Markets Around The World Are Seeing Big Swings Over The Past 24 Hours As The Unknowns Of Monetary Policy
Markets around the world are seeing big swings over the past 24 hours as the unknowns of monetary policy, war strategy and storm paths all converge. It’s not unusual for the day after an FOMC announcement to see big price swings, and today in particular is set up for big moves after the FED made it clear it prefers a recession to inflation, and numerous other banks followed suit.
ULSD has been the most volatile contract in the energy complex this week, with multiple 10 cents swings in various directions as demand fears and supply fears manage to both grip parts of the global distillate market simultaneously. Adding to the uncertainty this week, Exxon’s refinery in France is facing a strike as employees see more leverage than ever given the weakened state of Europe’s energy supplies.
2 brothers were killed in the fire at the Husky refinery in Ohio, adding a tragic turn to the supply shortages in the area, which have sent Chicago basis values soaring. That plant is completely offline, and may stay so for weeks as the investigation continues, further complicating resupply efforts. The Explorer pipeline froze nominations shortly following that fire as shippers raced to find replacement options from other regions, quickly maxing out the pipe’s capacity. See the PADD 2 inventory charts below for perspective on how unusually low supplies in the Midwest are as a rash of refinery issues, and lack of shipments from the Gulf Coast – who is busy supplying the rest of the Western hemisphere – draw down stocks. PADD 2 refinery runs did see a 2nd straight large increase, largely due to the BP Whiting plant coming back online after a fire a few weeks ago.
The storm currently known as 98L continues to move towards the Caribbean with 90% odds of development in the next 5 days. Florida looks like it is still has the highest odds of getting hit by this storm (soon to be named Hermine) although the GEFS model has shifted it further West in the past 24 hours which puts Alabama, Mississippi and Louisiana all in the range of potential landing zones. While the odds may still be low, Louisiana has been a hurricane magnet the past two seasons, so those refineries and off-shore facilities will not breathe easy until this system is long gone. Hurricane Fiona meanwhile continues to churn north after battering several islands as a category 3 or 4 storm, and now sets its sites on Atlantic Canada. The Irving refinery in St. John looks like it will avoid a hit from this storm, while the long-idled and struggling to convert to RD production refinery in Come-By-Chance could still take a hit from this system.
Refinery production increased again last week, holding near the top end of the seasonal range as plants defer maintenance to try and continue maximizing output during these times of tight supply (and high margins). Compare this year’s refinery runs to 2021 and 2020 which both saw big storm-induced declines, and you’ll get a feeling for why the industry is still holding its breath to make it another month without a direct hit on refinery row.
One item to keep an eye on (if you didn’t have enough already): US ethanol production dropped to its lowest level since the great freeze of 2021 wreaked havoc on fuel producers of all varieties, which pushed ethanol inventories to their lowest levels of the year. Ethanol prices have been pulling back since the railroads narrowly dodged a major strike, so this drop in production could be a short term anomaly tied to maintenance or timing the corn crop, but if not, it could further complicate the refined fuel supply network since gasoline is no good in most cases without 190 proof grain alcohol to go with it.
West Coast (PADD 5) gasoline stocks look like they turned the corner on the charts with a small increase last week, but that did little to stop the squeeze on prompt supplies as San Francisco values shot up to a $1.70/gallon premium to futures and PNW values traded north of $1.40, which puts current values back close to $4/gallon.
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View AllRefined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
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