Refined Product Futures Attempting A Recovery Rally After Monday Sell-Off
Refined product futures are attempting a recovery rally this morning after a big Monday sell-off pushed prices to 3-week lows. A few cash markets for gasoline around the U.S. ticked down to their lowest levels of the year during Monday’s rout as the big physical players are backing off purchases ahead of winter. Today is expiration day for November RBOB and ULSD contracts, so if your cash market hasn’t already transitioned, make sure you’re watching the HOZ and RBZ contracts for direction.
Oil prices are now trading lower than they did when the war broke out 3.5 weeks ago as there continue to be no signs of supply disruption beyond the war zone. Charts continue to favor lower prices in the weeks ahead, with the downward trend lines that started at the end of summer still intact and a bearish wedge pattern is forming that threatens a big move lower should the October lows break.
The Dallas FED’s manufacturing survey showed “tepid” growth for a 2nd month in October, following several months of contraction. Chemical manufacturers noted the uncertainty surrounding the Middle East war, and how it could help prices, but also could hurt the world economy.
Flint Hills reported another upset at its Corpus Christi West refinery over the weekend that affected operations at an FCC unit. It’s unclear what caused this upset, or if it was related to last week’s power-loss-induced shutdown. There have been a rash of issues at the Corpus-area refineries the past couple of months, but so far there have not been major impacts on supply in the San Antonio/Austin/DFW corridor they serve.
A storm brewing in the Caribbean will bear watching for the next few days. The system is now given 70% odds of being named, and while the European forecasting model has it plowing into Central America, the US GFS model suggests it may just brush Central America before hooking north and east back towards Florida. It still seems like a long shot this will be a threat to the Gulf of Mexico oil production and refining zones, but with the wide range of forecasts – not to mention the huge forecasting error last week with Hurricane Otis, anything seems possible at this point.
Marathon reported another strong quarter with average refining margins north of $26/barrel and 94% utilization. The company did not break out the earnings for its renewables segment but did note it was on pace to increase output at the Martinez renewable refinery to roughly 47mb/day by the end of the year.
BP also had strong results from its refining group during the quarter, but its stock is pointing lower this morning as its results continue to lag behind expectations, and the company had to write off more than $500 million on a failed wind project in New York. A WSJ article this morning suggests the terrible results this quarter for EV and Wind producers will lead to the next round of government bailouts to avoid their grand plans from going bust.
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“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.