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Week 7 - US DOE Inventory Recap
RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday
Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.
The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.
Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.
The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.
The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.
RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.
The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.
Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.
Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.
It’s A Mixed Start For Energy Markets To Start Wednesday’s Session After A Heavy Round Of Selling Tuesday
It’s a mixed start for energy markets to start Wednesday’s session after a heavy round of selling Tuesday. RBOB gasoline futures are clinging to modest gains in the early going while the rest of the complex is moving lower.
WTI is pulling back for a 2nd day after reaching a 3.5 month high just shy of $80. The pullback pushes prompt values back below the 200-day moving average, reducing the likelihood of a breakout to the upside near term.
ULSD values are down nearly 10 cents for the week and are down more than 26 cents from the high trade set February 9th. That pullback leaves ULSD in neutral territory and could act as a headwind for gasoline prices that still seem poised to at least attempt a typical spring rally that adds roughly 20-30% from winter values.
RIN prices continue their slide this week, with D6 and D4 values reaching new 4-year lows around $.41/RIN Tuesday, which is down just slightly from the $1.62/RIN they were going for a year ago.
HF Sinclair reported a loss for Q4 this morning, with its refining and renewables segments each losing roughly $75 million for the quarter. The change from a year ago in the refining segment is a harsh reminder of the cyclical nature of the business as earnings dropped more than $800 million year on year, with inventory cost adjustments accounting for roughly ¼ of that decline.
While it wasn’t mentioned in the press release, HFS has the most direct exposure to New Mexico’s recent approval of a clean fuel standard that will start in 2026. That law will no doubt help the company’s struggling Renewables assets in the state but will also create extra costs for their traditional refining operations.
The EIA this morning noted that conditions in the Panama Canal improved slightly in January, allowing Gulf Coast exports to Asia, primarily of Propane and ethane, to increase. While transit capacity is still far below levels we saw before the drought reduced operations in the canal, any improvement offers welcome relief to shippers as they can avoid going the long-way around to avoid the violence in the Red Sea.
France’s navy didn’t waste any time getting into the Red Sea action, shooting down a pair of Houthi Drones less than a day after joining the EU’s official mission to assist in clearing the shipping lanes. It’s not yet clear whether this marks the first official military victory by the French since Napoleon.
Reminder that the weekly inventory reports are delayed a day due to the holiday Monday.
March WTI Was Down Around 50 Cents Overnight But Has Since Recovered To Trade Near Breakeven
Energy futures are coming under selling pressure as traders return from Monday’s quasi-holiday. RBOB futures were leading the move lower with nickel losses in the early going while ULSD were down around 2 cents. March WTI was down around 50 cents overnight but has since recovered to trade near breakeven, while forward months are trading slightly lower.
EU officials authorized the deployment of naval assets to the Red Sea Monday to assist the US and UK navies in repelling the Houthi attacks on ships transiting the region.
Just a few of days after raining on the ethanol industry by saying they had to actually lower emissions to qualify for lower emissions tax credits, a new Reuters report suggests the White House is preparing an olive branch for the farm belt voting block by authorizing E15, with the catch that this may not begin until 2025. It’s been tough sledding for ethanol producers lately with spot prices and RINs both approaching 4-year lows in the past week.
Total’s Pt Arthur refinery reported an upset at a Sulfur Recover unit over the weekend but was able to return to normal operations based on their filing with the TCEQ. That facility has had units offline for more than a month since the January deep freeze and was attempting to restart the facility when this latest upset occurred.
A Bloomberg analysis Monday estimated that Ukranian attacks on Russian refineries has taken 380,000 barrels/day of fuel production capacity offline, which is helping to strengthen the distillate market as Russian product exports decline.
Refined Product Futures Are Seeing Some Modest Selling To Start The Abbreviated Trading Session Monday
Refined product futures are seeing some modest selling to start the abbreviated trading session Monday, with many in the industry taking President’s Day off since cash markets in the US aren’t being assessed.
WTI is trading slightly higher despite the dip in products and Brent crude prices would mark a 10th move higher in the past 11 trading sessions if it can hang on to those gains. That said, there won’t be a settlement for NYMEX contracts today due to the holiday, so it won’t officially count either way.
The violence around the Red Sea shows no signs of slowing after the US naval forces carried out new attacks in Yemen over the weekend, and the Houthi’s proved they aren’t discerning at all in their targets after hitting a cargo vessel with missiles that forced its Lebanese crew to abandon ship.
Money managers jumped back on the energy bandwagon last week, adding to speculative net length across all of the major contracts via a combination of new length added and short covering. While the total length held by the big funds is still unimpressive by historical standards, there is more money being bet on higher Brent crude oil prices now than at any time in the past year.
A Reuters article published Friday suggested the White House was preparing to announce a change in scientific modeling that would show the detriments of using ethanol as a renewable fuel, which would prohibit most producers from qualifying for SAF production credits. SAF production has been seen as the next option for ethanol producers to finally work around the fuel’s blend wall, but if they can’t show a 50% reduction in GHG emissions they won’t be able to get the $1.25/gallon tax credit which (on top of RIN values) is the only way to make those fuels economically viable.
RIN values meanwhile continue to plummet, approaching a 4 year low around $.45/RIN for both D4 and D6 values as the flood of new renewable diesel production continues to far-outpace the EPA’s mandated demand. Don’t be surprised if promises to change that mandate become one of many hot button items in the presidential campaigns this year.
Speaking of which, a NY Times article Saturday suggested the White House is preparing to walk-back its proposals to cut tail pipe emissions by forcing EV usage in what is seen as an election year concession after automakers called the plans “neither reasonable nor achievable”.
Baker Hughes reported a decline of 2 oil rigs drilling in the US while the natural gas rig count held steady.
Diesel Futures Are Trying To Drag The Energy Complex Lower To End The Week
Diesel futures are trying to drag the energy complex lower to end the week losing about a nickel in early trading as refinery restarts and sluggish demand both put downward pressure on prices that have lost more than 20 cents on the week. RBOB futures are reluctantly following ULSD’s lead so far, down around 3 cents so far, while WTI is clinging to small gains.
WTI had its highest settlement since November Thursday, just north of $78/barrel, and came within 2 cents of reaching a 3-month intra-day high overnight. IF WTI can break and hold above this $78 range, the charts suggest there is a good chance we’ll see a run at the $85 level in the next few weeks, while a failure spells more sideways action.
Natural gas prices have fallen to their lowest levels since the depths of the pandemic this week, removing a bid from the diesel market as heating supply remains ample without supplementing with ULSD.
Today’s PPI report confirmed the stubborn-inflation theme that the CPI report started Tuesday, which led to heavy selling in equities. Stocks are pointed lower again to start the session and are threatening to give up their hard-earned gains for the week.
Reports that BP is restarting its Whiting refinery after being offline for 2 weeks seems to be contributing to the weak action in products this morning. If all goes well on that startup, which is the most vulnerable time for a refinery, they should be back to normal operations in about a week. In addition to the BP restart, Total’s Pt. Arthur TX plant is reportedly in restart after a failed attempt to get back online 2 weeks ago. That facility has been offline since the January freeze.
Cenovus joined PBF Thursday in reporting a loss in its refinery operations in Q4 of 2023, ending an otherwise strong year on a weak note. Unlike PBF however, Cenovus was able to lean on profitable oil production operations to keep total profits positive, but that didn’t stop the company from reducing run rates at its US facilities due to the “…exceptionally weak refined products pricing environment in December…”
Flint Hills reported a leak in a pressure relief valve at the Corpus Christi West refinery yesterday, although outside of a brief flaring event operations don’t seem to have been impacted and the valve was replaced according to the filing.
Union workers at Marathon’s Detroit facility voted to strike over wage negotiations this week, but only if negotiations break down. Marathon seemed to shrug off that threat, saying they were prepared to operate the facility without the union employees. Given the excess supply in the region lately, and the struggle for some facilities just to break even, it doesn’t seem like the union has the ideal amount of leverage at the moment.
Chevron and Marathon both reported unplanned flaring at their LA-area refineries Thursday, continuing a string of nearly a dozen upsets reported to the AQMD since the heavy rains started nearly 2 weeks ago. So far, those unplanned events don’t seem to be hurting operations, at least not as much as the rain has hurt demand, as diesel basis values dropped more than a nickel in LA this week.
Today’s interesting read from Reuters: Why the flurry of M&A in Oil production isn’t helping US refiners offload their aging assets.