New Lockdowns Have Markets On Edge
Fear is in the driver’s seat to start the week as energy and equity markets face an early wave of selling. Rising COVID case counts and new lockdowns have markets on edge, and a lack of stimulus plan progress has many concerned that this could be a long and painful winter, and so far are keeping attention away from the fact that there’s yet another hurricane heading towards refining country.
Remember that system in the Caribbean that was given 20% odds of developing last week? It’s now Tropical Storm Zeta, and is expected to become a hurricane heading towards (you guessed it) Louisiana later this week. The storm is on an eerily similar path to Delta’s earlier forecasts two weeks ago with the models taking it over the Yucatan, then on towards New Orleans with a landfall on the U.S. coast late Wednesday or early Thursday.
Will Zeta be the storm that ends New Orleans lucky streak? Already a handful of storms including Marco, Laura, Sally, and Delta were forecast to hit the big easy at some point, only to shift and make landfall on other parts of the Gulf Coast. The Lake Charles region has had the opposite luck, and although it’s currently out of the forecast cone, will no doubt keep a wary eye on this storm as well. There’s been a pattern that the early models underestimate how strong these storms will become as they move over open water. At this point Zeta is only predicted to reach Category 1 status, but is currently traversing the warm waters that saw Delta spike to Category 4 status in one day. Expect Gulf of Mexico rigs to be shut as a precaution, and if the storm stays on its current path, there’s a good chance the NOLA are refiners may start idling units as well to minimize potential damage.
So far the storm threat seems to have had little impact on energy futures, although RBOB gasoline is showing some resistance to the early sell-off that could be thanks to the storm risk. Most contracts are trading at three week lows, and threatening a technical breakdown that could finally end the sideways trading pattern that’s held since June and push products back below the $1 mark. West Coast cash markets are bucking the weak trend in futures however, with reported refinery issues spurring diesel basis values to six month highs.
The latest big deal: Cenovus agreed to acquire Husky Energy as the two Canadian oil producers and refiners sought a merger to survive the COVID Crisis. You may not recognize Cenovus as a U.S. refiner, as they’re a JV partner with P66 in the Wood River, IL and Borger, TX plants, and will now also be involved with Husky’s Lima, OH and Toledo (JV w/ BP) operations. No word yet on how Husky’s marketing and supply office in Columbus, OH will be impacted, although job cuts at some level are expected to be part of the deal based on the dreaded term “Synergies” used in the announcement.
Baker Hughes reported six more oil rigs were put to work last week, marking the fifth straight week of increases in the U.S. drilling rig count. Although the uptick in activity is certainly a small amount of much needed good news for the beleaguered industry, keep in mind the total rig count is still less than 25% of where it was one year ago.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
Click here to download a PDF of today's TACenergy Market Talk.
The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.