Nation Nervously Awaits News On Colonial Pipeline Shutdown

Market TalkWednesday, May 12 2021
Pivotal Week For Price Action

Energy futures continue to tick modestly higher, even as equity markets are moving lower for a third day, as the nation nervously awaits news on the Colonial pipeline shutdown. The EPA has extended RVP waivers through the end of May, and a partial Jones Act waiver is still being considered to help alleviate the supply crunch, but as everyone is learning this week, there just is no good way to replace 100 million gallons/day of supply.

We should find out later today if Colonial is still on track to restart its main lines by the weekend, at least according to the U.S. Energy Secretary, who joined the long list of bureaucrats jumping in front of the camera this week to make it seem like they’re helping the situation. Many drivers in the Southeast aren’t waiting to find out as panic buying is reported across several states, which can create shortages even when the supply network is fully functional. A poll on how many people are filling up even though they’re working from home would be interesting.

Colonial’s website was offline for much of the day Tuesday, and even though the company reported that had nothing to do with last week’s cyber-attack, it didn’t seem to provide confidence that things were improving. The site is up and running today, with an added layer of “I’m not a robot” security. You can see their media updates here:

Important details from the latest update are that the manual operations are allowing batches already in the line to get to the terminal level where trucks can load it, but since they’re not yet taking in any new batches of fuel at the Gulf Coast origin points, refiners are left without a key outlet for their production, forcing many to cut back on run rates, which will start backing up crude supplies as well, in a less dramatic version of what we witnessed last spring when everyone stayed home for two months.

While we wait to find out if there’s a go/no go for restart, there’s plenty to read as we have monthly reports from the EIA and OPEC, and a new IEA report on the CPL issue all published in the past 24 hours, in addition to the weekly inventory reports. 

The API showed a draw in crude oil and diesel stocks last week of 2.5 million and 872,000 barrels respectively, while gasoline stocks had a large increase of 5.6 million barrels. That news didn’t seem to move prices as the data is now considered obsolete since it was collected pre-Colonial shutdown. The EIA report is due out at its normal time today, and is likely to be shrugged off as well. With numerous gulf coast refineries cutting rates this week due to the shutdown, we could see large builds in crude, and large declines in refined product inventories in next week’s report.

The EIA’s monthly forecast increased estimates for gasoline demand this summer, although totals are still expected to be below what we saw in 2019. The monthly report also finally acknowledged the influence record high ethanol and RIN prices are having on refiners and their product prices. Distillate demand increased to its highest level since November 2019 in April, “likely” driven by high freight demand.  Here too the agency expects that strength to continue this summer.

OPEC’s monthly report showed the cartel’s output held steady for the month, with increases from Iran, Nigeria and Saudi Arabia offsetting declines in Libya and Venezuela. The report held its global demand estimates steady for the year, and highlighted the return of US drilling operations that will drive non-OPEC production gains for the next year.

The IEA released a note on the Colonial situation, and calling for greater focus on cyber resilience. That report highlighted the unique situation the East Coast (PADD 1) is in as the largest “importer” of refined products in the world that continues to see a drop in supply options thanks to the shutdown of numerous refineries over the past decade. Perhaps it’s even more remarkable how well supplied these markets are most of the time given the huge amounts of fuel needing to be transported every day to meet that demand.

As a result, if considered on its own, PADD 1 is the largest net importer of refined products in the world, ahead of all of Africa and the Southern Asia Pacific (Australia, Indonesia, Singapore and New Zealand combined).

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Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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Pivotal Week For Price Action