much but a small increase there leaves runs below the 5-year average before this week’s upsets.