The Threat Of A Tropical Storm System Targeting The US Increased Dramatically In The Past 24 Hours

Refined product futures have found their footing and are rallying for a 2nd straight day to their highest levels in over a month as technical resistance broke down Wednesday and the US faces its first potential major storm threat of the season.

The threat of a tropical storm system targeting the US increased dramatically in the past 24 hours. The NHC is still tracking 2 systems, the first known currently as 94L is still given low odds of development, and models have it moving inland over Mexico and not being a threat to the US. The 2nd system known as 95L that’s moving over the central Atlantic was given 30% odds of developing yesterday but now is given 70% odds of being named as it approaches the Caribbean. Long term models suggest this storm will make a northerly turn, with the entire Gulf of Mexico from Texas to Florida shown as possible targets late next week.

More East Coast thunderstorms reminded us that a storm doesn’t need a name to disrupt energy infrastructure, with the 2nd major terminal of the week taken offline by storm damage. The difference of course is usually this type of event takes just hours to fix the damage, compared to days and weeks with a hurricane.

Yesterday’s DOE report showed refinery runs dropped for a 3rd week, with all 5 PADDs seeing decreases run rates. It appears that refiners may have gotten the memo that supplies are more than ample to cover demand, which has pushed crack spreads dangerously close to break-even levels across larges parts of the country. It’s also possible that the declines are nothing more than the typical rash of unplanned upsets that are common, particularly with high heat challenging facilities across most of the country, and seasonally we don’t expect to see run rates to peak for the year until later in the summer.

Gasoline demand snapped a 2 month-long streak of demand estimates that beat the 5-year seasonal average (which really isn’t saying much considering the 5-year average includes the COVID lockdowns) but given the relatively new Federal holiday in the middle of the week, that decline in the weekly estimate isn’t too surprising. What’s more troubling for suppliers is that PADDs 3, 4 and 5 are all showing inventories well above average levels, with most at or above the top end of their seasonal range. PADD 1 is the only region in the US with inventories materially below the 5 year average, which helps explain why gasoline line space values along Colonial have been holding north of 8 cents/gallon the past few weeks.

The changes in diesel supply look unimpressive at first glance, but if you account for the 5-6 million barrels of RD inventory that’s not included in the DOE’s weekly figures, actual inventories are approaching 3-year highs. The PADD 5 chart is the most glaring of course, showing the official estimate to be 10 million barrels of diesel supply along the West Coast which is 20% below the low end of the seasonal range and 30% below average, but in reality, the total diesel stocks including renewables are sure to be north of 14 million, which is right at the top end of the seasonal range. We saw this similar phenomenon with ethanol about 15 years ago, and it took a few years to add the new product into their weekly survey.

The new giant Dangote refinery in Nigeria that is becoming a swing producer of distillates for the entire Atlantic basin had a fire yesterday, and depending on which headline you believe, it was either a major disaster, or a non-issue. Company officials say the fire only impacted a waste-water treatment facility not operating units.

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