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: https://www.colpipe.com/news/press-releases/media-statement-colonial-pipeline-system-disruption

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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Pivotal Week For Price Action
Market TalkMonday, Dec 5 2022

The Officially Imposed Sanctions Against Russian Oil Exports Are Taking Credit For This Morning’s Gains In Energy Prices

The officially imposed sanctions against Russian oil exports are taking credit for this morning’s gains in energy prices. Brent futures, the benchmark for European crude oil, are leading the pack higher so far today, trading up nearly 3%. West Texas Intermediate futures, along with both American refined product contracts, are tagging along with 1.5-2.5% gains.

OPEC’n’friends decided to stay pat on their Production Reduction™ policy through the end of the year, which aims to remove about 2 million barrels per day from global oil inventories. The relatively muted response in energy futures action suggests the ban on Russian crude and the continued reduction in cartel oil supply were both largely priced in.

It seems we have averted disaster last Friday as Washington passed legislation to prevent rail workers from going on strike. While the vast majority of refined products are transported to market hubs via pipeline, the required ethanol component of retail gasoline is by-and-large supplied via railcars.

Heating Oil futures stand out as the lone contract of the ‘big five’ that saw increased bullish bets from money managers last week, mostly due to the trimming of short positions rather than the addition of long positions. It seems fewer and fewer traders are willing to bet on lower diesel prices heading into the winter, where distillates act as backup supply for heating homes.

Market participants in crude oil futures fell to lows not seen since 2016 last week. It seems the global uncertainty surrounding energy supply and infrastructure has some potential players taking a wait-and-see approach rather than betting on price direction.

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Pivotal Week For Price Action
Market TalkFriday, Dec 2 2022

The Energy Complex Is Trading Mostly Lower So Far This Morning

The energy complex is trading mostly lower so far this morning, with prompt month RBOB futures leading the way. Brent crude oil is struggling to hold on to overnight gains and it is exchanging hands on the green side of even, if only just.

The easing of quarantine protocols in China is taking partial credit for the weekly gain in WTI futures this morning, despite the emergence of reports and images showing provisional camps set up to enforce isolation and curb the latest spread of the pandemic.

The “ban” on Russian crude oil, set to take effect on Monday, has yet to reach final approval in Europe. Poland seems to be one of the last holdouts and has not been shy about wanting the price cap to be as low as possible.

Sunday’s OPEC+ meeting, which will reportedly be held virtually, is also getting some play in the headlines this morning. While some consider the setting of the meeting to telegraph no change in the cartel’s production policy, others posit the group is considering cuts ahead of next week’s oil ban.

The Bureau of Labor Statistics published the November jobs report this morning, an increase in nonfarm payrolls of 263,000 while unemployment rate held pat at 3.7%. The stock market did not like that: S&P 500 futures dropped 1.4% on the news as traders expect higher-than-expected job growth to buttress the Fed’s intent on continuing to raise interest rates.

The EPA published their proposed volume obligations under the Renewable Fuel Standard for the next three years and is now seeking public opinion on their target levels. Their report also estimates that the RIN obligations will reduce US oil imports by ~170,000 barrels per year. Is that a typo? We imported 6 million barrels per day last week, for reference.

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Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

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