Shockwave Sent Through Energy Arena
Weak demand estimates reported by the DOE sent a shockwave through the energy arena Wednesday, pushing refined product futures to their lowest levels in two weeks, and some cash prices to their lowest levels in five months. All talk and no action from Washington on a stimulus bill to try and prop up the economy, which does not seem to be helping the sentiment for either energy or equity markets, as an attempt at a recovery bounce overnight has already fallen flat.
U.S. gasoline demand reached an 18 week low according to the DOE’s weekly estimate, and gasoline prices in many markets followed suit, reaching their lowest levels in about the same time-frame.
Gasoline prices in the NYH, LA and Group 3 spot markets all reached their lowest levels since early May during Wednesday’s sell-off, and are threatening further losses after the overnight bounce has fizzled in the early going. It’s starting to feel like a move back below $1 for gasoline is inevitable as the seasonal demand slowdown is just beginning, with more run cuts seeming to be the only option for many refiners that might prevent that next move lower.
Diesel demand also saw a large decrease on the week, but unlike gasoline, that figure started from a much higher level and remains above what we saw for most of the summer. Diesel prices were also hit hard during Wednesday’s sell-off, but still have more room to fall before threatening the low end of their sideways range.
Refinery runs were reduced across all 5 PADDs last week, as the lingering effects from Hurricane Delta and fall maintenance were both in play. In normal years we’d expect to see fall maintenance peak around this time, and then see refinery runs climb steadily through the end of the year. With this year being anything but normal, the next few weeks will bring an interesting showdown between the seasonal patterns and a weak margin environment.
Q3 earnings reports are highlighting just how challenging the operating environment is for refiners, and why more run cuts may be likely over the next several months. This morning, Valero and Neste both reported operating losses in their traditional refining segments for the quarter, while their renewable divisions continued to see increasing profits.
The plight of refiners led a group of Senators to ask the EPA to waive the planned increase in renewable volume obligations for 2021, to help those companies deal with the pandemic, and avoid excessive costs for unreachable targets caused by the weak demand environment. RIN prices have surged to multi-year highs in recent days thanks to stronger crop prices and last month’s ruling on restricting refinery waivers. We’ll see today if the request sparks a pullback, or is shrugged off given the bigger fish that need frying in Washington these days.
Hurricane Epsilon blew up into a major Hurricane in the past 24 hours – far exceeding earlier forecasts – but is expected to stay out to sea and not threaten land. The system being tracked in the Caribbean is given 30% odds of developing by the NHC, but should not impact the U.S. other than perhaps dumping some rain on south Florida.
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.