Prices Have Gone Nowhere In Spite Of Attacks

Market TalkWednesday, May 15 2019
Bulls Have Taken Back Control Of Energy Markets

Bearish fundamental data from the API, OPEC and the IEA, and perhaps another soft start for US equity markets, are outweighing the threat of a supply disruption in the Middle East this week, as prices have essentially gone nowhere in spite of attacks on the world’s most important shipping bottleneck for crude and one of its largest pipelines.

The US state department ordered non-emergency personnel to leave Iraq, as the tensions in the region have escalated dramatically over the past few days and due to an “…increased threat stream.” So far the oil markets are not acting as though this is the next step on the path to a confrontation with Iran, as oil and product prices did not make much of a reaction to the news overnight and are holding modestly in the red this morning.

The API was said to show across-the-board builds in energy inventories, most notably an 8.6 million barrel build in US Crude oil stocks, while diesel increased by 2.2 million barrels, and gasoline stocks ticked up by 567,000 barrels. The DOE’s weekly report is due out at its normal time of 9:30 central today.

The fears of Iranian oil export declines due to sanctions were tempered by OPEC’s monthly oil market report that showed gains from Iraq, Libya and Nigeria were more than enough to offset Iran’s decrease, with the Saudi’s still taking the role of the flywheel to balance the cartel’s production. OPEC held its global oil supply & demand estimates steady from last month

The IEA’s monthly oil market report noted a sharp slowdown in oil consumption in Q1 2019, and revised its global demand estimate lower for the rest of the year, citing weaker economic data from Brazil, China, Japan and Korea among others for the weaker outlook. The counter-OPEC agency also noted the relative calm in oil markets given the rising tensions in the Middle East, declining OPEC production and quality issues with Russian oil as new supply sources manage act to insulate the market from more volatility.

Most of the time, the OPEC monthly report gets cited only for its oil production figures, but the report had several other noteworthy items as well.

OPEC on Global Refining

“In April, refining margins globally saw a counter-seasonal positive performance, as the tightness in the gasoline market witnessed in the previous month prevailed, providing stimulus for trade flows amid limited product output. Meanwhile, the peak spring refinery maintenance season is slowly approaching its end. In all main trading hubs, markets of all other key products, with the exception of gasoline, witnessed losses, in line with seasonal trends and given the recently increasing supply-side pressure.”

OPEC on Non-OPEC oil production

“In 2018, non-OPEC oil supply experienced a robust growth of 2.91 mb/d, amounting to more than three times the increase seen in the previous year, and was led by the y-o-y gains of 2.26 mb/d in the US. In addition to the US, other non-OPEC countries, such as Canada, Russia and UK contributed to the gains. Indeed, the recovery in oil supply in 2017 and 2018, following the contraction in 2016, was driven by improving oil market conditions and rising oil prices, with NYMEX WTI increasing by around $14/b, or 27.5%, y-o-y, to average $64.90/b in 2018. Free cash flow (FCF) in non-OPEC reached to a record high of $310 bn in 2018, a jump by almost 100% y-o-y. There are several reasons to why free cash flows have improved from the low of $35 bn seen following the oil price collapse in 2015. Key among these reasons are the higher oil prices, lower cost levels and reduced investments. The non-OPEC’s FCF in 2019 is expected to decline 15%, before rising again by 23% to reach $324 bn in 2020.

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Market TalkFriday, Jun 21 2024

Charts Continue To Suggest We’re In For A Period Of Sideways Trading

It’s another quiet start for energy markets that seem to have entered the summer doldrums where peak gasoline demand for the year meets peak disinterest as many in the industry start taking vacations. Charts continue to suggest we’re in for a period of sideways trading now that the big June recovery bounce seems to have run out of steam.

Tropical storm Alberto dissipated over Mexico Thursday, but not before its far-stretching thunderstorms upset another refinery in the Corpus Christi area. Flint Hills reported a boiler was knocked offline at its East Corpus refinery, a day after Citgo reported an upset at its East facility as well. Large parts of Texas have been swimming in supply most of the year as neighboring markets to the North and West have been long, backing up barrels into the Lonestar state so these small upsets are unlikely to move the needle in terms of prices or allocations in the area, but they are a good reminder of how vulnerable these facilities are to the weather. The NHC is still tracking 2 more systems with coin-flip odds of being named in the next few days, but neither one looks like it’s headed for the oil production and refining zones in the Gulf Coast at this point.

Ukraine continues to pound Russian energy infrastructure, with 4 different refineries reportedly struck overnight, following attacks on multiple export facilities earlier in the week. The global market continues to largely shrug off the attacks, as excess refining capacity in Asia seems more than capable of picking up any slack in the supply network that may be caused by a loss in Russian output, which is a very stark contrast to what we were experiencing 2 years ago.

Another dip in capacity: The EIA reported a drop of 103mb/day of refining capacity in the US last week, the first reduction in capacity reported since before Russia invaded Ukraine. A general drop in capacity came as no surprise as the conversion of the P66 Rodeo refinery in the San Francisco Bay area earlier this year was well documented. The surprise in the figures was that the East Coast made up 40% of the total decline, which may suggest those facilities which are generally disadvantaged due to labor costs and limitations in crude oil sourcing, are once again knocking on death’s door after a 2-year reprieve.

With the conversion of Rodeo, PADD 5 now has the least amount of refining capacity since the EIA started tracking that stat 40 years ago. Right on cue, the DOE also reported PADD 5 gasoline imports surged to the highest level in over 3 years last week, offering a glimpse of what lays ahead as the region will now be more dependent on shipments from across the Pacific to meet local demand.

Speaking of which, lobbying groups are filing responses to California Energy’s workshop proposals on new refinery rules to cap profits, using the forum to tout the advantages of whatever product they’re selling, and highlighting the risks of the state making itself a fuel island dependent on imports from overseas.

Another one bites the dust? BP “is pressing pause” on its biofuel project at its Cherry Point WA refinery this week, the latest in a line of biofuel producers to rethink plans to make diesel from soybeans and waste oils as subsidies have plunged. On top of plummeting LCFS and RIN values that have cut nearly $2/gallon out of the credit values of the fuel that costs $3-$4/gallon more than traditional diesel, the new Clean Fuel Production Credit is replacing the $1/gallon Blender’s Tax credit that’s been the lifeline to many producers over the past decade. The new program (which is part of the Inflation “Reduction” Act) sets a higher bar to clear before producers can get their handout, which means some domestic facilities will see another loss in credit values from 50-80 cents/gallon vs the BTC, while importers won’t qualify for any credit under the new program.

For real this time? Mexican officials continue to make up stories about when their new Dos Bocas refinery will begin producing fuels, kicking the can further down the road this week saying the facility will start up in the back half of the year. This is at least the 10th time officials have moved back the start date of the facility over the past few years and given that the back half of the year starts in 10 days, I’ll take the over on this bet. Refiners along the US Gulf Coast are no doubt celebrating anytime another delay is announced as they’re facing more competition than they have in the past two decades for their exports.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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Market TalkThursday, Jun 20 2024

Energy Futures Giving Back Yesterday's Holiday Shortened Session Gains

Energy futures are giving back almost all of the gains made during yesterday’s holiday-shortened session as a search for direction begins to emerge after crude oil and diesel prices reached 7-week highs. Charts suggest we may be in for a few weeks of sideways trading unless buyers can push prices up another 5-10 cents before the month's end.

A reminder that since futures didn’t settle yesterday, the price change you’re seeing today is relative to Tuesday’s close. Spot markets weren’t assessed yesterday. The DOE’s weekly status report will be released at 11 am Eastern.

Tropical storm Alberto was finally named Wednesday after a couple of days of a “potential tropical cyclone” label. While the storm is already moving inland over Mexico, it is having widespread impacts with parts of Texas already declaring states of emergency to deal with flooding.

Yesterday we mentioned that the heavy rains brought by this system may interfere with restart efforts at Citgo’s Corpus Christi West refinery, but it was actually their East Corpus Christi plant that reported flaring due to the “heavy rainfall event.” No units were reported to be shut from that upset, and if the refiners in the area can make it another 12 hours, they’ll have dodged their first storm bullet of the year.

Although the forecasts all said this would be an extremely busy year for storms, Alberto was actually the latest named storm in the Atlantic basin for a season in 10 years. Don’t worry though, it looks like we’ll quickly make up for lost time with two more systems being tracked. One on Alberto’s heels is given 50% odds of being named as it moves into the Gulf of Mexico this weekend, while the other lingering off the SE coast is only given 40% odds, but is still set to bring heavy rain to Florida, Georgia and the Carolinas.

The treasury and IRS published guidance on the Prevailing Wage and Apprenticeship (PWA) requirements for renewable fuel facilities to qualify for the new Clean Fuel Production Credit (CFPC) that will replace the blanket $1/gallon Blender’s Tax Credit next year. Without reaching the PWA standards, producers can get a maximum of $.20/gallon for Biodiesel and RD, and $.35/gallon for SAF. If a producer meets the PWA guidelines, they can theoretically earn 5 times the base amount, for a maximum of $1/gallon for RD and Bio and $1.75 for SAF. The actual amount will be calculated by multiplying the maximum credit times the fuel’s emissions factor, meaning many producers will earn much less than the current $1/gallon credit. It’s also worth noting again that importers will not qualify for the CFPC after many years of earning the BTC, which may shake up the supply outlook later this year as anyone who can, will race to dump their barrels into a US market before the credit goes away.

Click here to download a PDF of today's TACenergy Market Talk.