News & Views
News & Views
News & Views
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Energy Markets Are Attempting To Rally For A 2nd Day
Energy markets are attempting to rally for a 2nd day after mysterious coordinated explosions caused both Nordstream pipelines to leak and be shut down Tuesday. Although the reason for such an attack remains unclear, it did succeed in turning the market’s focus back on the supply challenges caused by the shooting war in Ukraine, and less on the demand challenges that are coming along with the global currency wars and plummeting stock market.
California gasoline basis levels surged to new record highs Tuesday, with both the LA and San Francisco spot markets trading at $2.45/gallon OVER futures. That puts cash prices in those markets around $4.80/gallon, and will push retail values north of $6, while several markets in the Gulf Coast region are seeing retail values below $3. While nowhere near as dramatic as the West Coast, Chicago basis values remain elevated after reports that the Husky refinery in Ohio will remain closed until December after the fire that killed two employees last week.
Hurricane Ian is beginning its battering of Florida after knocking out power to all of Cuba yesterday. A fortunate shift in the projected path overnight keeps the huge storm well to the south of Tampa bay, which keeps that critical port on the “clean” side of the storm and should help limit the damage to the fuel terminals sitting dangerously close to the water’s edge. More than 10% of oil production in the Gulf of Mexico has been shut in as a precaution while the storm passes, but the system is far to the east of those rigs, and should not cause any damage.
Week 39 - US DOE Inventory Recap
Energy Futures Are Pulling Back This Morning With The Prompt Month Diesel Contract Leading The Way Lower
Energy futures are pulling back this morning with the prompt month diesel contract leading the way lower, currently down around 5.5 cents to start the day. The October gasoline contract is down just over two cents while November crude oil futures (which is prompt this late in the month), is down about 50 cents per barrel. A rising US dollar and recession fears are taking credit for today’s negative price action, driving oil prices down to levels not seen since January.
Hurricane Ian is expected to develop into a major Hurricane just before making landfall in Cuba and Jamaica early tomorrow morning and maintain that status before hitting the central west coast of Florida by Friday. The storm is expected to bring heavy rainfall, hurricane-force winds, a sizeable storm surge, and flooding to the greater Tampa Bay area late this week. While it may cause a high level of localized damage, right now it seems the majority of the Gulf Coast energy infrastructure has dodged a bullet.
Another disturbance has queued up behind Ian but looks to be staying out to sea for the next week.
Money managers trimmed their short bets on both major crude oil futures last week, showing signs of profit-taking by the speculators that have taken advantage of the bearish trend we’ve seen since June. Many market participants are still sitting out though, with open interest for both crude oil grades at 6 year lows.
Baker Hughes reported an increase in active oil production rigs last week, bringing the total of active crude platforms to 602 (+3) in the US. Natural gas plants dropped by two last week.
Risk Taking Has Fallen Out Of Favor As Markets Around The World Fall Out Of Bed With Heavy Losses To Start Friday’s Trading
Risk taking has fallen out of favor as markets around the world fall out of bed with heavy losses to start Friday’s trading. Refined product futures are seeing heavy selling this morning, down 13 cents or more in the early going, despite signs from cash markets of supply tightness in numerous spots around the country.
Diesel prices would still finish with 10 cent gains for the week if they settled at current levels, but have dropped 20 cents from Wednesday’s high just a few ticks below the $3.50 mark. That pullback keeps a downward trend line in place that started from the August 25th high of $4.11, and would set up another test of the $3.14 range in the next week or two if prices don’t rally soon. Ordinarily, those types of swings would make for a busy year, and now we’re used to it happening in a month.
Fiona looks like it will set records as one of the strongest storms to ever hit the Canadian coast this weekend, but appears like it will stay just far enough east to avoid a hit on the Irving refinery in St. John New Brunswick. Shipping in the region will certainly be impacted as the storm blows through, but the current path appears favorable to avoid significant long term damage to ports.
The storm likely to be named Hermine was upgraded to a tropical depression overnight, and is now expected to hit south west Florida as a category 2 or 3 Hurricane Tuesday or Wednesday. The Key West and Ft. Myers are looking particularly vulnerable from the path of this system, with Cuba looking like the only thing that might slow the storm’s rapid intensification as it crosses the extremely warm waters in the Caribbean this weekend. The good news for energy supplies about this forecast path is that it keeps it well east of the oil production and refining zones in the Gulf of Mexico. That won’t prevent a surge of panic buying in Florida, but it will help resupplies once the storm has passed. Some models have this storm making additional landfalls on the east coast next week.
It’s been a rough week for refineries around the world. A fire at Husky’s refinery in Ohio killed 2 workers and has sent Chicago basis values soaring. Exxon is shutting down a refinery in France after a walkout of workers, and now Argentinian oil unions are striking after refinery explosion killed 3 workers. While none of those facilities individually will create major disruptions, they are all clear reminders of both the dangers of the industry, and the vulnerability of supply with refining capacity stretched to its limits.
Speaking of which, the West Coast continues to struggle with extremely tight supplies of gasoline that have sent basis values surging $1.50-$2 above futures and most other regional markets. A rash of refinery issues, and no options from neighboring markets for summer-grade gasoline are both contributing to the extreme price action. The big question for the next two weeks is whether or not imports are available to help alleviate this tightness, or if resupplies will have to wait until the market converts to winter-grade gasoline.
Markets Around The World Are Seeing Big Swings Over The Past 24 Hours As The Unknowns Of Monetary Policy
Markets around the world are seeing big swings over the past 24 hours as the unknowns of monetary policy, war strategy and storm paths all converge. It’s not unusual for the day after an FOMC announcement to see big price swings, and today in particular is set up for big moves after the FED made it clear it prefers a recession to inflation, and numerous other banks followed suit.
ULSD has been the most volatile contract in the energy complex this week, with multiple 10 cents swings in various directions as demand fears and supply fears manage to both grip parts of the global distillate market simultaneously. Adding to the uncertainty this week, Exxon’s refinery in France is facing a strike as employees see more leverage than ever given the weakened state of Europe’s energy supplies.
2 brothers were killed in the fire at the Husky refinery in Ohio, adding a tragic turn to the supply shortages in the area, which have sent Chicago basis values soaring. That plant is completely offline, and may stay so for weeks as the investigation continues, further complicating resupply efforts. The Explorer pipeline froze nominations shortly following that fire as shippers raced to find replacement options from other regions, quickly maxing out the pipe’s capacity. See the PADD 2 inventory charts below for perspective on how unusually low supplies in the Midwest are as a rash of refinery issues, and lack of shipments from the Gulf Coast – who is busy supplying the rest of the Western hemisphere – draw down stocks. PADD 2 refinery runs did see a 2nd straight large increase, largely due to the BP Whiting plant coming back online after a fire a few weeks ago.
The storm currently known as 98L continues to move towards the Caribbean with 90% odds of development in the next 5 days. Florida looks like it is still has the highest odds of getting hit by this storm (soon to be named Hermine) although the GEFS model has shifted it further West in the past 24 hours which puts Alabama, Mississippi and Louisiana all in the range of potential landing zones. While the odds may still be low, Louisiana has been a hurricane magnet the past two seasons, so those refineries and off-shore facilities will not breathe easy until this system is long gone. Hurricane Fiona meanwhile continues to churn north after battering several islands as a category 3 or 4 storm, and now sets its sites on Atlantic Canada. The Irving refinery in St. John looks like it will avoid a hit from this storm, while the long-idled and struggling to convert to RD production refinery in Come-By-Chance could still take a hit from this system.
Refinery production increased again last week, holding near the top end of the seasonal range as plants defer maintenance to try and continue maximizing output during these times of tight supply (and high margins). Compare this year’s refinery runs to 2021 and 2020 which both saw big storm-induced declines, and you’ll get a feeling for why the industry is still holding its breath to make it another month without a direct hit on refinery row.
One item to keep an eye on (if you didn’t have enough already): US ethanol production dropped to its lowest level since the great freeze of 2021 wreaked havoc on fuel producers of all varieties, which pushed ethanol inventories to their lowest levels of the year. Ethanol prices have been pulling back since the railroads narrowly dodged a major strike, so this drop in production could be a short term anomaly tied to maintenance or timing the corn crop, but if not, it could further complicate the refined fuel supply network since gasoline is no good in most cases without 190 proof grain alcohol to go with it.
West Coast (PADD 5) gasoline stocks look like they turned the corner on the charts with a small increase last week, but that did little to stop the squeeze on prompt supplies as San Francisco values shot up to a $1.70/gallon premium to futures and PNW values traded north of $1.40, which puts current values back close to $4/gallon.
With The DOE And FOMC Both On Tap, More Big Swings Appear Likely To Come
It’s already been a volatile day for energy prices, and with the DOE and FOMC both on tap, more big swings appear likely to come.
The big news overnight was Russia announcing it would draft 300,000 reservists to aid its [failing] war in Ukraine. That move seemed to add to bullish sentiment in oil and refined product prices with ULSD up 12 cents not long after that news broke, only to see prices pull back and trade down 4 cents as of 7:30 central. Crude oil and gasoline prices have seen less dramatic versions of those price swings, and are still holding on to modest gains in the early going.
The API reported inventory builds across the board last week, with crude stocks up 1 million barrels (thanks again to large releases from the SPR) while gasoline stocks increased by 3.2 million barrels and distillates increased by 1.5 million. The DOE’s weekly report is due out at its normal time of 9:30 am central.
The FOMC announcement is due out at 1pm central, just 30 minutes ahead of the settlement for NYMEX contracts, which often makes for some wild trading to end the session. Just about everyone expects the FED will raise interest rates by at least 75 points today, with a large focus on what the chairman will say in the news conference following that announcement, which is likely to add to the volatility late in the day.
Gasoline prices on the East and West coast continue heading in opposite directions. NYH gasoline prices have dropped to just even with RBOB futures, and hold just a 3 cent premium vs their USGC counterparts, which marks the lowest spread since the RVP transition in April. Colonial line 1 space was reported to trade at a negative 2 cent value yesterday, which marks the lowest value in 2 years, just a few short weeks after reaching an 8 year high.
While the East Coast is seeing gasoline values crumble, West Coast markets continue to hold premiums of $1/gallon or more as refinery issues and the end of the summer gasoline spec keep inventories at extremely low levels.
Another refinery fire in the Midwest injured 2 employees, and has completely shut operations at the Toledo facility and will keep surrounding markets which have been unusually tight further on edge. That fire is yet another black eye for Husky which is still rebuilding the refinery it blew up in Superior WI a few years ago.
There are 5 potential storm systems being tracked in the Atlantic basin today, which will probably mark the unofficial peak of activity for the 2022 season. Tropical storm Gaston
The most troubling at this point for energy supplies is the system known as 98L that is given 90% odds of being named (Hermine) in the next 5 days. Odds are good that this system will make it through the Caribbean and it could blow up to a major Hurricane once it reaches the extremely warm water East of the Yucatan, but are unclear where it will head once it reaches the Gulf of Mexico. The early favorite looks to be a Florida landfall, which would keep it east of the oil production and refining centers, but will not help the state’s fuel supplies that have been running low for the past 6 months.