Production Doubts Overshadow Recession Concerns as Refined Products' Rally Continues

Market TalkFriday, Jan 20 2023
Pivotal Week For Price Action

After a 1 day break, energy prices resumed their rally Thursday, with strong gains that have continued on into Friday’s trading.  For the moment, it appears that a variety of refinery concerns are outweighing the recession fears that had cropped up mid-week.   From a chart perspective, this quick recovery puts both gasoline and diesel in a position to see more strong gains in the weeks ahead. 

The nationwide protest in France over a change to increase the retirement age from 62 to 64 before workers are eligible for their state pension was estimated to surpass 1.1 million people Thursday, and halted fuel deliveries from at least 3 refineries.  While the price reaction was delayed somewhat, it does seem like it was a key contributor to the strong rally that pulled both RBOB and ULSD futures to new highs for January, and opening the door to another 20-30 cents of upside on the charts.

If all you do is look at where US fuel inventories are to start the year in the charts from the DOE’s weekly report below, it’s easy to understand why prices have been rallying for 9 out of the past 10 days, as most regions have far less supply of gasoline and diesel than they normally do to start a year.  While demand remains average at best, it is improving quickly as we move out of the worst 2 weeks of the year, and refinery runs are still far below normal due to the numerous weather-related disruptions over the past month. 

If you’re looking for a silver lining in the low refinery output figures, it may be that it’s allowing crude oil inventories to recover, even though the SPR releases have come to an end.  Then again, you can’t put crude oil in your vehicles, so that’s not particularly helpful for consumers.  Exports remain at above-average levels for refined products and crude oil, as facilities on the Gulf & East Coasts have no shortage of buyers in the Atlantic basin, while producers on the West Coast are being incentivized to send barrels overseas to avoid the spreading environmental taxes on their products.

Caveat Emptor:  The new owners of the beleaguered refinery FKA Hovensa may be wanting a do-over after a judge ruled they must stand as co-defendants in environmental claims for the variety of toxic mishaps that occurred on the prior owner’s watch.  If there weren’t already enough nails in that facilities coffin to keep it from having a meaningful impact on Atlantic basin refinery capacity, add this as one more. 

Motiva, AKA Aramco, reported an upset on an FCC unit at its refinery Thursday.  While it’s unclear if that unit or others were forced to reduce rates because of that upset, the timing of the report also coincided with the building momentum in refined product prices.  

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

Market Talk Update 01.20.2023

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Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

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.

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

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.

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

Pivotal Week For Price Action