News & Views
News & Views
News & Views
Rash Of Refinery And Logistics Issues Plague Markets
It’s been a strong week for energy contracts, with RBOB gasoline pushing north of $2.35/gallon for the first time since October of 2014, and leading the rest of the petroleum complex higher. Cash markets have also moved to multi-year highs as a rash of refinery and logistics issues plague markets across the western half of the country.
Oil and diesel prices have also had solid weeks, but remain below the multi-year highs they set early in July. That will remain a pivotal test near term, and if they fail to break above those levels, the case for a large technical-driven selloff continues to grow.
RIN values have joined in on the rally, even though grain prices have moved sideways, which could be at least partially blamed on the spike in West Coast product prices, since they will no doubt attract fresh imports, which generate a renewable volume obligation for the supplier.
Today is the last trading day of the month, so watch the September product contracts (RBU/HOU) for price direction.
Earnings week for the 2nd quarter has brought a deluge of data to sift through. The themes of dramatically different year on year comparisons, and new investment in renewables/carbon capture are prevalent throughout. This WSJ article highlights that the new focus on climate change isn’t just about appeasing investors, it’s also about protecting operations from extreme weather. A few highlights from some of the earnings releases are included below.
Energy Futures Continue To Hover Near Multi-Year Highs
Energy futures continue to hover near multi-year highs, although the gains this week have been muted. That lack of conviction may suggest that buyers are growing weary after 8 months of strong gains, or it could just be some consolidation before the next big move higher. The difference is likely to be whether or not we can see prices push through to new highs over the next week or two.
Yesterday’s DOE report showed inventory draws across the board. RBOB futures did jump initially after the report, but quickly gave up those gains as it became clear that the inventory draw last week had more to do with a drop in imports than an increase in consumption. Evidence at the street level of a summer demand plateau seems to be confirmed in the DOE’s estimates, which appears to be giving buyers reason to pause after pushing gasoline prices to 7 year highs.
It seems like every day there’s a headline about Jet fuel shortages at airports across the country. Make no mistake, the shortage is not one of supply (even though this “expert” says it is) – the charts from the DOE weekly report below how that nationwide supplies are above the top end of their seasonal range, and refiners have capacity to produce more (and would love to make more given the lack of RVO with Jet) as demand returns to more normal levels. The shortage is in the capacity for transportation as a driver shortage continues to challenge many industries, and is made worse in the case of jet fuel, because many shippers were forced to abandon their space on pipelines in 2020, and in some cases are struggling to get it back now.
It’s quarterly earnings reporting time and not surprisingly given the recovery in prices, oil producers are showing huge improvements over last year. The picture is not quite as rosy for oil refiners however, even with big gains in crack spreads, many are still seeing operating losses at some plants, with the RFS taking much of the blame.
Week 30 - US DOE Inventory Recap
Gasoline Demand (And Perhaps Prices) Reach A Plateau
RBOB gasoline futures reached fresh 7 year highs in Tuesday’s session, but were unable to drag oil and diesel prices along for the ride. All petroleum contracts are ticking modestly higher to start Wednesday’s session, and even the laggards are just 1 strong day away from reaching multi-year highs of their own, as the market continues to shrug off concerns of rising COVID cases, and shutdowns. Read this Reuters article to see an argument why gasoline demand (and perhaps prices) have reached a plateau.
San Francisco continues to steal the spotlight with spiking basis values as refinery shutdowns, various logistical hurdles caused by wildfires, pipeline slowdowns and now an emergency request from airlines to have the FERC force more jet fuel shipments all combine to send prices soaring 20-30 cents above futures, and 10-20 cents around neighboring markets.
Inventory draws across the board reported by the API seem to have helped encourage buyers through the overnight session, although the moves are relatively small. The weekly industry estimate showed gasoline stocks dropped by 6.2 million barrels, crude stocks were down 4.7 million barrels and distillates decreased by 1.9 million. The government’s version of the weekly inventory report is due out at its normal time. Keep an eye on import levels, particularly for gasoline, as it seems the US has become the target for the fuel the rest of the world can’t use.
Speaking of which, RIN values are ticking steadily higher over the past few days, despite corn & soybean prices. Those refined product imports – which create an RFS obligation – are one reason that may be helping those credits find a bid. Ethanol producers meanwhile are feeling the heat of accusations that their fuel is bad for the climate, and sent a letter to the President Tuesday committing to join the rest of the world in pretending it can reach net zero emissions by 2050.
Some good news for renewable energy: The EIA reported that renewables surpassed both coal and nuclear to become the 2nd largest power generation source in 2020.
Bad news for renewable energy: That same report projects coal will outpace renewables in 2021 as rising natural gas prices make it more competitive.
RBOB Gasoline Futures Try To Lead Petroleum Complex
RBOB gasoline futures are trying to lead the rest of the petroleum complex on another rally this week, moving higher for a 6th straight sessions, and coming within $.0025/gallon of reaching a new 7 year high overnight. Diesel and crude oil contracts are reluctant to follow so far, and remain a few percentage points below the multi-year highs they set earlier in the month. Which contract wins the tug of war this week may well determine if the 8 month old rally can continue, or if we’ll see a more substantial pull back in prices this fall.
The Dallas Fed’s manufacturing survey for July showed another month of above average production for the state, while also highlighting the ongoing inflationary pressures many companies are facing. The report also offered a glimpse into the challenging labor market that is being felt across industries, and the country.
American Airlines is the latest in the long list of companies impacted by the driver shortage this summer, and has encouraged pilots to conserve fuel as a result. Make no mistake, it’s not a shortage of fuel - refiners would love to make more Jet – as that product does not create a Renewable Volume Obligation like gasoline and ULSD do, and is one of the last outlets for higher sulfur blends, it’s a lack of capacity to get that fuel where it needs to go.
While there may be plenty of fuel nationwide, regional shortages are becoming more common, with the San Francisco bay area becoming the latest to see prices spike as inventories dwindle. SF diesel basis values spiked another 7 cents in Monday’s trading, adding 16 cents to those differentials in the past 2 weeks. With two of the areas 5 refineries already shutting their doors to convert to renewable diesel production, and 2 more being told last week they’ll need to spend hundreds of millions of dollars to install equipment to reduce pollution, it seems like resupply will have to come from overseas.
LA Spot values have also risen due to a pair of refinery issues in July, but are so far lagging the move this week. In normal years, we’d expect a fleet of trucks to long haul fuel to alleviate the regional shortages across the Western half of the country, but, well, you know the story.
Today’s interesting read: The wave of deal making changing the landscape of US oil drillers.
Energy Futures Tread Water To Start Last Week Of July
Energy futures are treading water to start the last week of July, and US equity markets are seeing small losses after reaching fresh record highs Friday.
Although volatility has dropped in both energy and equity markets since spiking a week ago, things aren’t as calm as they seem based on current prices, as we did have refined products trading over nearly a nickel range overnight. The last week of July will bring a key test for the energy bulls, that have already passed two big tests so far in July. If prices do not break to fresh highs before month end, there will be an argument that the weekly charts are forming a rounding top pattern that could end up meaning sharply lower prices as we get closer to fall.
Ethanol prices appear to be on the verge of a technical breakdown, along with corn futures which traded below their 200 day moving average for the first time in nearly a year on Friday. That selling in grains didn’t prevent a jump of more than 3 cents in RIN values Friday, although some stronger offers did appear in the afternoon, which could create some downward pressure to start the week, especially with futures flashing red.
Hedge funds look like they may have thrown in the towel after last Monday’s brutal sell-off (and likely missing out on the subsequent rally) with managed money net length seeing sharp reductions across the energy board last week. WTI and RBOB net length plunged to the lowest levels since last October as long positions were cut, and new short positions were added. Those new shorts may help explain the strong rallies in WTI and RBOB Wednesday and Thursday if those new speculative shorts were getting squeezed out. Brent and Gasoil contracts also saw large declines in the large speculator books, while ULSD was the only contract to see a single digit percentage drop on the week, which could end up being a sign of hedge funds struggling to figure this market out as there’s a case that the ULSD contract looks the weakest currently on the charts.
The EIA last week took a closer look at the spike in renewable diesel production expected over the next 3 years, which is forecast to bring US capacity from less than 1 billion gallons/year currently, to nearly 5 billion gallons by 2024. The report notes that even with this surge in production, RD will only account for roughly 20% of West Coast diesel refining capacity, and 4% of USGC capacity after these upgrades are made. The report also highlights the challenges the consequences of higher feedstock and RIN prices caused by this race to take advantage of California’s credits go green.
Baker Hughes reported 7 more oil rigs were put to work last week, continuing the steady increase in drilling activity as producers enjoy the highest prices in nearly 7 years. Unlike the past month, the Permian led the increases this week, with 4 more rigs operating in the country’s largest basin.
Emphatic Recovery Puts Bulls Back In The Driver Seat
Don’t call it a comeback. Refined products are now up a couple of cents on the week, despite having their biggest single-day selloff in more than a year on Monday. The emphatic recovery after it looked like prices were about to collapse puts the bulls back in the driver seat, although they will need to quickly break through the July highs to avoid creating a rounding top pattern on the charts that would favor some heavy selling as we come into fall.
The impact (or lack of) the surge in COVID cases around the world continues to seem to be helping drive the action in both energy and equity markets (you, as it has for the past 18 months) with the S&P 500 now pushing fresh record highs as fears of lockdowns have eased after investors were spooked earlier in the week.
The world’s best oil trader? China has made a habit of filling up its strategic oil reserves when prices were depressed, and this week is offering to sell 22 million barrels from those reserves in an effort to curb inflation. It would also make for a nice return given that prices are roughly double what they were during their buying spree, which is slightly better than what they get from of US treasury bills. In addition, the Chinese government is cracking down on refiners’ import quotas, which could further reduce the demand for oil from the world’s largest importer. So far, that pair of headlines doesn’t seem to be doing much to prices, but they could be a key factor in the months to come.
While the wild futures action has justifiably taken most of the attention this week, there has been a big rally in West Coast basis values as well. A pair of refining issues in the LA area has diesel basis pushing 4 month highs, but those values trail a larger jump in San Francisco spot prices by almost 5 cents. It wasn’t clear if the SF spot spike was driven by an immediate refinery issue, or the realization that this week’s ruling by Bay-area regulators may mean that 4 of the 5 refineries in the region won’t be operating in a couple of years.
Concerns Of More Widespread Shutdowns Alleviated
Energy futures have taken back most of Monday’s big losses, rallying it tandem with equity markets as more evidence emerges showing that vaccines are largely effective against the Delta variant, alleviating concerns of more widespread shutdowns. For now, this recovery rally has removed the risk of a price collapse and leaves the complex in neutral technical territory, which may mean we’ll be stuck in another back and forth pattern near term.
Wednesday saw some healthy early buying turn into a furious late-morning rally after the DOE report showed a bounce back in demand estimates, even as crude oil inventories snapped an 8 week streak of declines. The report wasn’t as bullish as the price action might have you believe however, as gasoline imports reached their highest level in 10 years last week, in what could be a sign of the ongoing global refining capacity excess that many expect will lead to more plant shutdowns.
Speaking of which, California continues its crusade against crude oil refiners this week, as local regulators in the Bay Area voted to require the PBF and Chevron refineries to install wet gas scrubbers within the next 5 years. The timeline means this ruling is unlikely to have a near term impact on supplies, but the hundreds of millions of dollars required for those installations could be the last straw for those facilities longer term and could force them to close or convert operations as we’ve already seen from 2 other bay-area facilities over the past year.
Up in smoke: As wildfires sweep across north America, a Washington state forestry program that was the 2nd largest generator of carbon offset credits for California’s Cap & Trade program has reportedly burned down. While that story has plenty of low-carbon irony, it’s unlikely to have much influence on CCA credit prices as those offsets are only currently allowed to cover 8% of a company’s obligation, and that off-set cap will soon shrink to 4%.
Week 29 - US DOE Inventory Recap
Energy Markets Try To Claw Back
Energy markets are trying to claw back after Monday’s big sell-off, with equity markets appearing to be giving them a boost for a 2nd straight day.
The API was reported to show a build in crude oil stocks of 806,000 barrels last week, which would snap a 2 month long streak of inventory declines. Gasoline inventories were also said to have built by 3.3 million barrels, while distillates dropped by 1.2 million. Prices sold off in the immediate aftermath of that report, and RBOB actually flipped back into negative territory after settling up nearly 2 cents, but it appears that report’s influence ended overnight.
The DOE’s weekly report is due out at its normal time this morning (although there was an unscheduled hour-long delay last week). We’ve seen big swings in demand the past two weeks, and if the pattern holds, we should see an increase in consumption estimates this week.
A Reuters report Tuesday said that the White House is intervening to delay the annual target setting for the RFS, seeking a solution to the political football that has left refiners and biofuel producers in political purgatory for the past 15 years. While that’s a noteworthy headline, the reality is the EPA has already delayed setting the RVO’s for this year, and is already behind schedule for 2022, as it struggles with the fact that it’s physically impossible to meet the statutory limits set in the law.
Meanwhile, senators from PA, ME, NJ and CA proposed new legislation to repeal the ethanol mandate from the RFS, while leaving the requirements for “advanced” biofuels, saying that “…the RFS drives up the cost of gas and food, harms our environment, and damages engines.”
RIN values didn’t seem to have a big reaction to either story, trading higher in the morning and then pulling back in afternoon to end the day with small gains.
The tropics have been quiet since Elsa set records a few weeks ago, in large part thanks to heavy layers of Saharan dust prohibiting development. The NHC is giving 20% odds of a system developing off of the South East US coastline over the next 5 days, but even if that system does get named, it’s unlikely to become a major storm, and is not in a position to threaten the energy supply network.
An IEA report details how spending on clean energy options is falling woefully short of what’s necessary to meet climate goals, even as record amounts of money are printed to aid economies around the world recover from the pandemic. (Charts Below).
Cocktail Of Bearish News Sends Financial Markets Lower
A cocktail of bearish news sent financial markets around the world sharply lower on Monday, and energy futures had their biggest 1 day declines since that fateful week in April 2020 when WTI went negative, and products were trading in the 60 cent range. So far equity markets seem to be faring better than energy contracts, with most US indices seeing a recovery bounce this morning, while energy futures have already given up their overnight gains, and appear to have ended their 8 month bull run.
Now that the upward trend is broken, the June lows at $2.10 for RBOB and $1.95 for ULSD look like the next natural point of support, and if they break, it looks like we’ll head towards $1.90 for RBOB and $1.80 for ULSD, which is the area of congestion that held prices for about a month in the spring.
In some cases, these large sell-offs can create a snowball effect as speculative traders are forced to liquidate positions to meet margin calls, which creates more pressure to the downside, and may be what we’re seeing this morning as futures continue to slip further into the red. With money managers steadily increasing their long bets on energy prices this year, perhaps the determining factor on whether or not we see another big drop in the coming weeks is if those funds have the fortitude and finances necessary to ride out the storm.
RINs and Carbon credits also came under pressure during the widespread sell-off, albeit on a smaller scale than what we saw from crude and products, in another sign of the widespread liquidation that seemed to grip markets globally throughout the day.
Equity And Energy Markets Sent Sharply Lower
Surging COVID case counts, a new OPEC deal, and the risks of a cyber - war between the world’s two largest economies all seem to be combining to send equity and energy markets sharply lower to start the week, putting the bullish trend that’s pushed prices higher for 8 months at risk.
All of the big 4 petroleum contracts are currently trading below the weekly trend-lines that have pushed prices higher since November. ULSD is looking the worst from a technical perspective, already moving below the lows we saw during the short-lived sell-off two weeks ago, and coming within a penny of taking out its June lows. If these trend lines break, there’s a strong argument based on the charts that we could see a $10/barrel drop in crude and $.25/gallon drop in products before the end of summer. Don’t bank on it just yet however, we still need to see prices settle and hold at these lower levels before we can call an end to the trend.
OPEC & Friends ratified their agreement to add 400,000 barrels/day of held back production starting in August, and are planning to continue increasing at that level until output returns to pre-COVID levels sometime late next year. While the market is moving lower following that news, this is actually less than the 500,000 barrels/day many expected to see added monthly, and should leave global inventories on a drawdown path for the rest of this year, so it would seem that the selling today has more to do with concerns over the spread of COVID and Chinese Computer viruses and less with a sudden surge in oil output.
While the news will focus on the accusations of state-sponsored hacking, China is steadily waging war on global refiners, ramping up run rates and seeing record diesel exports which is contributing to refiners in other parts of the world contemplate permanent shut downs. They aren’t just expanding operations at home either, as reports announce a new $3 billion refinery will be funded and built by China’s national engineering firm in Iraq.
Baker Hughes reported 2 more oil rigs were put to work in the US last week, matching the average weekly change that we’ve seen over the past 2.5 months. Notable this week is that the “other” non-specified basins saw an increase of 6 rigs (10% of their total) while the Permian stayed flat for a 4th week, and the Eagle Ford and Woodford basins both declined by two. The increases in relatively unknown basins is consistent with a WSJ article last week that highlighted how speculative grade oil companies are (not surprisingly) raising large amounts of capital through low-rate bond issuances.
If you’re feeling whiplashed by the recent market swings, don’t beat yourself up, the people who bet with other people’s money for a living don’t appear to be doing very well lately. The weekly Commitments of Traders report showed that Money Managers (aka hedge funds) jumped back off the energy bandwagon 2 weeks ago just before prices bounced sharply off of the 8 month old trend-lines, and then added to their positions last week, just in time for another sell-off. The weekly moves continue to be relatively small – particularly in crude oil contracts – but products are seeing larger moves.
WTI Drops To Lowest Settlement Value In A Month
The back and forth action continues with energy prices rallying to start Friday’s session, after WTI dropped to its lowest settlement value in a month on Thursday. Refined products seem to be stuck in a temporary technical no-man’s land, still needing a big rally to test their multi-year highs set earlier in the month, while staying a safe distance above their bullish trend-lines. The outside influences of equity and currency markets continue to have an inconsistent impact on energy prices as the correlations between the asset classes has weakened over the past couple of weeks.
OPEC’s monthly oil market report held global supply & demand estimates steady, and like the IEA report earlier in the week, suggested that will lead to continued drawdowns in inventories near term, although supply should catch up sometime in the next year. The cartel’s monthly output jumped by 586mb on the month, 3/4 of which came from Saudi Arabia unwinding its voluntary output cuts now that the market seems to be ready to absorb those barrels without hurting prices.
The report also highlighted how increased refinery output globally was tightening the crude oil market, and putting downward pressure on refining margins across all regions. The other piece of bad news for refiners is that depressed values for crude tankers has led to several newly built VLCC’s to convert to hauling clean products, which is putting downward pressure on those rates as well and contributing to the competition globally to find a home for those barrels, even as some in-land regions continue to face shortages.
West Coast spot markets saw another day of stronger basis differentials, largely offsetting the downward slide in futures, even though California refinery output and inventories increased last week. That strength continues to be blamed on an LA-area refinery being forced to shut multiple units due to power failures earlier in the week, although it’s still unclear what the damage may be or how long that downtime may last.
RINs have been uncharacteristically quiet this week, with D6 (ethanol) values ending at essentially the same level the past 3 days, as we’ve gone an entire week without a major change being announced in Washington.
The tropics are quiet with no storm activity forecast by the NHC for the next 5 days, giving us a bit of a breather before what’s still expected to be a busy season.
Energy Complex Under Heavy Selling Pressure
The energy complex is under heavy selling pressure for a 2nd straight day after almost reaching new 6 year highs Monday as a tentative agreement between OPEC Members, slowing imports from China and some ugly demand estimates from the DOE all seem to be giving buyers pause.
After a yoyo overnight session, prices were holding near break-even levels Wednesday until the DOE’s weekly status report (which was delayed an hour due to some unknown technical glitch) showed some troubling demand numbers, after last week’s bullish report sent prices to new multi-year highs.
Distillates look particularly troublesome as demand dropped sharply and is now estimated to be below where it was this time last year, which could be a consequence of people traveling this year instead of ordering packages from Amazon. Even with diesel exports reaching a 1 year high, and output declining for a 3rd straight week, diesel inventories still built, which may keep refiners hesitant to increase run rates. There is a huge disparity across the country however as the Midwest (PADD 2) looks like it has more diesel than it knows what to do with as stocks have increased by 30% in less than 2 months, and the Gulf Coast (PADD 3) continues to hold above average inventory, while PADDs 1, 4 and 5 are all below average levels, with evidence at the rack level suggesting product remains tight.
Gasoline demand also saw a large drop a week after reaching an all-time high. This is probably partially due to the holiday hangover effect of drivers not needing to fill up for a while after topping off for their road trips. It is also another reminder of how challenging (aka unreliable) the weekly estimates are. As a reminder, since they really don’t estimate actual consumption, they estimate the product that’s moved out of the bulk system.
Refinery rates held relatively steady on the week, with a small net decline. It’s worth noting that after a brutal stretch that saw US refining capacity drop by the most in decades, total US capacity showed a small increase of 38mb last week. That’s a reminder that even though many refiners are still struggling through an existential crisis caused by excess global capacity and the crescendo of climate change concerns, there are still facilities with logistical and scale advantages putting money into expanding that will continue to put pressure on those that don’t.
You can read here to see the EU’s wide ranging proposal for reducing carbon emissions. Don’t expect any immediate market impacts however as getting any of these proposals approved by member countries is expected to take years.
Click here to download a PDF of today's TACenergy Market Talk, including all charts from the weekly DOE report.
Week 28 - US DOE Inventory Recap
Big Swings Overnight Driven By Compromise News
It looks like a quiet morning for energy futures that are holding near break-even for the day, and still hovering close to 6 year highs. Don’t be fooled into thinking the market isn’t still volatile however, as the current values don’t show that refined products dropped 4 cents overnight (wiping out Monday’s 3-4 cent gains) only to bounce back violently to erase those losses in a span of just about 20 minutes shortly after 6 a.m. central. For now, the charts continue to favor higher prices with the 8-month-old bull trend intact, but we’ll need to see last week’s highs taken out before month end or there’s a good chance that a big correction lower will come soon.
The big swings overnight appear to be driven by news that Saudi Arabia and the UAE have reached a compromise, which should eventually bring more oil to market. The eventually piece may be what encouraged buyers to step back in so quickly as the new output – IF the deal is confirmed - isn’t likely to come online for several more months.
As has become the pattern of late, the API reported another large draw in oil inventories last week at 4 million barrels. Gasoline stocks were also estimated to be lower, by 1.5 million barrels, but distillates increased by nearly 4 million barrels, which helps explain ULSD futures seeing the most downward pressure overnight. The EIA’s weekly report is due out at its normal time this morning. Last week’s report saw an all-time record for the gasoline demand estimate, which coincided with the pre-holiday rush now that most people are back to moving about. There’s evidence on the ground of a substantial holiday hangover with retail volumes dropping last week, but it’s hard to say if that will translate to the official numbers which only measure product removed from the bulk system.
EIA prophecy? Monday the EIA highlighted its Southern California Daily Energy report, (which is ominously published at eia.gov/special/disruptions/summer/) and then Tuesday a refinery near Los Angeles was reportedly forced to shut most of its units due to a power failure. That news sparked a modest rally in LA spot diesel basis, which had been languishing in negative territory for the past 2 months. So far the moves are relatively minor, just a penny or two, nothing like the wild swings the LA Spot market has been used to in years past, but have gone dormant over the past year. (See chart below)
Caught short: A violent spike in corn prices had RINs rallying early in Tuesday’s session, but quickly gave up those gains when the grain rally proved short lived. It appears someone may have got caught short on the expiring July corn contract, which were up 80 cents (nearly 12%) at one point before giving up almost all of those gains later in the session, while the forward contracts did not move much at all. Not sure what that means? Think back to when crude went negative last April on the day before the May contract expired…it’s just like that, just less extreme and in reverse.
More big news in the Carbon markets this week. The EU is set to release 13 policies today aimed at combating climate change this decade. The centerpiece is an expansion of the Emissions Trading Scheme (their word not mine). China meanwhile is launching the world’s largest Emissions-Trading program this week, which sounds impressive but also makes sense because they’re the world’s largest carbon emitter. Not sure what these various programs mean or how they work? You’re not alone, the segmentation in this rapidly expanding and evolving space is creating plenty of confusion, and like we saw in with the Renewable Fuel Standard, will likely attract plenty of fraudsters making up fake credits.
Tug Of War Between Reopening Optimism And Delta Variant Fears
The IEA’s monthly oil market report forecast that the world could see the largest draw in crude oil inventories in more than a decade this quarter as refiners ramp up run rates to try and keep pace with reopening around the globe. The report noted that this phenomenon should continue pushing prices into a steeper backwardation as suppliers will be challenged to keep pace with the uptick in demand, and noted how that phenomenon is pushing prices to multi-year highs and threatening the economic recovery. The report ended with a call for OPEC to figure out its output plan as the volatility caused by its lack of decision making is not, “…in the interest of either producers or consumers.”
The forward curve charts below show how the recent increase in demand has pushed most petroleum contracts into a steeper backwardation, and put downward pressure on refinery margins as products have struggled to keep pace with the rise in crude prices. On the other hand, the crack spread chart does not account for the drop in RIN values that has taken roughly $2/barrel off the cost of doing business for US refiners over the past 5 weeks, which increases their net margin and largely offsets the drop in gross seen on the charts.
Technology topping out? An EIA report this morning highlights that most US drilling regions saw production/well drop in the past year, after more than a decade of steady increases that saw numbers increase 5 to 10 fold thanks to rapidly improving technology. Only the Bakken saw its total output per well increase to nearly 900 barrels/day (up from roughly 150 in 2007). This likely doesn’t mean that drillers are losing their edge however. The report also notes that the dip is likely due to unplanned shutdowns due to COVID, and that the rates are likely to increase again once more normal drilling patterns continue.
Hovensa no more: The refinery that threatened to bring more refined products to oversupplied Atlantic basin looks like it’s officially out of the game as the owners filed for bankruptcy after being forced to shut operations, and amidst multiple investigations from the US Attorney and EPA. Since that plant never really got back to full run rates, it’s unlikely to create any supply disruptions, but it may save another facility in the US or Europe from closing their doors as the race to rationalize refineries continues.
The July Rollercoaster Continues
The July rollercoaster continues: We hit 6 year highs, then saw products drop 16 cents in 2 days, only to wipe out almost all of those losses the next 2 days with a strong finish Friday, only to see more selling pressure this morning. US equity markets are also pointed lower after touching fresh record highs last week, with the common culprit of COVID concerns being blamed for the selling in both asset classes.
Throwing in the towel? Money managers made sizeable reductions in their net length across the petroleum complex last week, after weeks of steady buying had pushed the large-speculator’s bets on higher prices at multi-year highs. The timing of the report data (which is compiled using Tuesday’s positions, and reported on Friday) coincides with the heavy selling we saw early in the week, before the big price bounce Wednesday, so it will be interesting to see if they tried to jump back on the bandwagon later in the week, or if this is the start of a larger liquidation that could help bring an end to the 8 month-long price rally.
While petroleum wagers subsided, money managers continued to increase their net length in California Carbon Allowances last week, which appears to be driving the increase in those CCA credits to new all-time highs.
Baker Hughes reported 2 more oil rigs were put to work last week, both of which came in “other” smaller shale plays that don’t get their own classification, while the Permian Basin (which accounts for more than half of all drilling activity in the country) held steady for a 3rd week. With oil prices reaching 6 year highs last week, there will be more focus on the rig count over the next several weeks as US producers engage in a high stakes game of chicken with OPEC producers to see who wants to bring their spare capacity back into the game while risking popping the oil price bubble.
Remember when the IMO 2020 fuel specification change was expected to wreak havoc on global diesel supplies, before COVID made that idea seem quaint? We may be in for version 2.0 of that phenomenon as the EU gets ready to announce major changes to its carbon market this week, which could mean more overhauls for shippers.
Energy Bulls Pass Big Test With Flying Colors
The energy bulls passed their first big test in 3 months with flying colors this week, bouncing off of trend support early Thursday morning, then extending those gains later in the day following a bullish report from the DOE, and keeping that momentum going this morning. Big draws in oil and gasoline inventories, and an all-time record for gasoline demand estimates, highlighted the DOE’s weekly report, and sent prices on an immediate rally that was able to sustain through the afternoon and the overnight session.
The EIA’s total petroleum “demand” estimate surpassed 21 million barrels/day last week, a new high since the start of the pandemic, and higher than we were at this point in 2019. That surge was led by a 10% spike in gasoline demand, which reached its highest weekly level in 30 years of data provided from the DOE. While the 4-week average (which is deemed much more reliable than the weekly number) is still trailing pre-pandemic levels, that spike north of 10 million barrels/day (the first time that’s ever happened) is a signal that US consumers are ready to move. We are likely to see a dose of reality next week as the post-holiday hangover has hit demand across the country, and the rain Elsa is dumping along the east coast likely is keeping cars off the road this week. Diesel demand estimates slipped on the week, but remain above both their 5 year average and 2019 levels for this time of year.
Refiners look to be up to the challenge of surging demand, raising gasoline output north of 10.5 million barrels/day for just a 3rd time ever, even though total run rates remain well below where we’d expect them this time of year, and 5% of capacity going away permanently over the past year. That said, as the wide spread in rack prices across the country shows, just because refiners can produce enough fuel in total to continue outpacing US consumption, that doesn’t mean the pipeline network is equipped to get that fuel where it needs to be, particularly in the Western half of the country.
US Oil production did rise to 11.3 million barrels/day, another post-pandemic high. A WSJ article today suggests that American frackers are showing restraint with prices near 6 year highs, choosing to pay off debts rather than plow money into more drilling. While that sounds interesting, for an industry that does not do moderation, it seems like the supply-chain shortages being dealt with in so many industries may be a bigger factor. It will be interesting to see if we get a few more months of prices in the $70s, if the group long known as wildcatters will still be restrained.
If you need some weekend reading material (or are having trouble sleeping) check out BP’s annual world energy statistical review. The report highlights the record setting extremes we witnessed in 2020, details the progress the world is making on renewable energy sources, and notes why those efforts still fall far short of what would be needed to become carbon neutral.
Week 27 - US DOE Inventory Recap
Energy Markets On The Brink Of Technical Breakdown
Another big reversal from a morning rally Wednesday has left energy markets on the brink of a technical breakdown that could mean dramatically lower prices in the coming weeks, but so far are managing to cling to support and not break the bullish trend-lines. The lack of an OPEC deal continues to roil the energy markets, while global equity markets are selling off a day after US indices reached new record highs, which is being blamed on concerns about the latest COVID outbreaks.
RBOB gasoline futures have a bullish trend line just under the $2.18 mark, and hit a low of $2.1775 before bouncing back to positive territory north of $2.21 this morning. That makes the trend line look pivotal as a break down should have prices testing the $2 mark later in the month, while a hold here may encourage buyers to step back in. It’s not just refined products that are teetering on the edge of a technical breakdown. Ethanol prices are threatening a drop below $2.25, which looks like a technical trap door that could lead to prices quickly falling below $2 should support break. RINs are also coming under heavy selling pressure, but remain 20 cents above where they bottomed out in June.
The White House is also weighing in on the OPEC non-agreement, as the administration takes heat for the rapid increase in fuel prices. That pressure may trickle down to the EPA and how they handle the overdue RFS volume obligations, which may help explain some of the selling in RINs after they rallied to end last week when a court vacated the ruling to allow E15 in the summer time.
The EIA’s monthly short term energy outlook continued to forecast that global petroleum demand would climb back to pre-pandemic levels by next year, but suggests that US Gasoline demand will not thanks to a combination of greater fuel efficiency and work from home policies. The report also highlighted the growth in US gas liquid production and trade, led by steadily climbing propane exports. The report highlighted the continued slow but steady growth in renewable fuel and electricity options, but also highlighted that coal usage will increase after many years of decline thanks in large part to rising natural gas prices.
The EIA’s weekly report was delayed by the holiday and is due out at 10 a.m. central. The API report was also delayed a day, and continued the streak of large crude oil inventory declines (7.9 million barrels last week) while refined products build (2.7 million barrels for gasoline and 1.1 for diesel). California apparently doesn’t celebrate independence day, releasing its weekly data on schedule, showing a build in gasoline production, while distillate output fell, thanks to southern California refiners reaching a 3 month low.
Today’s interesting read: how long does it take for an EV to become cleaner than gasoline-fueled cars?
Huge Price Reversal From 6-Year Highs
Volatility is back in energy markets after a huge price reversal from 6 year highs in Tuesday’s session was followed up with more whipsaw trading this morning. After Tuesday’s outside down reversal (which the text book will tell you is a bearish signal) we saw prices rally overnight, wiping out more than half of the previous losses, only to see those gains wiped out in 10 minutes of heavy selling this morning before more modest buying picked up again.
The reversals are putting energy prices up to their biggest technical test in 2 months, threatening to finally put an end to the rally that’s been keeping prices moving steadily higher for the past 8 months. Volatile action is often seen when a trend comes to an end, so we could be seeing energy prices finding a top, but they haven’t yet dropped below their trend-lines, so it’s too soon to say that the bull market is over.
Tuesday’s big swings were largely blamed on the OPEC drama, but the sell-off was much more widespread than just petroleum, impacting both equities and numerous other commodities, that suggests fear may be creeping back into the market after an extended period of re-opening fueled optimism seems to have run its course.
While oil prices initially spiked when OPEC failed to come to an agreement, it quickly became clear that a lack of an agreement when the cartel is intentionally withholding production may actually be bearish for prices not bullish. Also, keep in mind that Saudi Arabia made its own production cuts – in excess of what the alliance agreed to – last year, so is free to reverse course and increase output whenever it wants. In both price crashes of 2014 and 2020, we’ve seen the Saudis allow prices to drop to teach the Russians and Iranians (among others) a lesson, and it wouldn’t be surprising to see them do something similar to the UAE now.
A stronger US Dollar also got credit for the selling, as it often does any time commodities see a broad selloff. The problem with that theory is that the correlation between the dollar and energy price movements has been strongly positive lately, which is the opposite of what it’s “supposed” to be. That certainly doesn’t help explain why the dollar moving higher Tuesday was suddenly bearish for oil when the two have been moving higher in tandem for much of the past month.
RINs joined in on the reversal action, following grain and refined products by dropping 10 cents from where they were trading in the early going. Grain prices are seeing an early bounce this morning, as refined products were, which should encourage buyers that may have grown weary after multiple big drops in the past month.
Elsa was briefly upgraded back to Hurricane status, but has since weakened again to a tropical storm and is soon to make landfall on Florida’s northern Gulf Coast. So far no major disruptions to terminal operations have been reported, or are expected, although several facilities shut down temporarily while the storm passes.
WTI And RBOB Futures Reach Highest Levels Since 2014
WTI and RBOB futures both reached their highest levels since 2014 overnight as a lack of unity from OPEC & Friends, an influx of investor money, and another renewable fuel court ruling, all seem to be helping push prices higher. Prices have pulled back since reaching those highs however, and there are some warning signals that a pullback may be coming soon.
OPEC & Friends failed for a third time to come up with an agreement on Monday as the UAE continues to act as a roadblock. While the market has reacted with higher prices following this news, it could in fact end up being bearish, as the fragile alliance was preventing too much supply hitting the market and without it, countries may overproduce to take advantage of prices trading at multi-year highs.
Tropical Storm Elsa is making its way across the Florida keys this morning, with winds around 60 miles an hour. The Storm is expected to pass near the port of Tampa overnight and make landfall sometime Wednesday. The path keeps the storm far away from any refineries or off shore production so should not a non-factor for supply.
Money managers continued their recent trend of increasing net length (bets on higher prices for refined products, but reducing them for Crude oil. RBOB gasoline contracts led the buying last week as the large speculative trader category increased their long positions by 10%, jumping on the high gasoline price bandwagon as prices reached 7 year highs.
Baker Hughes reported 3 more oil rigs were put to work last week. That puts the total U.S. oil rig count up 191 from a year ago, when prices were fighting to get back to $40 per barrel. Then again, the rig count is 412 less than it was 2 years ago, when prices were around $56, nearly $20/barrel less than where they are trading today.
RINs had another choppy session on Friday, starting the day under more selling pressure only to rally in the afternoon following a court ruling that invalidated E15 sales in the summer time. While E15 has had a hard time catching on outside of the Midwest, it does take another blending option off the table and reduce the availability of RINs to meet RFS obligations. Due to the early selling in RINs we saw Friday, the nickel move higher in values won’t show up until tonight’s assessment.
Friday's Calm-Before-The-Storm Feeling
There’s a calm-before-the-storm feeling to early trading in the energy markets Friday as we wait on more news from OPEC, and the first hurricane of the season.
As expected, the OPEC meeting has created volatility through uncertainty. Yesterday we saw prices spike when Russia and Saudi Arabia couldn’t come to terms, only to see prices pull back when it was reported they’d found a suitable compromise on raising output gradually, and then prices have moved higher again this morning when the UAE was reportedly standing in the way of a deal.
The day before a holiday weekend is often a quiet, low volume, trading session, which could mean more volatility later depending on what the cartel does or doesn’t agree to.
Elsa is now a hurricane, continuing a trend we’ve become familiar with the past few years where storms get stronger than the early forecasting models suggest. While that may be an ominous sign for the remainder of the Atlantic hurricane season, this storm’s path is still expected to stay well east of the oil production and refining zones in the Gulf of Mexico – and it will be interfered with while crossing the Antilles – so it should not be a major supply disrupter. That said, there will be panic buying in parts of Florida that will create their own shortages, and given that the supply/demand balance is tighter than it’s been in several years and trucking capacity is tighter than ever, dealing with those localized issues will be a challenge.
The June payroll report showed 850k more jobs added during the month, while the official unemployment rate ticked higher, in what seems like good news in that more people are once again looking for jobs. The U-6 unemployment rate dipped from 10.2 to 9.8%. Markets reacted positively to this news as it signals both continued recovery from COVID, and perhaps the end to the “why should I work” mentality feared from the trillions of dollars of stimulus that had been pumped into the economy over the past 15 months.
Today’s interesting read courtesy of Rystad Energy: Why the EV market is growing more reliant on Chinese battery components.
A Strong Start To July
It’s a strong start to July with refined products rallying more than a nickel in the early going, and crude oil prices reaching fresh 2.5 year highs. The OPEC meeting is underway and will likely create some volatility today as rumors start trickling out of the meeting ahead of the official announcement.
Tropical storm Elsa has formed in the Atlantic, and looks like it will hit Florida early next week. It’s still early in the season so the waters haven’t reached their warmest levels yet which should keep this storm from reaching hurricane strength. The forecast cone currently keeps the storm east of the oil refining and production region of the Gulf of Mexico, and if that holds, this should not be a supply threat beyond some headaches in the ports as the storm passes.
Wednesday’s DOE report added to the bullish sentiment for oil as US inventories saw another large decline, a 6th straight week of falling inventories, and one of the largest monthly declines on record. Total US Petroleum demand climbed for a third straight week and is holding above its seasonal average for this time of year. The exception in the report was gasoline, which saw a drop in the weekly demand estimate and a build in inventories. The DOE also reduced its gasoline demand estimates from the spring in its latest monthly update, although that’s done little to stop the rally as RBOB futures just reached their highest level in nearly 7 years in the past few minutes.
The exception to the weaker gasoline fundamentals is the PADD 4, which has by far the fewest people and thus the least amount of gasoline of the districts and is typically ignored in the weekly statistics given its volume amounts to a rounding error. This week however it could be the canary in the coal mine for the industry as it deals with the resumption in demand following so many refinery closures in the past year. Regional inventories have dropped to their lowest levels in nearly a decade as Colorado’s sole refinery struggles through a turnaround, and 2 of the main backup options nearby are no longer operating as oil refineries.
RINs have been uncharacteristically quiet the past couple of days after the Supreme Court ruling rippled through the market Friday and Monday. That relative lack of volatility may not last long however as grain prices saw a strong rally following the USDA’s crop report which showed fewer acres planted than many reports expected, setting the stage for stronger values in the back half of the week.
Abandoning ship: Shell continues to shed assets, with a sale of its share in a California production JV coming according to a new Reuters report. Meanwhile, Chevron is looking to sell some of its stake in the Permian, which should provide a good test of the new theory that US producers are showing discipline in their spending even now that prices are near 3 year highs pushing companies back into the black.
The EIA this morning published a note highlighting that non-fossil fuel sources reached 21% of total energy consumption in the US last year, the highest levels in more than a century, when wood was the renewable energy of choice. The report does point out that Nuclear power remains the largest non-fossil fuel category by usage, while petroleum’s share has held relatively steady the past several years. Those various sources of energy are facing multiple tests this week as temperatures & electricity usage have surged from coast to coast.
Another EIA report yesterday highlighted vulnerable areas of the country’s power grid this summer, with the majority of the country listed as an elevated or high risk of outage. New York was one of the relatively few states given a low risk status in the report, and right on cue, government officials are calling for conservation this week as the heat wave is giving their grid a tough test.