Supply Issues Seem To Have Put The Omicron Demand Fears On The Back Burner Temporarily

Market TalkTuesday, Dec 21 2021
Pivotal Week For Price Action

Oil prices have bounced nearly $4/barrel, and refined products by a dime since Monday’s lows as a combination of supply issues seem to have put the Omicron demand fears on the back burner temporarily. 

Part of the bounce is being blamed on Libya declaring force majeure on its oil exports Monday as several of the country’s largest fields were closed by militants ahead of the country’s election, which may or may not happen this week. OPEC has already been struggling to meet its output quotas, compared to pre-COVID when it struggled to keep its members from over-producing, and these shutdowns will only make that issue worse.

European natural gas prices are also soaring this week as cold weather arrives just in time for Russia to remind the world of its supply power by reversing flows on a pipeline that supplies Germany. While the supply crunch in Europe and Asia were often blamed for propelling oil and diesel prices higher earlier in the year, the Reuters chart below shows that US natural gas prices haven’t flinched during this latest price spike, which could be a reflection that LNG exports from the US simply can’t move fast enough to supplement during these winter weather events.

Stock markets are also rallying after 3 days of heavy selling, with plenty of guesses as to why, but little in the way of actual news to support the sudden turnaround. That begs the question for the rest of the week, is this a short term correction or the end of the Omicron fear selloff?  For energy contracts, look to the trend lines once again for the answer, with the weekly charts showing that RBOB needs to climb above $2.15 and ULSD above $2.25 to consider this move anything more than a dead cat bounce.

The EPA announced its new fuel economy standards for passenger vehicles Monday, which it called the most ambitious ever, and would require average an increase from the 2020 record of 25.4mpg to 40mpg by 2026. The plan focuses on model years 2023-2026, and estimates that electric vehicles will need to increase from 7% of the new vehicles produced in 2023 to 17% in 2026, on top of new technology in gasoline engines, in order to reach the standard.

Meanwhile, it looks like the EPA will get another chance to shut down the refinery formerly known as Hovensa, as a new auction has resulted in yet another company planning to attempt to restart the twice bankrupt facility.  

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Market Talk Update 12.21.2021

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Pivotal Week For Price Action
Market TalkFriday, Jun 21 2024

Charts Continue To Suggest We’re In For A Period Of Sideways Trading

It’s another quiet start for energy markets that seem to have entered the summer doldrums where peak gasoline demand for the year meets peak disinterest as many in the industry start taking vacations. Charts continue to suggest we’re in for a period of sideways trading now that the big June recovery bounce seems to have run out of steam.

Tropical storm Alberto dissipated over Mexico Thursday, but not before its far-stretching thunderstorms upset another refinery in the Corpus Christi area. Flint Hills reported a boiler was knocked offline at its East Corpus refinery, a day after Citgo reported an upset at its East facility as well. Large parts of Texas have been swimming in supply most of the year as neighboring markets to the North and West have been long, backing up barrels into the Lonestar state so these small upsets are unlikely to move the needle in terms of prices or allocations in the area, but they are a good reminder of how vulnerable these facilities are to the weather. The NHC is still tracking 2 more systems with coin-flip odds of being named in the next few days, but neither one looks like it’s headed for the oil production and refining zones in the Gulf Coast at this point.

Ukraine continues to pound Russian energy infrastructure, with 4 different refineries reportedly struck overnight, following attacks on multiple export facilities earlier in the week. The global market continues to largely shrug off the attacks, as excess refining capacity in Asia seems more than capable of picking up any slack in the supply network that may be caused by a loss in Russian output, which is a very stark contrast to what we were experiencing 2 years ago.

Another dip in capacity: The EIA reported a drop of 103mb/day of refining capacity in the US last week, the first reduction in capacity reported since before Russia invaded Ukraine. A general drop in capacity came as no surprise as the conversion of the P66 Rodeo refinery in the San Francisco Bay area earlier this year was well documented. The surprise in the figures was that the East Coast made up 40% of the total decline, which may suggest those facilities which are generally disadvantaged due to labor costs and limitations in crude oil sourcing, are once again knocking on death’s door after a 2-year reprieve.

With the conversion of Rodeo, PADD 5 now has the least amount of refining capacity since the EIA started tracking that stat 40 years ago. Right on cue, the DOE also reported PADD 5 gasoline imports surged to the highest level in over 3 years last week, offering a glimpse of what lays ahead as the region will now be more dependent on shipments from across the Pacific to meet local demand.

Speaking of which, lobbying groups are filing responses to California Energy’s workshop proposals on new refinery rules to cap profits, using the forum to tout the advantages of whatever product they’re selling, and highlighting the risks of the state making itself a fuel island dependent on imports from overseas.

Another one bites the dust? BP “is pressing pause” on its biofuel project at its Cherry Point WA refinery this week, the latest in a line of biofuel producers to rethink plans to make diesel from soybeans and waste oils as subsidies have plunged. On top of plummeting LCFS and RIN values that have cut nearly $2/gallon out of the credit values of the fuel that costs $3-$4/gallon more than traditional diesel, the new Clean Fuel Production Credit is replacing the $1/gallon Blender’s Tax credit that’s been the lifeline to many producers over the past decade. The new program (which is part of the Inflation “Reduction” Act) sets a higher bar to clear before producers can get their handout, which means some domestic facilities will see another loss in credit values from 50-80 cents/gallon vs the BTC, while importers won’t qualify for any credit under the new program.

For real this time? Mexican officials continue to make up stories about when their new Dos Bocas refinery will begin producing fuels, kicking the can further down the road this week saying the facility will start up in the back half of the year. This is at least the 10th time officials have moved back the start date of the facility over the past few years and given that the back half of the year starts in 10 days, I’ll take the over on this bet. Refiners along the US Gulf Coast are no doubt celebrating anytime another delay is announced as they’re facing more competition than they have in the past two decades for their exports.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
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Market TalkThursday, Jun 20 2024

Energy Futures Giving Back Yesterday's Holiday Shortened Session Gains

Energy futures are giving back almost all of the gains made during yesterday’s holiday-shortened session as a search for direction begins to emerge after crude oil and diesel prices reached 7-week highs. Charts suggest we may be in for a few weeks of sideways trading unless buyers can push prices up another 5-10 cents before the month's end.

A reminder that since futures didn’t settle yesterday, the price change you’re seeing today is relative to Tuesday’s close. Spot markets weren’t assessed yesterday. The DOE’s weekly status report will be released at 11 am Eastern.

Tropical storm Alberto was finally named Wednesday after a couple of days of a “potential tropical cyclone” label. While the storm is already moving inland over Mexico, it is having widespread impacts with parts of Texas already declaring states of emergency to deal with flooding.

Yesterday we mentioned that the heavy rains brought by this system may interfere with restart efforts at Citgo’s Corpus Christi West refinery, but it was actually their East Corpus Christi plant that reported flaring due to the “heavy rainfall event.” No units were reported to be shut from that upset, and if the refiners in the area can make it another 12 hours, they’ll have dodged their first storm bullet of the year.

Although the forecasts all said this would be an extremely busy year for storms, Alberto was actually the latest named storm in the Atlantic basin for a season in 10 years. Don’t worry though, it looks like we’ll quickly make up for lost time with two more systems being tracked. One on Alberto’s heels is given 50% odds of being named as it moves into the Gulf of Mexico this weekend, while the other lingering off the SE coast is only given 40% odds, but is still set to bring heavy rain to Florida, Georgia and the Carolinas.

The treasury and IRS published guidance on the Prevailing Wage and Apprenticeship (PWA) requirements for renewable fuel facilities to qualify for the new Clean Fuel Production Credit (CFPC) that will replace the blanket $1/gallon Blender’s Tax Credit next year. Without reaching the PWA standards, producers can get a maximum of $.20/gallon for Biodiesel and RD, and $.35/gallon for SAF. If a producer meets the PWA guidelines, they can theoretically earn 5 times the base amount, for a maximum of $1/gallon for RD and Bio and $1.75 for SAF. The actual amount will be calculated by multiplying the maximum credit times the fuel’s emissions factor, meaning many producers will earn much less than the current $1/gallon credit. It’s also worth noting again that importers will not qualify for the CFPC after many years of earning the BTC, which may shake up the supply outlook later this year as anyone who can, will race to dump their barrels into a US market before the credit goes away.

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