Refinery Upsets Whipsaw Energy Markets
It’s been a rollercoaster ride for energy prices this week with strong gains Monday turning into heavy losses Tuesday, only to see prices rally again overnight and then give up those gains this morning. The theme seems to be that prices have rallied when refinery disruptions appear, then give back the gains when it looks like those issues may not be as bad as originally feared. The first up and down cycle seemed to have a lot to do with the impact, or lack thereof from French protests, while the second ride came courtesy of the severe weather sweeping the US.
The tornado outbreak near Houston Tuesday came dangerously close to many refineries, including a handful of the largest facilities in the country. There were a few reports of power outages and other operational upsets, but so far there are no reports of damage to any facilities or units being completely knocked offline, so we may have just dodged a big bullet in terms of supply security. While we did see a strong price rally overnight as it appeared there would be some disruption to supply in this critical region, the 7-8 cent gains for refined products have been erased this morning as it appears the damage may not have a meaningful impact on output.
In addition to the latest string of weather-related disruptions along the Gulf Coast, there were reports of a fire that injured an employee at the PBF Delaware City refinery Tuesday, although here too it’s unclear if operations were impacted by that event. That’s the second fire in less than a week at a PBF facility, after its plant outside of New Orleans shut a unit over the weekend. Meanwhile, one of the six workers injured in a fire at the Borger TX refining complex last week died of his injuries over the weekend.
In total, we’re seeing unplanned issues stretching coast to coast, with facilities accounting for more than 10% of US production impacted, although the actual extent of the output losses remains unclear, except at the Suncor facility in Colorado which remains completely offline.
We’ll get another look at the impact of this variety of events in today’s DOE report. Yesterday the API reported another build in crude inventories of 3.4 million barrels – suggesting that refinery rates are still restricted, while gasoline inventories saw a small build of 620,00 barrels, and distillates dropped by 1.9 million.
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View AllRefined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.
Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.