Roiling Markets Around The Globe
A big Thursday reversal saw an 8 cent bounce from an early selloff in refined products, which pushed ULSD and crude prices to fresh 3 year highs. Government intervention, or the lack of in some cases, is the theme of the week roiling markets around the globe. The US government seems to have gotten out of its own way to avoid the latest debt ceiling stand-off, but remains gridlocked on longer term spending & tax bills, not to mention the RFS rulings that are already almost a year overdue.
The big story Thursday was the Chinese government has reportedly ordered energy companies to secure supplies “at all costs” this winter, reminding many market veterans of a similar plan that helped oil prices reach record highs 14 years ago. Here’s the cliff notes:
2008: Beijing hosts Olympics: Chinese government mandates fuel suppliers stock up ahead of the games to ensure no outages on the world stage. WTI reaches $147 and ULSD surpasses $4 in the months leading up to the games….before crashing to $32 and $1 later in the year as the world financial markets get hammered by housing & banking crisis, and Chinese suppliers stop their artificial purchases.
2022: Beijing host Olympics: Chinese government orders fuel suppliers stock up ahead of the games to ensure no outages on the world stage, coal and natural gas prices trading at record highs, crude and diesel prices reach 3 year highs.
Does this mean we’re in for another record high in oil and diesel prices? Some options traders are definitely betting that way as $200 call options on Brent have been trading this week.
Three big reasons why this time the Chinese fuel hoarding will be different than the last time, and why $200 (or even $100) seems like a stretch:
First, OPEC & the US have a combined 10 million barrels of spare capacity for oil production, which in 2008 was less than 2 million barrels.
Second, international spectators won’t be allowed at the games due to COVID, so the desire to window dress for millions of spectators may be substantially less than it was 14 years ago.
Third, most of the globe is still dealing with a refining capacity overhang, meaning that if prices continue to rally there will be an incentive to figure out a way to get oil or diesel on a boat and make money to solve the problem, and perhaps offer a life line to those refiners who have been contemplating shutting their doors.
Of course, we’ve seen plenty of evidence this year that turning spare capacity back on isn’t like flipping a switch, and logistical hurdles mean new supplies will take at least months to come back online. Here too the government intervention may get in the way as US drillers already struggling with worker shortages (like just about every other industry these days) are concerned that things could get much worse if vaccine mandates are passed.
While the China story earned much of the credit for the big price bounce on the day, it seems that another big rally in RIN prices may have been more of a factor as refined products outpaced crude gains on the day by a wide margin. There is still no official word from the EPA or the White House on the RVOs, and each day that passes without an update seems to be giving the market more confidence that the numbers “leaked” last week were fake.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.