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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The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.
Week 15 - US DOE Inventory Recap
Prices To Lease Space On Colonial’s Main Gasoline Line Continue To Rally This Week
Energy markets are sliding lower again to start Wednesday’s trading as demand concerns and weaker stock markets around the world seem to be outweighing any supply concerns for the time being.
Rumors continue to swirl about an “imminent” response by Israel to Iran’s attacks, but so far, no news seems to be taken as good news in the hopes that further escalation can be avoided, even as tensions near the Red Sea and Strait of Hormuz continue to simmer.
Prices to lease space on Colonial’s main gasoline line continue to rally this week, trading north of 11 cents/gallon as Gulf Coast producers still struggle to find outlets for their production, despite a healthy export market. Gulf Coast CBOB is trading at discounts of around 34 cents to futures, while Gulf Coast RBOB is trading around a 16-cent discount, which gives shippers room to pay up for the linespace and still deliver into the East Coast markets at a profit.
Back to reality, or just the start of more volatility? California CARBOB basis values have dropped back to “only” 40 cent premiums to RBOB futures this week, as multiple flaring events at California refineries don’t appear to have impacted supply. The state has been an island for fuel supplies for many years as its boutique grades prevent imports from neighboring states, and now add the conversion of the P66 Rodeo refinery to renewable diesel production and the pending changes to try and cap refinery profits, and it’s easier to understand why these markets are increasingly vulnerable to supply shocks and price spikes on gasoline.
RIN prices continue to fall this week, touching 44 cents/RIN for D4 and D6 values Tuesday, their lowest level in 6 weeks and just about a nickel above a 4-year low. While the sharp drop in RIN and LCFS values has caused several biodiesel and Renewable Diesel producers to either shut down or limit production, the growth in RIN generation continues thanks to projects like the Rodeo refinery conversion, making the supply in RINs still outpace the demand set by the Renewable Fuel Standard by a wide margin.
The API reported draws in refined products, 2.5 million barrels for gasoline and 427,000 barrels for distillates, while crude oil stocks had an estimated build of more than 4 million barrels. The DOE’s weekly report is due out at its normal time this morning.
Click here to download a PDF of today's TACenergy Market Talk.