Technical Trapdoor Opens
The technical trapdoor has opened and energy prices fell right through with refined products dropping more than a dime since Tuesday’s close. Fear continues to be in the driver seat across multiple asset classes as U.S. equities had their biggest one-day selloff since June, while energy futures were reaching multi-month lows.
Yesterday’s DOE report was actually more bullish than the API report that got credit for an early wave of selling, with gasoline and diesel stocks declining and demand increasing across the board, but it did little to slow the downward momentum. Now that support is broken on the charts, and traders appearing to fixate more on where demand is headed instead of where it is, it looks like the next stop is $34 for WTI and $.96 for RBOB unless the bargain hunters start stepping in soon. ULSD prices still have not broken their September lows, but if they do break $1.06, it looks like they’ll make a push towards the $1 mark as well.
How 2020 is this? A hurricane made a direct hit on one of the country’s largest refinery clusters Wednesday, and that wasn’t even the biggest refining news of the day.
PBF announced it was halting fuel production at its Paulsboro, NJ facility due to the ongoing demand destruction and weak economic outlook for refining in the region. The facility may reopen in a limited capacity when demand recovers, but will be focused on providing feedstocks to PBF’s other east coast refinery in Delaware City. 18 months ago, the east coast (PADD 1) had 1.2 million barrels/day of refining capacity, when PES shut down that dropped to 889,000 barrels/day, and with Paulsboro offline will fall to roughly 723,000 barrels/day. That 40% decline in less than two years is certainly a big deal, but should not have an immediate impact on supply as actual run rates in the region are currently below 600,000 barrels/day. There is capacity on pipelines from the Gulf Coast and from waterborne vessels to cover this drop in production – particularly at current demand levels – but that loss of production will create the potential for supply bottlenecks, particularly in the Philadelphia market when summer demand is at its peak and VOC restrictions on RBOB limit supply.
Zeta made landfall as a strong Category 2 hurricane Wednesday night, with winds around 110 miles an hour (just 1 mph below Category 3 status). The storm passed within about five miles of the Valero/Meraux and PBF/Chalmette refineries as it moved through New Orleans. Earlier reports suggested that the NOLA-area refineries planned to operate through the storm, but now it appears that power outages have taken several of them offline temporarily while damage assessments are underway.
Make no mistake, in any other year, having five tropical systems hitting refining country and knocking multiple refineries offline in one season would be cause for sharply higher prices, and potential shortages throughout the region. This year, Gulf Coast cash markets have barely flinched and futures are tumbling due to the lack of demand that means there’s plenty of capacity to offset the storm-induced outages.
An EIA report Wednesday showed how tanker rates that spiked into the spring due to the super-contango forward curve have now reached their lowest levels in nearly two decades and are expected to remain at low levels until global demand recovers.
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.