Senate Election Results Impact On Financial Markets
We’ve had a busy couple of weeks’ worth of price action so far in 2021, and we’re just starting our third day of trading. Energy prices have gone from the cusp of a technical breakout to the upside, to a huge reversal that threatened a price collapse, and back again to 10 month highs in just two days. Prices are starting Wednesday’s session with more of a wait-and-see approach after being unable to sustain their rally overnight. OPEC-inspired whiplash is getting most of the credit for the big swings in energy markets, while the Senate election results look like they’ll be the big story today that will likely have broader impacts on financial markets.
Saudi Arabia surprised pretty much everyone Tuesday by announcing it would unilaterally cut its oil output by one million barrels/day, which would allow Russia and other countries to increase their output, without flooding the global market as demand continues to sputter. While the move shocked the markets, which responded with a furious rally in oil and refined product futures, it seems to be in some ways the Kingdom making good on the promise it made in the fall to do whatever is necessary to stabilize the global oil markets and teach speculators a lesson. This move also sets the stage for some interesting political theatre once demand returns, as the Saudi’s will no doubt remember those that supported them in this effort, and probably even more those that did not.
Not buying it? As the basis charts below show, differentials for physical prices in most regional U.S. spot markets dropped on the day as cash markets seem to think the current supply/demand realities are not as optimistic as the futures market action suggests. That hesitation by the big physical traders could be enough to stall the momentum in futures, just as they look like they’re breaking technical resistance and poised for another rally. The API report in the afternoon gave more reason for fundamentalists to have doubts about the recent run-up as both gasoline and diesel saw large very large inventory builds last week (5.5 and 7.1 million barrels respectively) but that report seems to have been largely lost in the shuffle of the bigger news stories. The DOE’s report will be out at its normal time today, but you’ll be forgiven if you miss it while watching the election coverage.
Early results appear to show that Democrats will win both seats in Georgia, flipping control of the Senate, and giving the party control of Congress and the White House for at least two years. There will surely be some selling as control of the legislative and executive branches will no longer be split, assuming the current calls hold, but some other reports suggest we could see some risk assets rally as this change could also make new fiscal stimulus measures easier to sign into law.
For energy markets in particular, a flip in the Senate will almost certainly mean more aggressive laws to combat climate change, which in some cases may mean tighter restrictions on traditional oil producers and refiners. That is not necessarily bearish for prices however as more restrictions tend to mean less supply (and less investment) which could end up driving an extended rally in prices if demand recovers this year.
The reaction in RIN markets today may give us an early indication of how traders in the refined product space view the changing of the guard in the Senate. RIN prices have already been surging lately, in sympathy with corn and soybean prices that are reaching multi-year highs largely due to concerns over South American grain exports, and this latest bit of news could encourage another strong rally if the market believes the new congress will push for increased renewable mandates. Then again, the RIN market is notoriously volatile, and there could be some buy the rumor sell the news once the current bout of short covering is over.
Click here to download a PDF of today's TACenergy Market Talk.
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Markets Rallying To End The Week, Diesel Prices Lead The Way For Energy
Energy markets are rallying to end the week, with diesel prices leading the way up 2.5 cents in the early going. Equity markets are also rallying after a big Thursday selloff as strong tech earnings seem to be outweighing the FED’s favorite inflation gauge remaining stubbornly high.
RBOB gasoline futures are trading higher for a 4th straight day, but despite bouncing nearly 14 cents from Tuesday’s low, they still need to rally another nickel to break the downward sloping pattern forming on the weekly charts. Seasonal factors could go either way for gasoline for the next few weeks as we’re in the Spring peaking window, and while the high set April 12th would fit the annual pattern nicely, a May price peak is certainly not unusual, and if $2.85 is broken it seems like RBOB will run to $3 in a hurry.
Diesel prices have bounced 7 cents after touching a 5-month low on Monday but need to climb back above $2.60 to reduce the chance of a slide to $2.20 or lower should the chart support around $2.50 break down.
Back to the shadow war: After a relatively quiet few weeks in the Red Sea, Houthi attacks on ships have started again over the past few days, although so far, no major damage has been reported.
ExxonMobil reported another strong quarter in Q1 with more than $10 billion in free cash flow generated, even though earnings in its refining segment were down 67% from the first quarter of last year. The company noted the success of its Beaumont refinery expansion that came online last year and marked the only major refinery expansion in the US in over a decade. It's worth noting that within the refining segment, international earnings suffered more than domestic facilities did, with non-US refining earnings down 77% from a year ago as crack spreads came back to reality after the record-setting quarters in 2022 and 2023.
Chevron followed a similar pattern (as expected) in its Q1 report, noting strong operating cash flows of $6.8 billion in total, despite downstream earnings falling more than 56% for the quarter.
The company also highlighted its expanding marketing network along the US West and Gulf Coast markets encompassing more than 250 retail stations and highlighted its new solar-to-hydrogen project in California.
Phillips 66 continued the trend, reporting a “strong” quarter in which earnings were 63% lower than a year ago. The company highlighted the conversion of its Rodeo refinery which is now producing roughly 30mb/day of RD and is expected to ramp up to 50mb/day in the 2nd quarter. That facility had a capacity of more than 120mb/day prior to its conversion, and it used to produce gasoline along with its diesel. The company also noted its ongoing plans to sell assets that no longer fit its strategy, highlighting retail assets in Germany and Austria as being on the chopping block, while not mentioning any of its US refining assets that have long been rumored to be for sale.
Delek reported another upset at its Alon Big Spring refinery Thursday, which has become another one of the TCEQ’s frequent fliers after suffering damage from the cold snaps in both 2021 and earlier this year.
A harsh reality sinking in: Mexico’s President has made plenty of headlines with fictitious claims of energy sovereignty in the past few years, but not only is the country’s new Dos Bocas refinery still not producing finished products on any sort of meaningful scale, two of its other facilities have suffered fires recently forcing the country to import even more product from the US. This phenomenon continues to help US Gulf and West coast refiners who would be struggling (even more) to move their excess with sluggish domestic demand.
Click here to download a PDF of today's TACenergy Market Talk.
Energy Markets Rally Again Thursday After A Choppy Wednesday Session
Energy markets are trying to rally again Thursday after a choppy Wednesday session. RBOB gasoline futures are leading the push higher, on pace for a 3rd consecutive day of gains after finding a temporary floor Tuesday and have added 12 cents from those lows.
Equity markets are pointing sharply lower after a weak Q1 GDP estimate which seems to have contributed to a pullback in product prices over the past few minutes, but don’t be surprised if the “bad news is good news” low interest rate junkies start jumping in later on.
The DOE’s weekly report showed sluggish demand for gasoline and diesel, but inventory levels in most markets continue to follow their typical seasonal trends. Refinery runs held fairly steady last week with crude inputs down slightly but total gross throughputs up slightly as most facilities are now back online from a busy spring maintenance season and geared up for peak demand this summer.
Propane and propylene exports spiked to a record high north of 2.3 million barrels/day last week, which demonstrates both the US’s growing influence on global product markets, and the steady shift towards “other” products besides traditional gasoline and diesel in the level of importance for refiners.
The EIA acknowledged this morning that its weak diesel consumption estimates reflected the switch to Renewable Diesel on the West Coast, although they did not provide any timeline for when that data will be included in the weekly survey. The agency acknowledged that more than 4% of the total US consumption is now a combination of RD and Biodiesel, and that number is expected to continue to grow this year. This morning’s note also suggested that weak manufacturing activity was to blame for the sluggish diesel demand across the US, while other reports suggest the freight recession continued through Q1 of this year, which is also contributing to the big shift from tight diesel markets to oversupplied in several regions.
Valero kicked off the Q1 earnings releases for refiners with solid net income of $1.2 billion that’s a far cry from the spectacular earnings north of $3 billion in the first quarter of 2023. The refining sector made $1.7 billion, down from $4.1 billion last year. That is a pattern that should be expected from other refiners as well as the industry returns to a more normal market after 2 unbelievable years. You wouldn’t guess it by looking at stock prices for refiners though, as they continue to trade near record highs despite the more modest earnings.
Another pattern we’re likely to see continue with other refiners is that Renewable earnings were down, despite a big increase in production as lower subsidies like RINs and LCFS credit values sting producers that rely on those to compete with traditional products. Valero’s SAF conversion project at its Diamond Green joint venture is progressing ahead of schedule and will give the company optionality to flip between RD and SAF depending on how the economics of those two products shakes out this year. Valero also shows part of why refiners continue to disappear in California, with operating expenses for its West Coast segment nearly 2X that of the other regions it operates in.