Senate Election Results Impact On Financial Markets

Market TalkWednesday, Jan 6 2021
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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. 

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkWednesday, Feb 21 2024

It’s A Mixed Start For Energy Markets To Start Wednesday’s Session After A Heavy Round Of Selling Tuesday

It’s a mixed start for energy markets to start Wednesday’s session after a heavy round of selling Tuesday. RBOB gasoline futures are clinging to modest gains in the early going while the rest of the complex is moving lower.  

WTI is pulling back for a 2nd day after reaching a 3.5 month high just shy of $80. The pullback pushes prompt values back below the 200-day moving average, reducing the likelihood of a breakout to the upside near term.

ULSD values are down nearly 10 cents for the week and are down more than 26 cents from the high trade set February 9th. That pullback leaves ULSD in neutral territory and could act as a headwind for gasoline prices that still seem poised to at least attempt a typical spring rally that adds roughly 20-30% from winter values.

RIN prices continue their slide this week, with D6 and D4 values reaching new 4-year lows around $.41/RIN Tuesday, which is down just slightly from the $1.62/RIN they were going for a year ago.

HF Sinclair reported a loss for Q4 this morning, with its refining and renewables segments each losing roughly $75 million for the quarter. The change from a year ago in the refining segment is a harsh reminder of the cyclical nature of the business as earnings dropped more than $800 million year on year, with inventory cost adjustments accounting for roughly ¼ of that decline.   

While it wasn’t mentioned in the press release, HFS has the most direct exposure to New Mexico’s recent approval of a clean fuel standard that will start in 2026. That law will no doubt help the company’s struggling Renewables assets in the state but will also create extra costs for their traditional refining operations.

The EIA this morning noted that conditions in the Panama Canal improved slightly in January, allowing Gulf Coast exports to Asia, primarily of Propane and ethane, to increase. While transit capacity is still far below levels we saw before the drought reduced operations in the canal, any improvement offers welcome relief to shippers as they can avoid going the long-way around to avoid the violence in the Red Sea.

France’s navy didn’t waste any time getting into the Red Sea action, shooting down a pair of Houthi Drones less than a day after joining the EU’s official mission to assist in clearing the shipping lanes. It’s not yet clear whether this marks the first official military victory by the French since Napoleon. 

Reminder that the weekly inventory reports are delayed a day due to the holiday Monday.

Click here to download a PDF of today's TACenergy Market Talk.