Witnessing A Technical Breakout In Energy Prices
We’re witnessing a technical breakout in energy prices as oil and diesel contracts have surged to 7 year highs after chart resistance at the 2018 highs failed to contain the rally. OPEC & Friends decision to stick with their existing plans for oil output sent prices soaring Monday morning, and that momentum has carried through the overnight session. With OPEC members not willing to formally commit to new production increases (don’t forget they are already planning to increase output by 400,000 barrels/day each month) it seems there will not be a short-term answer to the supply crunch for energy supplies being felt around the world these days, which gives the bulls a strong argument to keep pushing prices higher.
While gasoline prices haven’t yet joined diesel and crude at 7 year highs, the fact that we’re seeing winter-grade gasoline specs rival the highs from summer-grade prices earlier in the year, after the US driving season has been put in the rearview mirror is no less impressive.
A pair of pipeline leaks last weekend are creating plenty of trouble for their local communities, but so far appear to be having limited impact on prices.
The well-publicized oil spill caused by a pipeline leak near Los Angeles is creating plenty of ecological damage, even though the size of the spill (roughly 3,000 barrels) is fairly small in comparison to evens like the Deepwater Horizon spill that was estimated near 60,000mb PER DAY for several weeks) or the Exxon Valdez spill which was more than 260,000 barrels. While the damage to beaches and wildlife is tragic, and may take months to recover, the relative small size may explain the lack of market reaction so far. Adding insult to injury? Some reports suggest that a ship’s anchor may have caused the pipeline to rupture (although the cause is still being investigated) which gives an unfortunate new perspective to the ship backlog at the port of Long Beach.
Meanwhile, a not-so-well-publicized leak in Alabama shut down the pipeline formerly known as Plantation last week, causing some suppliers to restrict product allocations at terminals across the South East. The lack of publicity for this event suggests that Kinder Morgan’s strategy of changing the pipeline’s name to something generic like the Products (SE) Pipeline, is a stroke of brilliance, and/or that the industry has become numb to supply disruptions after going through so many over the past year. Gulf Coast basis values barely flinched following the news, and premiums for line space on the competing Colonial line remained in negative territory. Reports suggest the pipeline expects to resume operations tomorrow (10/6).
RINs had a 5th straight session of strong buying interest, with D6 values moving north of $1.30/RIN for the first time in nearly a month, and rallying 45 cents since bottoming out last week. The strength in RINs seems to be helping keep refined products outpace the rally in crude oil as crack spreads will adjust to offset the impact of the RVO for refiners. The industry continues to wait for official word on the long overdue blending obligations from the EPA, and with congress gridlocked on debt, infrastructure and tax bills, it’s hard to know if we’ll see the actual numbers anytime soon.
Meanwhile, BP became the latest refiner to announce plans to expand its Renewable Diesel production, with an investment at its Ferndale WA plant that would allow co-production of RD along with traditional refined products. That means that BP, Chevron and Exxon are all working towards avenues of co-producing renewables at existing refineries, while Marathon, P66 and Holly are going the route of converting existing refineries to produce RD. The outcome of these new investments may define the refinery landscape in the coming decade, as co-production could allow some refiners to stay afloat – and continue producing other products – vs a conversion that all but ends most other output.
Click here to download a PDF of today's TACenergy Market Talk.
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Baker Hughes Reported A Net Increase Of 5 Operating Oil Production Rigs Last Week
“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Week 48 - US DOE Inventory Recap
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Baker Hughes Reported A Net Increase Of 5 Operating Oil Production Rigs Last Week
NYMEX HO is the sole energy futures contract trading higher this morning, exchanging hands ~1.5 cents higher than Friday’s settlement. It’s refined product counterpart, along with both American and European crude oil benchmarks, are trading lower to start the week. Uncertainty surrounding the plausibility of further, voluntary supply cuts by OPEC+ members is taking credit for the weakness in WTI prices this morning.
Baker Hughes reported a net increase of 5 operating oil production rigs last week, bringing the total number of active platforms to 505. While this is good news for US energy security and for any producer that managed to hedge future production north of $100, others are viewing the increase in drilling as an incremental environmental hazard.
The fight over year-round access to E15 is raging on in the Midwest. Eight states in the breadbasket are pushing the EPA to reduce restrictions on the purchase of the increased ethanol ratio fuel. The Attorneys General from Iowa and Nebraska are asking a regional court to force the EPA’s ruling while the Agency claims it needs more time.
Money managers increased their net long position in both gasoline and diesel futures last week. Bets to the downing increased for WTI, however, as speculators bank on the latest round of supply cuts by OPEC+ being much ado about nothing.
Click here to download a PDF of today's TACenergy Market Talk.
“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.