Yesterday’s Double Digit Losses Are Followed By Double Digit Gains Today
Energy market whiplash: yesterday’s double digit losses are followed by double digit gains today. Official news that the EU plans on completely banning Russia energy imports is taking credit for today’s rally, despite that news being a day old. Maybe the change in language describing the timing of the embargo from “by the end of 2022” to “in the next six months” sparked some additional concern this morning.
An anticipated decrease in energy inventory levels last week certainly isn’t doing anything to reign prices in this morning. The American Petroleum Institute published an across-the-board drawdown in their inventory estimates yesterday afternoon. Eyes will be on the DOE’s version of the report, scheduled to be released at its normal time this morning, to see if the API’s ~3.5 million barrel drop in oil stocks and the ~4.5 million barrel drop in refined products will be confirmed.
This month’s Federal Open Market Committee meeting is today where a 50 point interest rate hike is all-but-certain. In addition to bumping borrowing rate by twice the usual amount, more rate increases are expected in the coming months as the Fed tries to curb inflation, currently at a 40 year high. While the long term effects are uncertain, some view the rate hike as a “de-risking” event and anticipate a decrease in short-term volatility and an accompanying rally in equities in the short term.
Soybean Oil prices, and likewise biodiesel RINs, have back off from multi-year highs this week but still remain in the stratosphere as the world grapples with a shortage of edible oils. It’s a similar story with corn futures and ethanol RINs so far this week and while this might be great news for farmers, high blendstock prices aren’t doing anything to help bring down prices at the pump.
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Prices Continue To Move In A Relatively Tight Range Awaiting The Next Big Move
Energy markets are treading water heading towards the weekend after Thursday’s rally attempt fizzled and prices continue to move in a relatively tight range awaiting the next big move.
Ukraine struck another Russian refinery overnight, this one a small facility outside of Moscow that was previously hit in March. Yesterday a new type of Ukrainian drone set a record for distance traveled inside of Russia to strike another larger refinery far away from the border. These strikes don’t seem to be stirring market sentiment as they did a couple of months ago as the global market seems to be doing just fine without the incremental Russian barrels for now.
P66 reported unplanned flaring at its Wilmington CA refinery overnight. Since the AQMD doesn’t require the units to be named in the filings it's unclear what impact this may have on production or basis values in the LA-area, which have been the weakest on the West Coast lately as the region struggles with an oversupply of diesel and is less tight on gasoline than its peers.
Citgo continued to report quarterly earnings as it tries to convince bidders that they’re worth years of legal wrangling that’s sure to come along with the auction of its assets. The company had strong run rates of near 95% for the quarter at its 3 plants, and earnings were healthy at $709 million in EBITDA, which was half of year-ago levels.
The biggest story of Thursday’s earnings reports came from the smallest refinery as Vertex announced it was pausing renewable diesel output at its Mobile plant in an effort to survive its liquidity crisis. The company is currently struggling under a mountain of debt including a $196 million term loan that’s costing 17.25% interest as lenders are commanding a huge premium to take risk with the firm.
RBN Energy published an article on Renewable Diesel’s huge reliance on subsidies that helps explain why so many biodiesel and RD producers are cutting production as RIN values and LCFS credits tank. With the change in the blenders tax credit coming next year, those economics are expected to get even worse.
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ULSD Futures Are Trading Higher For A 5th Straight Session
Energy prices are trying to rally Thursday as the liquidation cycle that pushed prices to multi-month lows earlier in May appears to have ended and new supply concerns trickle into the market. ULSD Futures are trading higher for a 5th straight session, and although the gains are minor at this point, they do suggest that buyers are willing to jump in near the pivotal technical support layers just below the $2.50 mark, and that the fund liquidation that pushed the HO contract to a net short position for money managers is probably over. RBOB futures are trading 8 cents above Wednesday’s low which also suggests that a buy the dip mentality may be taking hold, and now we’ll just see how long it lasts.
The latest in the drone wars: After a major Russian attack focused on Ukraine’s electricity infrastructure earlier in the week, Ukraine’s drones reportedly struck back hitting a Lukoil fuel terminal near Crimea, and a Gazprom oil refinery more than 1,000 miles from the border.
What feedstock problems? A surge of imports of used cooking oil (UCO) from China to the US, used to make RD with a lower CI score, has several domestic producers crying foul and adds to the long history of fraud surrounding renewables as bad actors try to take advantage of government subsidies.
The excess of Renewable Diesel on the west coast is only adding to the relative weakness of diesel margins for refiners who have watched their distillate cracks erode to the lowest levels since January 2022 over the past few months. A Reuters article this morning highlights the challenges that poses, and it will only get worse if the recent rebound in gasoline margins fails to hold. That excess of renewable production targeting the West Coast is also contributing to California’s LCFS values dropping to multi-year lows this week, which is putting pressure on earnings for companies that races to convert refineries to RD production in recent years.
Speaking of which, HF Sinclair reported another net loss in its renewable segment in Q1, while its traditional refineries followed the recent pattern of decent earnings that were far below year-ago levels.
Energy News Today reported a fire at the HF Sinclair refinery in Anacortes WA Wednesday which seemed to contribute to stronger basis values in the typically illiquid PNW spot market, and some tightening of allocations by suppliers in local terminals. In hopefully unrelated news, the company posted a job opening for an Emergency Response Specialist at that facility just last week.
P66 reported yet another upset at its Borger refinery Wednesday, marking the facility’s 14th TCEQ filing of the year so far. Two different sulfur recovery units were noted as being impacted by the event, but it appears the units were able to restore operations.
Click here to download a PDF of today's TACenergy Market Talk.