Shutdown Pessimism Outweighs Vaccine Optimism
Energy and equity markets are giving back most of Monday’s gains in the early going Tuesday as shutdown pessimism seems to be outweighing vaccine optimism today.
New state-wide restrictions are popping up from coast to coast just ahead of one of the busiest travel weeks of the year, which will certainly put some more downward pressure on fuel demand, although the extent remains to be seen.
After being the weak link in the energy chain for months, distillates have had a strong performance this fall as inventories in several regions dropped to normal levels thanks to a slow recovery in demand and plummeting output from refiners. We can see evidence of that dramatic change in the chart of Midwestern diesel stocks below that shows inventories going from all-time highs in August, to an eight-year-low today. The annual harvest demand peak, and a pull from neighboring states to the West seem to be the major contributors to that rapid drawdown, with W. Texas, New Mexico, Arizona, Colorado and Nevada all finding themselves suddenly short on diesel supply. Cash markets suggest this will be a short-lived phenomenon with steep backwardation into December foreshadowing a recovery in supplies, and the seasonal demand drop, both coming soon.
Reuters is reporting that documents leaked from OPEC’s technical committee make the case for another three to six month extension of the current output cuts. We should find out two weeks from today if that plan is adopted by the cartel.
See this note for a listing of all the refinery closures/conversions announced around the world so far, which total roughly 1.7 million barrels/day of capacity. The exception to the current refining rule of weak margins appears to be China, as the country’s plants reached another output record in October amidst healthy domestic demand.
U.S. refiners are not so lucky, and are facing yet another new challenge as the ordered shut down of Enbridge’s line 5 puts more plants in MI and OH at an even greater risk of being unable to operate economically, although it could be a life saver for other refiners in the mid-continent who have the logistics in place to make a home for that newly distressed crude oil coming from western Canada.
The line 5 saga is just one of several pieces of political theater impacting energy markets since the election. RIN values had been on a tear since the renewable friendly Presidential victory was called, but D6 values have pulled back sharply this week after the EPA administrator said RIN values were “out of control” and that the agency would not release RVO targets for 2021 by the Nov. 30 deadline.
In addition, nominations for drilling in ANWR have been opened up, leaving just enough time for potential leases to be signed before the presidential inauguration. The flurry of events in the past few days suggests we are likely to see more moves from the democratically warring factions in the weeks ahead.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.