Real-World Impact Of Refinery Shutdowns

Market TalkThursday, Oct 1 2020
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The fourth quarter is starting on a soft note for energy markets with the big 4 petroleum contracts all trading modestly lower to start the day, after staging a healthy recovery bounce to finish off September.  This time yesterday it was looking like we may be setting the stage for a substantial move lower in product prices, but the selling pressure didn’t last long after 8 a.m., leaving the complex stuck in its sideways pattern. 

After a rough September, U.S. equity markets are pointed higher to start October trading, but so far that strength has not carried over to energy prices. 

Yesterday’s DOE report did little to sway price action as inventory and demand estimates had relatively minor moves. Total refinery runs in the U.S. remain lower now than they were after Hurricane Harvey knocked nearly 1/4th of the country’s capacity offline three years ago, and yet this time there are no supply shortages to speak of as demand continues to lag. 

With the seasonal demand slowdown looming for gasoline, and diesel inventories still near record highs, we may see refinery run rates continue to decline over the next month, with more outright closures still a distinct possibility. This article highlights the real-world impact of the refinery shutdowns that have already happened this year. 

The CFTC ordered Sunoco LP to pay a $450,000 fine for spoofing crude oil, gasoline and diesel contracts in 2014. The statement says the trader involved used 50-100 lot increments (50,000-100,000 barrels or roughly 2-4 million gallons of notional volume) to push the market towards smaller positions they actually planned to execute, and once done would cancel the larger orders. This is just a day after JP Morgan agreed to pay $920 million for spoofing metals and treasury markets. Based on the size of the fines, you can get a feel for just how huge the banks’ manipulative trading practices were in comparison.

A Rystad energy report released yesterday suggests that U.S. onshore crude production likely peaked in August and will decline over the next year as prices are unlikely to recover enough to spur more drilling activity.   

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

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Energy Markets Are Trying To Find A Price Floor After Gasoline And Crude Oil Staged A Healthy Bounce To Minimize The Heavy Losses

Energy markets are trying to find a price floor after gasoline and crude oil staged a healthy bounce to minimize the heavy losses we saw early in Tuesday’s session. WTI is leading the move higher early Wednesday, up nearly $.90/barrel in the early going, while RBOB prices are up just under a penny.

Diesel continues to look like the weak link in the energy chain both technically and fundamentally. Tuesday the API reported a 4.9 million barrel build in diesel stocks, while gasoline inventories were only up 365,000 barrels, and crude oil stocks declined by more than 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning and it’s likely we’ll see a reduction in oil output and PADD 3 refining runs thanks to shut ins ahead of Hurricane Beryl, but otherwise the storm appears to be a relative non-issue with only 1 notable refining hiccup, that wasn’t even as bad as a midwestern Thunderstorm.

Chicago basis values rallied Tuesday after reports that Exxon had shut down the 250mb/day Joliet refinery following severe storms that knocked out power to the area Sunday. RBOB differentials surged nearly 9 cents on the day, while diesel diffs jumped more than a nickel. With 3 large refineries in close proximity, the Chicago cash market is notoriously volatile if any of those facilities has an upset. Back in May there was a one-day spike in gasoline basis of more than 50 cents/gallon after Joliet had an operating upset so don’t be surprised if there are bigger swings this week if the facility doesn’t come back online quickly.

Moving in the opposite direction, California basis values are heading the opposite direction with the transition to August scheduling pressuring CARBOB differentials in LA and San Francisco to their biggest discounts to prompt RBOB futures in more than 18 months. Gasoline imports into PADD 5 have held well above average levels over the past 2 months, which has more than offset the loss of the P66 Rodeo refinery’s output after it completed its conversion to RD production, in another sign of how growing refining capacity in China and other Asian countries may become more influential to the US. California regulators may also pat themselves on the back that their new plans to force refineries to report their gross profit monthly, in addition to the rules requiring all bulk trades in the state be reported must be driving the lower gasoline differentials, assuming they figure out what a basis differential is.

Meanwhile, California’s Carbon Allowance values have tumbled to their lowest levels in a year after a CARB presentation last week suggested the agency would be delaying long-anticipated tightening of the Cap and Trade program until 2026.

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

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The Sell-Off In Energy Markets Continues, With Refined Products Reaching Their Lowest Levels In A Month Early In Tuesday’s Session

The sell-off in energy markets continues, with refined products reaching their lowest levels in a month early in Tuesday’s session. Reports of slowing growth in China, the world’s largest oil purchaser, is getting much of the credit for the slide in prices so far this week, although that doesn’t do much to explain why refined products are outpacing the drop in crude.

ULSD futures are leading the early move lower, trading down a nickel on the day, and marking a 19 cent drop since July 4th. There’s not much in the way of technical support for ULSD, so don’t be surprised if this sell-off continues to pick up steam.

With today’s slide, RBOB futures are down 17 cents from where they were trading on July 4th, and are just a couple of cents from testing their 200-day moving average. Should that support break, it looks like there’s a good chance to test the June lows around $2.29.

Physical markets are not offering any strength to the futures market with all 6 of the major cash markets for diesel across the US trading at a discount to ULSD futures, while only 1 gasoline market is trading at a premium to RBOB futures. That combination of weakness in futures and cash markets is going to be troubling for refiners who are seeing margins reduce during what is traditionally a strong time of year.

The EIA highlighted the energy trade between the US and Mexico in a report Monday, showing that despite so many claims of energy independence from Mexican officials, the actual amount of refined fuels and natural gas bought from the US continues to increase. That’s good news for many US refiners who have become more dependent on Mexican purchases to find a home for their output.

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