The Latest COVID Refining Casualty
After a one-day selloff, energy prices have resumed their rally with WTI back north of the $40 mark, and refined products testing the top end of their recent trading ranges. Unlike earlier in the week, this move does not feel like it’s storm related, as Hurricane Delta’s path and intensity both made slightly favorable moves overnight. U.S. equities had their best day in three months Wednesday and are pointed higher again this morning, which seems to be carrying over to help energy contracts find a bid.
Delta’s path shifted further to the west in past 24 hours, moving the New Orleans and Baton Rouge area refineries further away from the expected landfall, but coming closer to the plants around Lake Charles and Pt Arthur. The current path has it making landfall Friday afternoon around 30 miles east of Lake Charles, which could be close to the best case scenario for refiners - if the area is going to be hit by a hurricane - as there will be no plants that will take a direct hit, or be within 100 miles of the more dangerous eastern side of the storm as it makes landfall. If the westward shifts continue however, the plants in Lake Charles that are just coming back online after Laura look like they’ll take another direct hit. As long as Pt Arthur and Houston stay on the western side of the storm, as they are currently, the odds of major pipeline disruptions to Colonial, Magellan and Explorer are low.
Another bit of good news is that the most recent projections estimate winds will top out at around 115 mph (Category 3) when yesterday, they were expected to be north of 130 (Category 4). We’ll see if those predictions hold true as it moves further over open water today.
The DOE’s weekly report didn’t do much to move prices Wednesday, as inventory changes were minimal, and demand estimates held steady. We should see more big moves next week as the industry prepares for Delta, and it’s likely we could see refinery runs dip even lower than we did then as we’re in the midst of fall maintenance. The EIA this morning detailed the impact on LNG exports from Hurricane Laura’s landfall, and with the paths so close, we should expect similar impacts from this storm.
The latest COVID refining casualty: Australia’s Ampol is planning on closing one of the country’s four refineries – in spite of government incentives to keep it operating for national security purposes - due to the ongoing demand destruction and subsequently weak margins.
A strike by Norwegian oil workers looks like it will move forward next week, which could take more than 300,000 barrels/day of production offline. That story has been getting credit for some of the strength in crude prices this week, but it may have little impact on total global supplies as Libya’s output has recently increased by nearly the exact same amount.
Click here to download a PDF of today's TACenergy Market Talk.
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Crude Oil Inventories Climbed Above Year-Ago Levels For The First Time In 2024
Sell by May then go away.
The old trading adage looked good for energy markets in 2024 as the new month started off with the biggest daily sell-off of the year so far. WTI and ULSD contracts are now in “rally or else” mode on the charts with sharply lower prices a strong possibility now that technical support layers have broken down. RBOB doesn’t look quite as bearish on the charts, but seasonal factors will now act as a headwind as we’re well into the spring peaking window for gasoline prices, and we’ve already seen a 27 cent drop from the highs. If RBOB can hold above $2.50 there’s a chance to avoid a larger selloff, but if not, a run towards $2.20 for both gasoline and diesel looks likely in the months ahead.
The selling picked up steam following the DOE’s weekly report Wednesday, even though the inventory changes were fairly small. Crude oil inventories continue their steady build and climbed above year-ago levels for the first time in 2024. Demand for refined products remains sluggish, even after accounting for the RD consumption that’s still not in the weekly reports, and most PADDs are following a typical seasonal inventory trend. The Gulf Coast saw a healthy build in diesel inventories last week as the export market slowed for a 3rd straight week. Refinery runs dipped modestly last week following a handful of upsets across the country, but overall rates remain near normal levels for this time of year.
The Transmountain pipeline expansion began operations yesterday, completing a 12-year saga that has the potential to materially change refining economics for plants in the US that relied heavily on discounted Canadian crude to turn profits over the past decade.
The P66 Borger refinery reported another operational upset Monday that lasted a full 24 hours impacting a sulfur recovery unit. Last week the company highlighted how the plant’s fire department helped the surrounding area when the largest wildfire in state history came within feet of the facility.
The EPA approved a new model to determine life cycle carbon intensity scores this week, which cracks open the door for things like ethanol to SAF, which were previously deemed to not reduce emissions enough to qualify for government subsidies. The new model would require improved farming techniques like no-till, cover crop planting and using higher efficiency nitrogen fertilizer to limit the damage done by farms that no longer rotate crops due to the ethanol mandates. Whether or not the theoretical ability to produce SAF comes to fruition in the coming years thanks to the increased tax credit potential will be a key pivot point for some markets that find themselves with too much RD today, but could see those supplies transition to aviation demand.
The FED continues to throw cold water on anyone hoping for a near term cut in interest rates. The FOMC held rates steady as expected Wednesday, but also highlighted the struggles with stubbornly high inflation. The CME’s Fedwatch tool gave 58% odds of at least one rate cut by September before the announcement, and those odds have slipped modestly to 54% this morning.
Week 17 - US DOE Inventory Recap
The Energy Complex Is Trading Modestly Lower So Far This Morning With WTI Crude Oil Futures Leading The Way
The energy complex is trading modestly lower so far this morning with WTI crude oil futures leading the way, exchanging hands $1.50 per barrel lower (-1.9%) than Tuesday’s settlement price. Gasoline and diesel futures are following suit, dropping .0390 and .0280 per gallon, respectively.
A surprise crude oil build (one that doesn’t include any changes to the SPR) as reported by the American Petroleum Institute late Tuesday is taking credit for the bearish trading seen this morning. The Institute estimated an increase in crude inventories of ~5 million barrels and drop in both refined product stocks of 1.5-2.2 million barrels for the week ending April 26. The Department of Energy’s official report is due out at it’s regular time (9:30 CDT) this morning.
The Senate Budget Committee is scheduled to hold a hearing at 9:00 AM EST this morning regarding a years-long probe into climate change messaging from big oil companies. Following a 3-year investigation, Senate and House Democrats released their final report yesterday alleging major oil companies have internally recognized the impacts of fossil fuels on the climate since as far back as the 1960s, while privately lobbying against climate legislation and publicly presenting a narrative that undermines a connection between the two. Whether this will have a tangible effect on policy or is just the latest announcement in an election-yeardeluge is yet to be seen.
Speaking of deluge, another drone attack was launched against Russian infrastructure earlier this morning, causing an explosion and subsequent fire at Rosneft’s Ryazan refinery. While likely a response to the five killed from Russian missile strikes in Odesa and Kharkiv, Kyiv has yet to officially claim responsibility for the attack that successfully struck state infrastructure just 130 miles from Moscow.
The crude oil bears are on a tear this past week, blowing past WTI’s 5 and 10 day moving averages on Monday and opening below it’s 50-day MA this morning. The $80 level is likely a key resistance level, below which the path is open for the American oil benchmark to drop to the $75 level in short order.
Click here to download a PDF of today's TACenergy Market Talk.