Trio Of Supply Concerns Dissipate

Market TalkMonday, Oct 12 2020
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Energy prices are under pressure for a second straight session following strong weekly gains as a trio of supply concerns are dissipating, which seems to be outweighing the stimulus optimism fueling another rally in equity markets.  

Hurricane Delta made landfall as a Category 2 storm Friday evening, just 13 miles from where Hurricane Laura hit six weeks ago. While Delta didn’t pack the punch that Laura did, and didn’t stick around long enough to dump the huge amounts of rain parts of the gulf coast saw from Hurricane Sally, it did produce wide spread power outages that are hampering the supply network. Most of the refiners in the Pt Arthur area had to shut units down due to storm-related issues, and Colonial pipeline’s main diesel line is still shut down as they await power to be restored near the Lake Charles area. 

No word yet on the status of the Lake Charles refineries, but based on the storm’s path, and the damage we’ve already seen further away in Pt. Arthur, it appears likely both facilities will have to go through another round of repairs to resume operations. Just like with Laura, it will likely be a few days until the damage can be assessed at the facilities that were just resuming operations after Laura and will now start over again.  It appears that the plants around Baton Rouge and New Orleans, which were originally in Delta’s crosshairs, have dodged yet another bullet in the busiest hurricane season on record. 

There are roughly seven weeks left in the 2020 Atlantic hurricane season, and the NHC is giving 30% probability that a system churning east of the Windward islands will develop in the next five days. Those are relatively low odds, and wind conditions don’t appear favorable at the moment, but in this record setting year, it seems like a mistake to ignore any potential storm.

Good news for Libya, bad news for OPEC? The beleaguered country’s oil output is coming back online, complicating OPEC’s output plans as Libya has been exempted from previous production cuts. 

The Norwegian oil strike came to an end after successful mediation last week, which will keep more than 300mb/day of oil production online, adding to the downward pressure on prices.

Baker Hughes reported four more oil rigs were put to work last week, the third weekly increase in a row. Texas and New Mexico accounted for the build with Permian and Eagle Ford basins each adding one rig on the week, and two more were added in smaller unclassified areas.

Money managers continue to be unimpressed with oil contracts, making small reductions in net length in WTI and Brent for a second week, while making small increases to bullish wagers on refined products. RBOB gasoline continues to see a counter-seasonal bet on higher prices from the large speculators, while ULSD contracts remain in a net short position as the big funds bet diesel prices will lag.

New cleaner energy options continue to be a major story that’s getting even more attention given the polarity of the Presidential candidates on the issue. An unintended consequence in the surge of “green” stimulus packages is that they’re driving up costs for these projects, similar to what we saw with the spike in home remodeling & pool installation projects this summer. A Rystad energy report last week highlighted how those rising costs may hamper the development of one of the more promising alternatives, Green Hydrogen.

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Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

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Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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

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