More Choppy Action For Energy Contracts To Start The Last Day Of January, Which Will Be Highlighted By The Weekly Inventory Report

Market TalkWednesday, Jan 31 2024
Pivotal Week For Price Action

More choppy action for energy contracts to start the last day of January, which will be highlighted by the weekly inventory report, and a decision from the FED. Tuesday saw early morning selling largely erased in afternoon trading, with ULSD futures the only contract to end the day in the red. This morning ULSD futures are the only ones trading green, while RBOB and WTI see modest losses in the early going. Tuesday’s bounce keeps the bulls in control for now despite this week’s pullback in prices, with a strong spring rally still looking possible despite the weakness in many cash markets to start the year.

A glimmer of hope for peace? In addition to ongoing ceasefire talks in Gaza, one of Iran’s puppet armies announced it was backing down from attacks on US troops, as they try to avoid meeting the US Air Force the hard way following the deadly attacks on a base in Jordan. 

European Gasoil futures which are closely tight to ULSD (HO) futures in the US are trading lower for a 3rd straight day as traders seem to be betting that the supply disruptions caused by the re-routing of ships around the violence won’t become major. 

The FOMC will announce the latest in monetary policy at 1pm central today.  Pretty much nobody believes the FED will be changing rates today, with the CME’s Fedwatch tool showing just 2% probability of a 25-point rate reduction today. The big question for today’s whether or not the FED will signal plans to start lowering rates in March, with nearly half of the Fed Fund futures bets expecting the start of the easing then, down from 73% odds of a March cut bet a month ago.  

The API estimated crude oil and diesel stocks both declined by more than 2 million barrels last week, while gasoline stocks had a small build of around 600,000 barrels. The DOE’s weekly report will be out at its normal time this morning, and we’ll get to see how quickly refiners are coming back online after the cold snap. Don’t expect a complete bounce back in run rates this week however as there is plenty of scheduled maintenance occurring, as most refiners have been noting a busy turnaround schedule for Q1 in their earnings releases this week.  

Marathon noted two noteworthy projects in its Q4 earnings release Tuesday. The Galveston Bay facility, who earned frequent flier miles with the TCEQ in 2023 with nearly weekly upset reports, is going to install a new 90,000 distillate hydro-treater, with an expected completion in 2025. Their LA-area refinery meanwhile will be undergoing a modernization plan to improve its energy efficiency and reduce NOx emissions to meet California’s ever-changing regulations. The company did not specifically note anything about its renewable operations in the earnings release but did note in the analyst call that its converted facility in Martinez is running at less than half of its nameplate capacity after last year’s fire. For those who have been experiencing how suddenly long California is on RD this winter, just imagine if that plant was producing another 25MBD.

Phillips 66 continued the trend of good, not great, earnings in its Q4 report this morning, earning more than $800 million in its refining sector the past 3 months, down from $1.7 billion in Q3.  Unlike most of the others however, P66 continues to highlight its cost reduction strategies rather than its plans to grow, saying it achieved $1.2 billion in sustainable savings in 2023 which is AKA laying people off. The company’s conversion project in Rodeo CA is still scheduled to come online in the first quarter, although it remains unclear how long it will take between starting operations and reaching the new nameplate capacity of 50MBD of renewables output. The company continues to highlight plans to sell off roughly $3 billion in unnamed assets that don’t fit its long-term strategy.

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Market Talk Update 1.31.2024

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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Pivotal Week For Price Action
Market TalkWednesday, Feb 21 2024

It’s A Mixed Start For Energy Markets To Start Wednesday’s Session After A Heavy Round Of Selling Tuesday

It’s a mixed start for energy markets to start Wednesday’s session after a heavy round of selling Tuesday. RBOB gasoline futures are clinging to modest gains in the early going while the rest of the complex is moving lower.  

WTI is pulling back for a 2nd day after reaching a 3.5 month high just shy of $80. The pullback pushes prompt values back below the 200-day moving average, reducing the likelihood of a breakout to the upside near term.

ULSD values are down nearly 10 cents for the week and are down more than 26 cents from the high trade set February 9th. That pullback leaves ULSD in neutral territory and could act as a headwind for gasoline prices that still seem poised to at least attempt a typical spring rally that adds roughly 20-30% from winter values.

RIN prices continue their slide this week, with D6 and D4 values reaching new 4-year lows around $.41/RIN Tuesday, which is down just slightly from the $1.62/RIN they were going for a year ago.

HF Sinclair reported a loss for Q4 this morning, with its refining and renewables segments each losing roughly $75 million for the quarter. The change from a year ago in the refining segment is a harsh reminder of the cyclical nature of the business as earnings dropped more than $800 million year on year, with inventory cost adjustments accounting for roughly ¼ of that decline.   

While it wasn’t mentioned in the press release, HFS has the most direct exposure to New Mexico’s recent approval of a clean fuel standard that will start in 2026. That law will no doubt help the company’s struggling Renewables assets in the state but will also create extra costs for their traditional refining operations.

The EIA this morning noted that conditions in the Panama Canal improved slightly in January, allowing Gulf Coast exports to Asia, primarily of Propane and ethane, to increase. While transit capacity is still far below levels we saw before the drought reduced operations in the canal, any improvement offers welcome relief to shippers as they can avoid going the long-way around to avoid the violence in the Red Sea.

France’s navy didn’t waste any time getting into the Red Sea action, shooting down a pair of Houthi Drones less than a day after joining the EU’s official mission to assist in clearing the shipping lanes. It’s not yet clear whether this marks the first official military victory by the French since Napoleon. 

Reminder that the weekly inventory reports are delayed a day due to the holiday Monday.

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