The Storm Made Landfall As A Category 2 Hurricane

Oil prices are continuing to try and lead a recovery rally in the energy complex for a 2nd day, but refined products are proving to be reluctant participants as early indicators suggest that Francine will have minimal impact on the refineries in the danger zone.

We did see most of Wednesday’s healthy gains briefly get wiped out following the DOE’s weekly report that showed healthy inventory builds and weak demand following Labor Day, but the selling proved short-lived as the focus shifted back to the potential impact on refineries and oil production from Francine.

The storm made landfall as a category 2 hurricane, and is currently moving north towards Memphis as a tropical depression. The day after landfall is generally difficult for assessing damage but there are already reports from ENT that Exxon is restarting its Baton Rouge refinery which is a good sign that the damage won’t be severe. Power outages are likely to be the biggest challenge for refiners in the region, but so far they’re being counted in the thousands, not millions, which also suggests that any impacts will be short lived. Right now, roughly half of Gulf of Mexico oil production has been shut in, and the LOOP is closed as, both precautionary moves. As long as those facilities come back online in the next week, their impacts should not be felt by the wider market.

Following yesterday’s CPI reading, the odds of a 50 pt rate cut at next week’s FOMC meeting plummeted to just 13% according to the CME’s Fedwatch too. Those odds had increased to 50% following last week’s jobs report, but stubbornly high non-energy inflation seems to be winning out. Stock markets appeared to have a bit of a temper tantrum after that shift as the free money crowd realized they’d have to pay a little more to steal, but equities rallied back later in the day, and energy markets mostly shrugged off those swings.

The IEA joined the chorus of demand doubters this morning, forecasting that global oil consumption growth would drop to its lowest level since COVID rocked the world in 2020. China continues to be the main contributor to the decreasing consumption, but it’s not just a softer Chinese economy driving the slowdown. Surging EV sales [largely powered by coal] and growth in the country’s high speed rail network are both cited for contributing to the drop in fuel demand. US demand isn’t much better as gasoline consumption has declined year on year in 5 of the first 6 months for which data is available. The IEA’s report also highlighted the rapid drop in refinery margins this year, but notes that USGC margins are holding up relatively well compared to Europe and Singapore, both of which saw negative values in the past 2 months. The agency ended its report by taking a veiled shot at OPEC, and perhaps a plea to US regulators threatening to defund the agency, by suggesting that “unbiased” market analysis will become more important than ever.

The negative refinery margins in Europe have already claimed their first casualty as the 100 year old Grangemouth Scottland refinery announced this morning they will cease operating next year as the ageing facility simply can no longer compete with newer and larger facilities in the Atlantic basin, particularly amidst the ever-changing targets for renewables.

US refiners did begin their annual fall turn to lower run rates last week, with planned turnarounds in PADDs 2, 4 and 5 all contributing to the slight decrease in output. The fall maintenance schedule is lighter in 2024 than the past couple of years however, so anyone hoping for stronger margins near term will have to rely on unplanned shutdowns to get there.

Basis values on the West Coast started to make the turn to earth Wednesday, which historically is usually followed by a collapse in values. PBF is doing their best to avoid the coming basis collapse, going 4 for 4 on daily notices to state regulators on upsets at their Torrance refinery this week. A surge in imports to PADD 5 for both gasoline and diesel seem to be helping keep a lid on the annual California basis spike, which will provide fuel to those currently arguing over whether or not to cap refinery margins and mandate minimum inventory levels in the state. Speaking of which, there’s a workshop scheduled at 10am pacific time today to review the state’s plans on restricting refining margins. If you’re interested on several P.h.D.’s perspective on an industry they’ve never actually worked in, you won’t want to miss this.

Exxon reported an upset that forced a shutdown of a sulfur recovery unit at its Beaumont TX refinery Thursday, although it’s unclear if that event was weather related or if that shut down would require other units to slow down as well. So far that’s the only refinery upset reported in Texas following the storm moving past.

The NHC continues to track 4 other potential storm systems. Of those, only 1 has high odds of being named, and it’s going to hook north over the open ocean and not be a threat to land.