Second Quarter Winds Down In Quiet Fashion
The second quarter is winding down in a quiet fashion so far with minimal moves in refined products, although oil prices are feeling some downward pressure in the early going. From a chart perspective, most energy futures are moving into a neutral territory which suggests the summer doldrums may soon be upon us with choppy but aimless trading to be expected.
July RBOB and ULSD/HO futures expire today, so look to the August (RBQ/HOQ) contracts for price direction this afternoon.
This was an unprecedented six months for energy markets. Remember in January when the U.S. and Iran started lobbing missiles at each other, threatening to send crude to $100/barrel? What a quaint idea that seemed just three months later when prices for WTI went negative for the first time ever, then about 25 minutes later went to negative $40/barrel.
Perhaps most remarkable about all of it is that as the dust is settling, oil prices are ending the same quarter that saw a 350 percent price drop in one day, with their largest quarterly percentage increase in three decades.
Looking back, the second quarter may be remembered as either the ultimate sign of American resilience, with U.S. energy and equity markets rallying sharply in the face of so much fear and uncertainty, or perhaps as one of the biggest head-fakes of all time if those fears come true later in the year.
It’s been a rough week so far for the oil majors. Exxon announced it was preparing substantial
job cuts over the weekend, BP announced it was selling its chemicals unit Monday, and now Shell announced it was planning an asset write down of up to $22 billion this morning.
Refiners aren’t faring much better these days as margins remain tight, and production increases are hampered by the unknown impact of the latest activity restrictions. Some Midwest refiners are also having to deal with the closure of Enbridge’s line 5 – which could become permanent – and is forcing at least temporary run cuts at OH and MI refineries.
Better times ahead? The Dallas FED’s Texas Manufacturing outlook showed a strong recovery in June, indicating an expansion in factory output after three months of steep declines. Similar to the energy outlook published last week, the factory survey shows expectations that most operations will be close to full capacity by the end of the year. That optimism may be a key barometer to watch in July as we’ll get a chance to see whether or not the tighter restrictions at the state and local levels impact these businesses.
After a volatile June, RIN values have been quiet as we approach month end. The possibility of retroactive small refinery exemptions continues to seem to be the market driving ping pong ball in the renewables market, with governors on the ag side of the debate weighing in with the EPA this week.
Click here to download a PDF of today's TACenergy Market Talk.
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Refined 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.