Refineries Initiate Restart Efforts

Market TalkFriday, Aug 28 2020
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We’ve reached the calm after the storm as the Gulf Coast refining industry is assessing the damage from Hurricane Laura, and most companies seem to be breathing a big sigh of relief.  Unfortunately, much of the country is still going to feel an impact from this storm, as flooding potential stretches through the mid-west and east coast through the weekend.

Three of the refineries that had initiated shutdowns ahead of the storm have already filed with the state that they were beginning restart efforts, and more are expected to follow suit today as reports suggest the plants outside of Lake Charles likely avoided major damage thanks to the eastward shift in the storm’s path prior to landfall.

We will probably not know the status of the two refineries that were operating in Lake Charles before the storm until next week, since damage assessment crews were not allowed into the area Thursday. A major fire in a nearby chemical factory, and the closing of the Interstate 10 bridge due to a runaway casino boat are just a couple of examples of issues that may be hampering those efforts. 

The one critical unknown in terms of regional supply is whether or not the Colonial station near Lake Charles suffered any damage. The pipeline continues to operate downstream, but if Lake Charles is blocked, the barrels originating in the Houston and Port Arthur hubs won’t be able to move through to the rest of the country. There are no reports that the facilities were damaged, they just don’t know since accessing the location may still take a couple more days. Explorer pipeline reported no damage to its facilities, but will still see slight delays in restart due to uncertainty from the local utilities on power supply.

The bad news for refiners that managed to avoid operational issues during the storm is that the boost in margins was short-lived as both gasoline and diesel prices have crumbled, and are now threatening a technical break to the downside that could drag many plants back to the cusp of break-even levels. 

Don’t relax just yet. As is often the case in active hurricane seasons, major hurricanes aren’t isolated events, (i.e. Harvey/Irma/Maria in 2017, Gustav and Ike in 2008, Katrina/Rita/Wilma in 2005). Already this morning, the National Hurricane Center is tracking two new potential systems crossing the Atlantic, both given 30 percent odds of development next week. 

D4 (Bio) RINs hit a fresh 2.5 year high Thursday, as surging soybean prices and falling diesel prices gives a poor outlook for incremental bio blending. Exports to China and weather damage from the Derecho earlier in the month are both getting credit for the rally in Soy prices. Corn and ethanol prices have also been rallying, but have not kept pace with bio, partially due to the fact that ethanol blending is less discretionary, which has kept D6 RINs from pushing through recent highs so far.

The EIA this morning took a closer look at how U.S. refineries have been forced to make drastic operational changes this year due to COVID demand impacts. Perhaps the most impressive piece is how the plants have been able to dramatically shift product yields in response to the wild swings in gasoline and jet fuel demand. That unprecedented shift towards diesel production also helps explain why diesel prices barely flinched this week even when it appeared that Laura might shut down 20 percent of the country’s refining capacity.

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Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

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Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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

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