Muted Reaction In Both Futures And Cash Markets
Energy futures are pulling back as August trading wraps up, with damage assessments along the Gulf Coast ongoing while the East Coast braces for another round of flooding rains as Ida moves north. While it will still take days to figure out the extent of the damage to one of the country’s largest oil hubs, the muted reaction in both futures and cash markets suggests the impact of this storm will not be widespread.
What a difference a decade makes: 2011 was the year the US became a net exporter of refined products for the first time since WWII. Prior to that, storms that made a direct hit on the country’s largest oil port, and 2nd largest refinery hub, would be expected to bring price spikes of $1/gallon or more. This time, gulf coast basis values barely flinched at one of the strongest storms to ever hit the Gulf Coast, even though it temporarily shuttered more than 10% of the country’s refining capacity and its largest pipeline, as the capacity to recover simply by not sending barrels to other countries has grown by millions of barrels/day.
Colonial pipeline did report that it was planning on restarting its 2 mainlines Monday night after a precautionary shutdown Sunday. The pipeline formerly known as Plantation, is still operating, but like most in the Baton Rouge area, is struggling with power outages that could end up forcing the need for the line to slow or shut. Exxon’s Baton Rouge refinery, a key origin point for the FKA Plantation pipeline, reported that it was forced to shut multiple units due to a lack of steady power and refinery inputs. Most of the other refineries that shut ahead of the storm have not yet made full damage assessments due to the widespread flooding and power issues. Early estimates are that most avoided major damage, but power supply will be the bottleneck determining how fast restarts can begin.
The EPA granted waiver requests allowing the sale of winter-grade gasoline (11.5lb rvp) 2 weeks earlier than normal in Mississippi and Louisiana to try and help alleviate any potential supply shortages. Pipelines were already just days away from starting to schedule winter grades, and the scope of the waiver is limited to just the 2 states so far, so it shouldn’t put downward pressure on prices elsewhere in the region.
While all eyes were focused on Ida, Tropical storm Julian came and went over the open Atlantic, and Tropical Storm Kate has also formed but looks like it will stay out to sea. Next up in the list for the year is Larry, and the NHC is giving 90% odds of a system moving off the coast of Africa getting that name later this week. That system is a good reminder that we’re now into the “Cabo Verde” portion of the Hurricane season where the systems moving off the African coast become more frequent, and form some of the most powerful storms we see each year, which is scary considering what we just saw from Ida that didn’t have nearly as much time to develop.
In non-storm news:
US equity indices reached fresh record highs (again) Monday, and are on pace for a 7th consecutive month of gains, just in time for the seasonal tick up in volatility.
Following up on a White House request, the FTC said that it is looking into whether or not retail station mergers and acquisitions is creating illegal activity in the way gasoline prices are set. It’s hard to say what, if any, changes this may bring about in the industry, but it certainly seems like it could slow down the rapid consolidation of retail station owners we’ve seen over the past several years.
The Dallas FED’s Texas Manufacturing Survey showed another month of expansion, but continued to highlight labor shortages and supply chain delays as major hurdles to continued growth.
Speaking of which, Bloomberg provides today’s interesting read: The race to recruit women to help fill the labor gap in the trucking industry.
Click here to download a PDF of today's TACenergy Market Talk.
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Baker Hughes Reported A Net Increase Of 5 Operating Oil Production Rigs Last Week
“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
No Official Word From OPEC Yet On Their Output Agreement For Next Year
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Baker Hughes Reported A Net Increase Of 5 Operating Oil Production Rigs Last Week
NYMEX HO is the sole energy futures contract trading higher this morning, exchanging hands ~1.5 cents higher than Friday’s settlement. It’s refined product counterpart, along with both American and European crude oil benchmarks, are trading lower to start the week. Uncertainty surrounding the plausibility of further, voluntary supply cuts by OPEC+ members is taking credit for the weakness in WTI prices this morning.
Baker Hughes reported a net increase of 5 operating oil production rigs last week, bringing the total number of active platforms to 505. While this is good news for US energy security and for any producer that managed to hedge future production north of $100, others are viewing the increase in drilling as an incremental environmental hazard.
The fight over year-round access to E15 is raging on in the Midwest. Eight states in the breadbasket are pushing the EPA to reduce restrictions on the purchase of the increased ethanol ratio fuel. The Attorneys General from Iowa and Nebraska are asking a regional court to force the EPA’s ruling while the Agency claims it needs more time.
Money managers increased their net long position in both gasoline and diesel futures last week. Bets to the downing increased for WTI, however, as speculators bank on the latest round of supply cuts by OPEC+ being much ado about nothing.
Click here to download a PDF of today's TACenergy Market Talk.
“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.