Market Talk Updates

Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.

The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.

Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.

The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.

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Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.

The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.

LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.

Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.

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Energy futures settled down around 4% across the board yesterday. RBOB and HO prompt month contracts lost just shy of 11 and 9 cents, respectively, and WTI and Brent dropped $3.21 and $3.38 on the day. The slide continues this morning with fuel futures down another 2% and oil down 3%, following a report showing a decline in the Chinese manufacturing purchasing managers index. The uncertain economic situation has resulted in reduced expectations for oil demand and downward pressure on oil prices. Attention is now turned to the upcoming June 4 OPEC+ meeting to determine whether further production cuts will be implemented.

Southern Rock Energy Partners is proposing the construction of a large-scale oil refinery in Cushing, Oklahoma, the oil hub which sets the WTI benchmark. If successful, it would be the first refinery built in the US in 50 years and could potentially lower gasoline and diesel prices. The refinery, with a projected capacity of 250,000 barrels per day, would exclusively process US-produced oil. However, analysts remain doubtful about the project's viability due to the complexities involved in obtaining permits, securing financing, and navigating the volatile nature of the industry.

Equitrans Midstream, the energy company with the largest stake in the 303-mile MVP Pipeline, saw a boost in its stock price yesterday following the inclusion of favorable provisions in the tentatively supported debt ceiling agreement in the House of Representatives. The agreement's provisions, which limit judicial review and accelerate federal permits, increase the likelihood of approval for the MVP Pipeline. However, the debt ceiling deal still requires congressional approval, and potential legal challenges outside the agreement's parameters may arise. Despite optimism, the pipeline's approval is not guaranteed.

Following a partial restart in April, the Cenovus Toledo Refinery in Ohio, formerly owned by BP, is set to restart its larger 115,000 b/d crude unit this week after being shut down since an explosion took the lives of two workers back in September last year. The company expects to resume planned run rates after the restart.

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The market excitement of an imminent debt deal reached by the White House and Congress seen in Monday’s trading has given way this morning. The agreement to suspend the US debt limit for the next two years agreed upon by President Biden and Speaker McCarthy originally had prices drifting higher, until uncertainties surrounding yet another rate hike by the Fed in June threw a wet blanket on bullish sentiment.

While not exactly taking credit for this morning’s selling action, the rise in tension between OPEC and its ‘+’ is certainly being considered by futures traders. Despite sundry sanctions, Moscow continues to peddle cheap crude, undermining Saudi Arabia’s/OPEC’s designs on “stabilizing” global oil prices. Last week, the Kingdom’s energy ministers issued a warning to those short selling oil futures, claiming that further production cuts are being considered.

Money manager’s net length in WTI futures continued to drop last week, with yet another refreshed round of bearish bets on the American crude oil benchmark. Speculation on European crude oil bounced in the bullish direction however, with an increase of more than 16,000 long positions. Covering shorts seems to be the stance taken on RBOB last week with only 705 new short positions while 10,607 bets were placed on higher prices.

Open interest in the NYMEX HO contracts continued to rise last week, while managers continued to shift to a hands-off approach on WTI futures following the aforementioned warning from Saudi Arabia on what will happen to short sellers.  

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Drivers heading out for Memorial Day weekend are enjoying retail gasoline prices that are more than $1.20/gallon less than last year’s record setting levels on average, thanks to the world’s supply network adjusting to the Russian supply shock. The year-on-year price drop is even more dramatic for diesel prices that are down $1.65/gallon on average, thanks to the “freight recession” pushing demand sharply lower.

Deal or no deal?  The political theatre continues in Washington with both sides preparing to declare victory in the debt debate, while dragging out the negotiations to the last minute in an effort to boost ratings.

Saudi Arabia and Russia are sending mixed messages on oil production quotas a week before the next OPEC & Friends meeting. This isn’t exactly new as Russia has been violating its official quotas for some time (which isn’t too surprising considering these are the same people that invaded Ukraine twice in the past decade) but the big question is whether or not the Saudi’s decide to teach them a lesson and turn this into another price war as they did in 2014 and 2020.   

NOAA predicted a “near normal” hurricane season in the Atlantic this year, with an El Nino pattern developing which will act as a counterbalance to the high-water temps in the Atlantic to some degree.  The forecast does warn that conditions for tropical waves forming off of the coast of Africa are favorable, which is where several of the biggest storms of all time have formed.  The outlook ends with its annual warning that despite the prediction for less activity this year than we’ve seen the past 3 years, it still only takes 1 storm to cause major disruptions. 

Pemex auditors are apparently admitting that the new 340,000 barrel/day refinery that had a grand opening last year was still not ready to produce refined products, and that the most recent target of July 2023 “was not feasible”. 

The Dallas FED published a look at the rapid growth at the busiest energy export port in the US this week, and it’s not the one you think it is. 

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