Supply Fears Are Dwindling As Temperatures Rise Across The Country

Market TalkThursday, Jan 18 2024
Pivotal Week For Price Action

It’s another soft start for energy markets to start Thursday’s session, as supply fears are dwindling as temperatures rise across the country. Mid-day price reversals have become the theme of the year so far however, don’t be surprised to see another rally later in the day as the energy complex struggles to find a new price trend.

More refinery upsets were reported Wednesday along the Gulf Coast, but basis values actually dipped on the day, suggesting the dozens of hiccups reported this week aren’t amounting to much lost production. See the attached spreadsheet of all filings to Texas regulators to get a feel for the various challenges faced by the energy industry this week.

While Gulf Coast refiners work to return to normal operations Mid Continent facilities look like they can’t wait for drivers to get back on the road. Prompt basis values in the Group and Chicago markets are trading around 30 cent discounts to futures for gasoline and 40 cent discounts for diesel, putting their values 20-30 cents lower than their neighbors on the Gulf Coast. This phenomenon has brought a return of an old seasonal pattern where markets in North Texas, Arkansas and Tennessee fed by Gulf Coast facilities see buyers disappear as trucks long haul barrels from neighboring markets. 

While there is another cold snap forecast to start tomorrow, it looks like the Gulf Coast refining zone will only dip down to freezing temps for a few hours, so it’s unlikely we’ll have another round of upsets like we experienced earlier this week. 

Talking their own books? Continuing a recent trend, the IEA sounded much more bearish than OPEC in its Monthly Oil Market outlook, predicting oil demand will increase by just 1.2 million barrels/day in 2024, compared to an increase of 2.2 million barrels/day predicted yesterday by the cartel. The IEA is also predicting more non-OPEC supply growth next year (1.5 million barrels/day vs 1.3 for OPEC’s forecast) which they think will keep a lid on prices despite the growing tensions in the Middle East. 

Markets continue to shrug off new attacks in the Red Sea, with oil prices ticking lower despite a 3rd ship this week being hit by a drone, which brought about more retaliatory strikes from the US. While the violence has caused many ships to take the long way to Europe, and caused freight rates to rise, the impact of physical supplies of oil, refined products and LNG supplies all appear to be minimal at this point.  

Iran vs the world? As if the proxy battles via Hamas, Hezbollah and the Houthi’s, or the attacks on tankers near the Strait of Hormuz weren’t enough, Iran appears to now be at war with Pakistan. While this latest escalation certainly doesn’t help soothe the frayed nerves in the region, it could actually end up being bearish for oil prices as it becomes clear that Iran is going alone in its various meddling and does not (so far) have the support of neighboring Arab nations that control more of the world’s petroleum production.

The API reported more inventory builds last week, with gasoline stocks up 4.8 million barrels, diesel up 5.2 million barrels while crude oil inventories had a small increase of around ½ million barrels. The DOE’s weekly report is due out at 11am eastern today. Reminder that this week’s report is based on data reported last Friday, so any impacts from this week’s weather events will not show up until next Wednesday’s report. 

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Market Talk Update 1.18.2024

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Market TalkWednesday, May 29 2024

The Texas Power Grid Is Once Again In The Forefront After Another Round Of Storms Left Hundreds Of Thousands Without Power Tuesday

It’s a quiet start to Wednesday’s trading, with refined products up less than a penny in the early going, following a healthy bounce Tuesday that alleviated concerns of a technical price breakdown near term.

A container ship transiting the Red Sea was heavily damaged by a Houthi Missile attack Tuesday. While energy markets continue to shrug off the shipping disruptions caused by those attacks, container ports around the world are feeling its effects and emissions from shipping are increasing along with the longer routes taken to avoid the conflict.

Consolidation continues: Less than a day after Hess shareholders approved its sale to Chevron, Conoco Phillips is reportedly in advanced negotiations to buy Marathon Oil for $22 billion. To avoid confusion, this does not have anything to do with the refining operations at Phillips 66 or Marathon Petroleum, both of which were spun off from their upstream exploration and production companies more than a decade ago. Meanwhile, acquisition activity in the Permian basin remains hotter than drilling activity as Energy Transfer agreed to buy WTG for more than $3 billion.

The Texas power grid is once again in the forefront after another round of storms left hundreds of thousands without power Tuesday. A Reuters article this morning highlights the record setting growth of renewable energy in Texas along with the record use of fossil-based sources to meet the state’s rapid demand increases. This phenomenon isn’t unique to the Lonestar state, with many in the industry believing that electricity demand from AI, Crypto and EV’s will drive the next energy supply squeeze in coming years.

Slowdown coming? The Dallas Fed’s Texas Manufacturing survey showed negative readings on output, new orders and the business conditions outlook in May.

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Pivotal Week For Price Action
Market TalkTuesday, May 28 2024

ULSD Is Leading The Move Higher This Morning With Prices Up Nearly A Nickel In The Early Going

Energy futures are attempting another recovery rally, with products up more than 7 cents from Friday’s early lows, while crude oil contracts have taken back $3/barrel over that time. ULSD is leading the move higher this morning with prices up nearly a nickel in the early going, while RBOB futures are up around 2.5 cents.

Money managers were adding net length in WTI, ULSD and Gasoil contracts last week with both new long positions and heavy short covering. Brent crude was a different story however with speculative net length in the European crude contract slashed by nearly 1/3 with nearly 33,000 new short positions added during the prior week. The big reduction in WTI shorts while Brent shorts are being added suggests the big play by hedge funds may be the WTI/Brent spread rather than bets on outright price movements.

Baker Hughes reported no change in the total oil rig count drilling in the US last week, holding steady at 497 vs 570 a year ago. Natural Gas rigs dropped by 4 on the week, reaching a 2 year low at 99 rigs, down from 137 this time last year. Natural gas prices have staged a big recovery from around $1.50/MMCF a month ago to $2.50 today, but current values are still not high enough to encourage drillers to get more active, particularly with more gas being produced from oil wells.

Deadly storms hit large parts of the country over the Holiday weekend, and continue this morning, but so far no reports of refinery damage from those systems has been reported. Marathon did report an upset in a Residual Hydrotreating unit at its Galveston Bay refinery Friday, but that event doesn’t appear to have slowed down the rest of the facility.

More bad news for US Bio producers: The EIA this morning highlighted the growth in biodiesel imports into the US from Europe – primarily Germany – as changing appetites for renewables and disjointed policies incent more barrels to travel long distances on diesel burning ships to find the highest tax credit value.

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Market TalkFriday, May 24 2024

Selling Continues In Energy Markets After Thursday's Reversal Rally Ran Out Of Steam In The Afternoon

The selling continues in energy markets after Thursday’s reversal rally ran out of steam in the afternoon, following the lead of U.S. equity markets which had a big sell-off on the day. Prices haven’t yet fallen below the multi-month lows we saw early last week, but we’re just a couple of cents away from those levels, and the potential technical trapdoor that could lead to sharply lower values over the next couple of weeks.

We did see a brief spike in gasoline futures after the settlement Thursday following reports that Colonial had shut down Line 4 due to an IT issue, but those gains were short-lived as the pipeline was restarted without issue a few hours later. Those who remember the chaos of May 2021 after Colonial was hacked are breathing a sigh of relief, particularly on one of the busiest demand days of the year, while others are no doubt disappointed we won’t get to see the rash of fake photos of people filling up plastic bags with gasoline.

OPEC & Friends (AKA the DoC) announced they’re moving June’s policy meeting to a virtual-only affair, which the market is taking as a signal of the status quo being held on output cuts.

Chicago being Chicago: Tuesday’s 60-cent basis spike was officially wiped out by Thursday afternoon, suggesting the short-lived rally was just short covering in an illiquid market rather than a meaningful supply disruption.

RIN values continued their rally this week, touching a 4-month high at 59 cents/RIN for both D4 and D6 values Thursday. If you believe in technical analysis on something like RINs, you can see a “W” pattern formed on the charts, suggesting a run to the 80-cent range is coming if prices can get above 60. If you are more of a fundamentalist, then you’ll probably think this rally is probably more short-term short-covering by producers of RD who have changed their schedule buying back their RIN hedges for volume they’re no longer planning to produce.

NOAA issued its most aggressive Hurricane forecast ever Thursday, joining numerous other groups that think a La Nina pattern and record warm waters will create more and bigger storms this year. With the activity level seeming to be a foregone conclusion at this point, now it’s all about where those storms hit to know if this busy season will be a huge factor in energy supplies like we saw in 2005, 2008, 2012 and 2017. With the Houston area already being bombarded by floods and deadly wind this year, the refinery row across the U.S. Gulf Coast seems even more vulnerable than normal to the effects of a storm.

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