The Bulls Survived A Big Test On Monday
The bulls survived a big test Monday, bouncing sharply off of 6 week lows and continuing to rally overnight, putting the risk of a price collapse on hold for now, although weekly charts continue to favor a move lower by year end.
Multiple refinery snags seem to have helped contribute to the sudden about-face in prices Monday, including reports that the country’s largest refinery was having to reduce production after a failed unit restart a month after an unplanned shutdown. The other indicator that the move was supply driven was that time spreads continued to strengthen, pushing several contracts into even steeper backwardation.
Between the COP26 pledges and 2,700 page US “infrastructure” bill, there’s a lot of data to sort through this week that could theoretically at least impact energy markets. Based on the price action in petroleum futures, the early reaction from the market is that none of this is going to have much impact any time soon. Read here on how the funds from this new law will flow through state governments, starting 6 months from now.
One relatively small (you know, only $5 billion) piece of the bill signed yesterday will be good test for EV market, as it provides funds to buy battery powered school buses. How the industry can handle this process, whether or not those buses can even be produced any time soon, may go a long way to signaling the viability of the electric car dreams held by so many. Meanwhile, how to power those vehicles will certainly become a growing point of contention as coal prices in the US have reached a 12 year high.
Supply chain snags are slowing the gains in US crude oil output, and helps explain why the drilling rig count haven’t jumped more with prices at 7 year highs. Here too the rapidly changing climate landscape may be playing a role, as a WSJ article this morning suggests that funding for US drillers will be more challenging after COP26, which may mark the end of decades of cheaper production. Of course both points are welcome news to OPEC, who is already urging caution from producers as signs mount that the world is shifting to a crude surplus.
Speaking of which, the IEA noted the rise in supply in its monthly oil market report. A few highlights from that report are included below.
-The world oil market remains tight by all measures, but a reprieve from the price rally could be on the horizon. Contrary to hopes expressed in Glasgow at COP26 this is not because demand is declining, but rather due to rising oil supplies.
-Global oil production is already rising. In October, oil supplies leapt by 1.4 mb/d … A further boost of 1.5 mb/d is expected over November and December even as OPEC+ disregarded pleas from major consumers to ramp up beyond a monthly allocated 400 kb/d to cool prices.
-Refinery activity is picking up after autumn maintenance, while end-user demand is on track to strengthen further as more countries open up to international travel
Click here to download a PDF of today's TACenergy Market Talk.
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View AllRefined 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.