News & Views
News & Views
News & Views
Week 26 - US DOE Inventory Recap
Multiple Equity Indices Holding At All-Time Highs
Energy futures continue to hold near multi-year highs, and multiple equity indices are holding at all-time highs as recovery optimism fueled by increasing jobs & manufacturing data seems to be edging out concerns about new travel restrictions keeping the upward trend lines intact for both asset classes.
It’s the last (trading) day of June, ending the second quarter and the first half of the year. It’s been another strong month for energy contracts (marking a seventh month of increases out of the last 8) with most blowing away pre-COVID price highs and trading to levels last seen in 2018 or earlier.
Most cash markets have already flipped to trading vs August futures, but for the remainder, make sure to watch the RBQ & HOQ contracts today as the expiring July (RBN/HON) contracts have minimal liquidity. As of this writing the last trade for both July contracts is nearly a penny/gallon lower than that for the august contracts, and the July Heating Oil hasn’t had a trade in more than an hour.
The API reported a large drop in oil inventories of more than 8 million barrels last week, while refined products had modest builds of 2.4 million barrels for gasoline and 428k barrels for distillates. The EIA’s version of the weekly data is due out at its normal time this morning.
The second tropical system churning across the Atlantic is given 80% odds of development as it moves towards the Caribbean, and will need to be watched next week since there’s still a chance it could make it to the Gulf of Mexico. While the first system being tracked by the NHC is only given 10% odds, it may act like a lead blocker for the second storm and provide a favorable atmosphere for development. The 3 systems on the map this week are more typical of August than June according to one expert, and makes this non-expert a little hesitant to think of what August (and September) might look like.
Energy Prices Bounce After Worst Daily Selloff In A Month
Energy prices are bouncing after their worst daily selloff in a month Monday, keeping the door open for an extended price rally.
New travel restrictions in a handful of countries due to COVID case spikes took some of the blame for Monday’s sell-off, although from a technical perspective the complex was due for a pullback after the bull rally has pushed prices to multi-year highs. Today’s bounce keeps the trend lines intact, so it’s too soon to say that the rally is over, and those calling for oil prices to reach $80-$100 this year will see the past two sessions as nothing more than a corrective dip.
Tropical Storm Danny made landfall in South Carolina Monday, and has weakened quickly as it moves inland. Two other storm systems are being monitored, but both look like long shots to get into the Gulf of Mexico and become supply threats.
After last week’s Supreme Court ruling that favored small refinery exemptions to the RFS, the EPA is now on the clock to finalize both the RVO requirements for the year (which are already 6 months past due) and to rule on 50 small refinery waiver requests. Not surprisingly, industry groups are not wasting any time lobbying the EPA to see things their way. RIN values did trade higher Monday from where they left off Friday, making for an unusual divergence between RBOB futures which sold off heavily despite the bounce in RINs. Given the close relationship between the two contracts, that could help explain why RBOB is leading the recovery rally this morning.
It’s worth noting that money managers appear to have made a wrong way bet on crack spreads ahead of that Supreme Court ruling, increasing net length in RBOB and ULSD, while reducing length in WTI and Brent. It’s possible that yesterday’s reaction was an unwinding of that trade when it became clear that the latest ruling would not be bullish on crack spreads, but it’s impossible to say given the limited scope of position data available. It’s just as possible that the bullish stance on crack spreads is a play on the St. Croix refinery closing indefinitely after numerous operational mishaps over the past year.
While the big money funds appear mixed on the outlook for oil and refined products, carbon credits remain a hot bandwagon trade with California Carbon Allowance (CCA) positions seeing an increase in net length (bets on higher prices) by money managers for a 6th straight week, even as prices trade at record highs. Given that climate change has become a dominant headline, it’s not surprising to see an influx in hot money into the few contracts that are easily tradeable, and this phenomenon could continue creating volatile swings, similar to what we’ve seen with RINs over the past decade.
Today’s interesting read: How a Salt Lake refinery is using salt to make safer, cleaner, alkylate.
Click here to download a PDF of today's TACenergy Market Talk.
Big Story Out Of Washington Snaps Refined Product Winning Streak
Oil prices are holding steady, while refined products are facing modest selling pressure to start the week. The OPEC & friends meeting that officially kicks off Thursday should be the major price-driving story this week, after a big story out of Washington snapped the refined product winning streak on Friday.
RIN values traded up nearly a dime early Friday morning but fell sharply after the Supreme Court ruled in favor of small refiners seeking exemptions to the RFS, overturning a lower court ruling. D6 values reached $1.74 prior to the ruling, and ended the day trading around $1.48. Since the high/low range for the day was so large, most reporting agencies showed only small changes on the day, but should catch up with the larger downward move today, unless of course the RIN rollercoaster cranks back up.
Refined products saw a bit of a flash crash in the wake of the news, with RBOB prices dropping 8 cents in 5 minutes following the report, after reaching a 7 year high earlier in the day, only to quickly recover those losses as cooler heads trading algorithms prevailed. It’s important to note that while the ruling opens the door for refiners to petition the EPA for a waiver, the agency still gets to determine which plants qualify, which helps explain why RIN values – while lower on the day – remain at historically high levels.
The EIA’s refining capacity report showed total throughput capability in the US dropped nearly 5% last year, the largest drop since the great recession as plants struggled to survive the demand collapse caused by COVID lockdowns. The Supreme Court ruling on small refinery waivers may help prevent this list from continuing to grow in 2021 since the RVO nearing $10/barrel this year could certainly be the difference between profitability and insolvency for several facilities.
The U.S. launched air strikes on Iranian-backed militia in Iraq and Syria over the weekend. So far, there has not been further escalation from the attacks labeled as “self-defense” but they certainly don’t seem to be moving the parties closer to one another in the ongoing nuclear treaty negotiations.
A storm system off of the South Carolina coast is given 70% odds of development this week, but should reach land in the next day or two, preventing it from strengthening too much. It also happens to be in an area without any refineries, so should not be a supply disrupter except for traffic in the Charleston and Savannah port areas. The storm system moving across the Atlantic is now given 40% odds of development this week, although it still looks like a long shot to get into the Gulf of Mexico where it would become a supply threat.
RIN Rollercoaster Remains In Full Effect
It’s a quiet start to end another strong week for energy prices, as traders seem content for now to wait and see what OPEC & friends will agree to next week. We did see some modest losses overnight, but futures have since moved back into the green with small gains on the day and will mark 6 straight sessions of increases for refined products if they can hold on.
WTI is set to finish a 5th consecutive week of gains, even as prices pulled back modestly from the multi-year highs set on Wednesday. Refined products are also treading water near multi-year highs, continuing to threaten a technical breakout to the upside that could add another 20 cents to prices this summer, but so far lacking the momentum to make a big move.
The RIN rollercoaster remains in full effect, as the credits dropped 5-6 cents Thursday after a 50 cent recovery rally, that followed a 75 cent crash after prices reached record highs to start the month. That’s pretty good action for a year, and in this case it’s happened in just over 2 weeks.
A new infrastructure agreement was announced, which does not include an increase in federal fuel taxes, and sharply reduces the amount of money pegged for electric vehicles. While the White House & several senators on both sides of the aisle set the terms of the deal, it’s not yet clear if this bill will have enough votes to get through congress.
Today’s interesting read: Why consumers, not producers, are the key to climate change goals, and why they’re not ready to give up cheap energy. Producers meanwhile continue to shift their stance, with the API laying out a new framework for standardizing the way companies report their emissions data.
'Reversal Thursday’ Holding True To Form This Week
Futures prices are taking a breather today with American gas, diesel, and crude oil futures all sagging anywhere from .5%-1% so far this morning. ‘Reversal Thursday’ is holding true to form this week as energy prices have rallied Monday-Wednesday and have sold off (so far) today. The question now is, will the rally continue tomorrow?
Just as one tropical disturbance peters off another pops up as a point of interest, this time with a little more development potential: 40% chance over the next five days. While the proto-storm has quite a ways to go before being considered a possible threat to the mainland US, its origin point and projected path are very similar to that of major hurricanes in the past.
Ethanol inventory levels have popped back into their 5-year range after spending 10 consecutive weeks setting new seasonal lows. Much like D6 RIN prices, ethanol prices have skyrocketed with corn prices for the past year. Now producers are considering output cutbacks to combat feedstock prices, a move that might explain why ethanol prices have remained elevated while corn futures have pulled back.
Oil futures are easing off their run at the $75 mark but still look poised to try a technical breakout in the near future. Even before that hurdle can be properly attempted, oil execs and banks are calling for $100 oil, not seen since 2014. While history is not always doomed to repeat itself, it should be noted the last two rallies that pushed oil north of $100 (2008 & recover rally in 2011) ended with WTI futures prices getting cut in half.
Week 25 - US DOE Inventory Recap
Energy Futures Punching Through Multi-Year Highs
Energy futures are punching through to multi-year highs this morning. The big three American benchmarks are trading at levels not seen since 2018 this morning, likely propelled by the American Petroleum Institute’s report published yesterday showing over a 7 million barrel draw in crude oil inventories. The large crude draw seems to be overshadowing the smaller builds in gas and diesel stockpiles, each failing to top one million barrels for the week.
OPEC+’s July meeting seems to be demanding a sizeable portion of collective attention this morning. The cartel is anticipated to ease their supply cut at next month’s meeting, effectively capping off oil prices despite some analysts calling for $100 oil by next year. While conventional wisdom sees an increase in production as a bearish market condition, others think turning the spigot back on now is ‘too little too late’.
The projected path of the tropical disturbance in the Southwest Atlantic has shrunk considerably overnight. It’s chances of development have likewise been reduced to 10% over the next 5 days.
The recovery in ethanol and biodiesel RIN prices continue to outpace each respective underlying feedstock. The renewable credits saw a ~10% bounce yesterday while corn and soybean oil ended the day with <1% gains.
Prompt month WTI futures are trading just over a dollar per barrel below the $75 mark. A confirmation of the sizeable inventory draw estimated by the API in today’s inventory snapshot published by the DOE could be reason enough for the American benchmark to take a run at the psychologically important resistance level. As with most rallies, Brent crude has beaten WTI to the punch, trading at $75.50 per barrel this morning.
All Quiet On The Atlantic Front
Energy prices are drifting lower this morning after yesterday’s rally left prompt month refined product futures with ~1.5% gains on the day. The complex was led by the crude oil grades with both WTI and Brent futures adding between 2-3%. The European oil benchmark touched above $75 per barrel this morning for the first time since 2018, prompting discussions at OPEC+ surrounding supply increases.
All quiet on the Atlantic front: tropical storm Claudette has rolled off the radar and the coast seems clear for the foreseeable future with only a small disturbance lurking to the Southeast of the Lesser Antilles. It’s given a low 30% chance of cyclonic development within the next 5 days, but eyes will continue to be trained eastward as 2021 is projected to be another busy hurricane season.
The RIN credits representing ethanol and biodiesel bumped another 4-5 cents yesterday, extending their bounce after a two-week long collapse. Underlying feedstock prices jumped, most notably soybean oil futures settling with nearly 4% gains.
Money managers have added to their net long positions in both WTI and Brent futures last week, making it a month-long streak of bullish bets by the “smart” money. Investing confidence in American crude oil hasn’t looked this strong in about three years with speculative length pushing to levels not seen since the summer of 2018. It’s the opposite story with refined product positions: the increase in short positions for diesel and the trimming of length in gasoline led to a drop in managed net position for both products.
Election Of New Iranian President
Energy futures are leaning towards the red side of flat this morning with both American and European crude grades taking turns peeking into positive territory. The election of a new ultra-conservative Iranian president seems to be taking the credit for the relative strength in crude benchmarks this morning. Regardless if the election was fair or not (President Elect’s main competitor was disqualified, record low voter turnout, millions of ballots voided, etc.) the anticipated effects include a delay in Iranian crude “returning” to the global market.
Baker Hughes reported a net increase of 9 active oil production rigs last week, bringing the nation’s total to 470, up 204 since this time last year. The most notable increase is the addition of 3 rigs in Colorado/Wyoming’s DJ-Niobrara oil and gas play, up 50% since last week.
The CFTC’s Commitment of Traders’ report is delayed due to the observance of a new holiday which was observed on Friday, June 18th. The bill, signed into law the day before on June 17th, established Juneteenth as the eleventh federal holiday. The COT report will be published later today.
Renewable fuel feedstock and likewise their corresponding RIN credits bounced back in Friday’s trading session. The ethanol and biodiesel RINs both ended the week nearly 16% lower, a mere shadow of the ~30% losses seen midweek. Grains and seed futures were corralled into the larger “commodity” umbrella Friday, blaming the rising dollar and Chinese sanctions for the day’s increase.
FED Signals That Days Of Money Printing May Eventually End
A big rally in the US Dollar after the FED signaled that the days of money printing may eventually end has become the big story this week that has sent a wave of “Risk Off” selling pressure across numerous markets. The selling this week sets up a pivotal test for energy futures in the back half of the month. If they can hold on around current levels and find a bid, the longer term upward trends are still intact, but if they drop another couple percent from here that opens the door on the charts for a 20-30 cent drop for products this summer.
Commodities in general have been under heavy selling pressure this week, with several wiping out their entire 2021 gains as supply chains start to catch up to the rapid swings in demand. While crude oil has managed to buck that trend so far, WTI is now giving up its gains for the week and may struggle to resist the pull of refined products and other commodities if the dollar rally continues. The selloff in corn & soybeans has added to the downward pressure in RINs that wiped out a third of their value in just 4 days. We did see values reach a temporary floor in Thursday’s session, but sellers moved offers lower in the afternoon suggesting the move lower may not yet be done.
It was a Reuters report that kicked off the huge sell-off in RINs one week ago, and a new report highlights the large obligations refiners have outstanding as of their Q1 earnings filings. While this week’s sell-off no doubt has many refiners breathing a little easier as Renewable Volume Obligation (RVO) values dropped to $.16/gallon of transportation fuel produced from $.23, prices are only back to where they ended the 1st quarter, so from a value standpoint, those refiners are no better off now than they were as of those reports.
Tropical Storm Claudette is expected to be named later today before making landfall in Louisiana overnight. The storm’s current path suggests it won’t make a direct hit to any of the numerous refineries in the area, but will dump heavy rains on an area that’s already been saturated this year, and is plenty weary of hurricanes from the parade of storms that hit them last year.
FED Acknowledges Higher Levels Of Inflation
Oil & equity prices are pulling back from Multi-year highs, after the FED (finally?) acknowledged higher levels of inflation and suggested it would start tightening its monetary policy earlier than previously thought. The moves in both asset classes has been relatively minor compared to some of the huge FED-induced swings we’ve seen in prior years, likely because despite that more hawkish tone, the earliest interest rate increases are still expected to come in 2023, and no timeline was given for reducing their asset purchases.
RIN values have dropped around 70 cents (30-35% depending on the type/vintage) in just 4 trading sessions since reports that the President was considering relief for refiners from the RFS. Wednesday a group of democratic members of congress urged the EPA not to allow that relief since their constituents can make money turning marginal farmland into 198 proof grain alcohol that we can put in our cars even though several studies suggest those ethanol policies are worse for the environment than gasoline. Any action from the EPA is expected to come after the Supreme Court rules on the small refinery waivers to the RFS, which could happen any day now. So far this morning RINs have found a bid a penny or two higher than where they left off Wednesday night, so the bleeding seems to have stopped at least temporarily.
There’s a good chance the storm system churning in the gulf will be named Claudette by the weekend, with heavy rain expected to start reaching refining country tomorrow. Forecasts suggest that wind shear and dry air will prevent this system from becoming a hurricane before it reaches land, and it’s been 35 years since a hurricane hit the Gulf Coast in June, but we’re all about breaking precedents recently, so don’t expect that bit of history to mean much.
Getting back to normal: Yesterday’s DOE report showed numerous data points from total petroleum demand, to refinery runs getting back into their typical seasonal ranges, even if not quite yet back to pre-pandemic levels. PADD 1 inventories are back towards the top end of their seasonal ranges, 5 weeks after dropped off a cliff when Colonial pipeline was shut down. Increased imports show how the world is ready and able to jump in to help alleviate tight supplies as long as the market will pay them to do so.
Who needs Keystone? PADD 2 refinery runs spiked last week to their highest levels in nearly 2 years. The lack of a Keystone pipeline means less competition for crude coming from Canada, giving those plants an economic advantage on their inputs, while they’ll struggle at certain times of the year to find a home for their output.
Week 24 - US DOE Inventory Recap
Another Day Of Crude Up And Products Down
It’s another day of crude up and products down as renewable fuel credits continue to be the big story driving the price action for gasoline and diesel.
The RIN collapse has picked up speed, with D6 (ethanol) values dropping from $1.99 last Thursday to $1.25 this morning, already trading 20 cents lower from where they left off yesterday afternoon. D4s haven’t fallen quite as hard, with the spread between D4 & D6 expanding during the collapse, but they’ve still wiped out 6 weeks of gains in less than 4 days. The sellers are back out this morning, with offers already 7 cents below where they left off yesterday, which is adding to the downward pressure on refined product prices. If prices hold below $1.30, the charts suggest the next stop may not come until prices reach the $1 area, which may sound extreme, but then again that’s where prices were less than 4 months ago.
A new credit bubble brewing? While the latest RIN bubble has popped, values for California Carbon Allowances (CCA) have gone parabolic recently, even as their counterpart LCFS credits have fallen. The CFTC’s report may offer the best explanation with a surge in long positions held by money managers, in what appears to be hedge funds trying to cash in on the carbon craze. With a race to produce new credit generating fuels ranging from traditional biofuels, to Renewable diesel, biogas, and numerous carbon capture projects, those funds may end up heading for the exits and causing those values to crash.
Tropical storm Bill has come and gone, but the system churning in the Gulf of Mexico is now given 90% odds of developing over the next 5 days and appears to be heading towards the heart of refining country. It may be too early in the season, and the waters not yet warm enough, for this to become a major threat, but then again the pattern the past few years has been for storms to exceed early intensity forecasts so we’ll need to watch this one closely through the weekend.
The API reported a large crude draw 8.5 million barrels, while products built by 2.8 million barrels for gasoline and 1.9 for distillates. The DOE’s weekly report is due out at its normal time this morning. After last week’s report showed large declines in implied demand estimates (which are running counter to anecdotal evidence of retail sales) it seems likely we could see a bounce back in those consumption estimates this week.
Oil Prices Reach Fresh Two Year Highs Overnight
Oil prices reached fresh two year highs overnight, and this time refined products are trying to join in on the rally after being weighed down by falling RIN prices the past two days. The oil rally, and product bounce, keeps the upward sloping trend lines intact for now, leaving the door open to another rally this summer, although warning signs from other commodities and a resurgence in supply suggest the top could soon be in.
RINs continued their tumble Monday, and are currently holding roughly 35 cents below the record highs set last Thursday. As the charts below show, crack spreads have reacted to that drop in RINs, as the premium for compliance was reduced by more than 15% in just two days.
Tropical Storm Bill has formed off the East Coast. Unless you have plans in Newfoundland later this week however, this storm probably won’t impact you. There is a system in the Gulf of Mexico given 70% odds of development this week that looks like it could head for refinery row and even if it doesn’t become a major storm, it’s likely to bring more heavy rain to the region that’s already had more than enough this year.
Read Bloomberg’s take on why the topping out of numerous commodity contracts suggests that inflation fears are subsiding. That could be a bad sign for refiners from the US to China that are seeing signs of supply outpacing the demand recovery, and cutting back on run rates (and crude imports) as a result.
Need more proof that prices might soon peak? The EIA this morning highlighted why growing supply of oil globally should keep a lid on prices over the next year, based on its most recent STEO forecasts. A steady decline in drilled but uncompleted (DUC) wells in the EIA’s drilling productivity report shows that so far US operators are staying disciplined as prices recover to profitable levels keeping overall output in check.
Refined Products Struggle To Keep Up After Friday’s Report
Oil prices are reaching fresh multi-year highs this morning, while refined products struggle to keep up after Friday’s report on potential changes to the RFS became a game changer for RIN prices, which is having a major impact on crack spreads. Equity markets continue to hold near record highs, and that may be enough to keep the oil price rally intact, while products seem like they be stuck watching the latest news out of Washington.
There were no further developments following the Reuters report Friday that the President was mulling RFS relief for refiners, but RIN values still dropped as much as 30 cents on the day, and ended the day trading down around 27 cents from Thursday’s record close. With numerous other potential deals being negotiated on infrastructure spending and energy policy, it’s easy to see the RFS changes being used as a bargaining chip, but hard to say how the end result will look.
Baker Hughes reported 6 more oil rigs were put to work last week, resuming the upward trend that stalled the week prior. 4 of the 6 rigs added were in the Permian basin, and the other 2 were in unclassified basins.
Money managers acted like they knew the RFS story was going to be released last week, continuing to add to positions in WTI and Brent, while reducing their length in RBOB and ULSD contracts. There is now more money held by the large speculative traders classified as money managers betting on higher oil prices than there’s been since July 2018…which is about the last time that we saw oil prices trading at these price levels.
The OPEC monthly Oil market report held global demand estimates steady for the balance of the year, and increased supply estimates slightly as US production has come back online faster than previously anticipated. The Cartel’s production was up 390mb/day for the month, mainly driven by Saudi Arabia, which is unwinding the voluntary production cuts it made to prop up the market last year.
The IEA’s monthly oil market report took a similar stance as the OPEC report, showing more signs of recovery, and forecasting that global demand will return to pre-pandemic levels next year. The report also notes that OPEC should have plenty of spare capacity to meet that demand, and that new refinery projects in Asia and Middle Eastern markets will offset the rash of closures/conversions that have happened in Europe and the Americas over the past year, and will continue to limit refining margins.
The FED’s open market committee (FOMC) meets this week, with an announcement due Wednesday afternoon. The CME’s fedwatch tool shows that traders are only giving 5% odds of a rate increase by the end of the year, so it’s unlikely we’ll see a rate change this week, but as always the market will be watching for any signals that the FOMC plans on reducing the huge amount of liquidity it’s been injecting via asset purchases to prop up the economy since the start of COVID.
Today’s interesting read: a good reminder from John Kemp on why the DOE’s weekly “demand” estimates are notoriously volatile from week to week.
President Considering Giving Refiners Relief
The big story this morning is a report that the President is considering giving refiners relief from the RFS has refined products down around a nickel, as several options appear to be on the table to burst the RIN bubble, a day after they reached yet another record high. The big drop on what amounts to a rumor may seem dramatic, but for those that lived through the RINsanity trade of 2013 when EPA relief knocked credits from $1.40 to $.20 in just a few months, the reaction makes a lot more sense.
One detail from the report that seems to make it more likely that the EPA will act: It’s 2 democratic Senators leading the discussions with the EPA, as they seek ways to save their state’s lone refinery.
D4 Bio RINs traded up to $2.05 yesterday, while D6 ethanol RINs topped out just under $2.00. Early action in the OTC market suggest we’ll see a drop of at least 15 cents in those prices today with D6 RINs already for sale at $1.85 while bids are 10 cents lower than those offers.
News that the U.S. had lifted sanctions on some individuals and companies in Iran briefly sent prices sharply lower in Thursday’s session, but those losses were quickly erased after it was clear that the majority of sanctions on the country were still in place, and that it was unlikely any new oil would find its way to the market as a result of this change. There will probably be headlines suggesting the lifting of those sanctions is the reason for the pullback in prices today, but given that refined products are down almost 2% while oil prices are flat, this seems to be driven by the RFS story, and not anything to do with Iran.
If the administration does change the RFS, that could very well break the bullish trend for refined products, and the charts suggest we might quickly see another 20-30 cents of downside as a result. On the other hand, fundamentally this could be bullish for Crude as it offers relief to the only real buyers of crude oil. The RVO value before today’s drop was $.23/gallon, so we could see much of that value come out of products, without changing the price of crude and refiners would effectively break even. Until we see some actual action from the EPA however, that strong of a move seems unlikely, and with the Supreme Court scheduled to make a ruling on the RFS small refinery waivers soon, it seems likely that the EPA may take a wait and see approach.
Cold Water Thrown On Petroleum Price Rally
The DOE’s weekly inventory report threw cold water on the petroleum price rally Wednesday, knocking prices backward after they’d reached multi-year highs earlier that morning. Huge drops in demand estimates created large builds in refined product inventories, and suggested that the reopening rally may be outkicking its coverage. Then again, despite the pullback, the upward sloping trend lines have not yet been threatened, and prices have resumed their push higher already this morning, so it’s too soon to say the bulls have lost control.
Gasoline demand estimates dropped sharply last week, falling almost to the same level we saw a year ago when the country was just beginning to talk about reopening. The bulls can easily write off this drop as a temporary holiday hangover as drivers filled up ahead of Memorial Day (or may still be using up that gasoline in their Rubbermaid containers after the Colonial shutdown) and there are signs on the ground that retail demand has been healthy to start June. Diesel saw a second straight week of large demand declines, in what is typically one of its weakest times of the year.
U.S. refinery runs jumped to 15.9 million barrels/day last week, the highest level since COVID started shutting down the country in March of last year. That is still more than one million barrels/day less than we would normally see this time of year when refiners typically start approaching maximum run rates to meet the peak summer demand. On a percentage basis, refineries are operating at 91% of capacity, compared to normal levels around 94% this time of year. Then again, we saw nearly 5% of the country’s capacity taken permanently offline in the past year, so there’s nearly 40 million gallons/day of production that isn’t coming back, making that % comparison less meaningful, and leaving the system more vulnerable to disruption.
Speaking of which, the DOE this morning took a look at the surge in refined product imports this March, following the rash of refinery shutdowns in the U.S. caused by February’s polar plunge.
Week 23 - US DOE Inventory Recap
Another Day, Another Record Set For RIN Prices
The bulls have regained control of petroleum futures as early losses Tuesday morning turned into solid afternoon gains, and that momentum carried through the overnight session, pushing all of the big 4 contracts to multi-year highs. WTI reached 70.62, and ULSD hit $2.1467, the highest for both contracts since October 2018, while Brent reached $72.83, its highest trade since June 2019. RBOB futures finally joined the rest of the complex, setting a new 3 year high at $2.2356 this morning, a level we haven’t seen since May of 2018.
If these early gains can hold on, the charts favor more upside, that should give WTI a run at the $77 range, which would mean ULSD making a run at $2.30 and RBOB pushing $2.40 in the next several weeks.
The API was said to report a draw in U.S. crude oil stocks of 2.1 million barrels last week, which is getting some of the credit for the rally in WTI this morning. That doesn’t help explain why products are also up however since gasoline stocks increased by 2.4 million barrels and distillates grew by 3.7 million. The EIA’s weekly report is due out at 9:30 central.
Yesterday the DOE released its monthly Short Term Energy Outlook (STEO). The forecasts show increased expectations for U.S. Gasoline demand compared to previous reports, noting that demand before and after the Colonial shutdown has surpassed expectations, but will likely stay below pre-pandemic levels until the end of next year. Diesel meanwhile continues to show demand outstripping supply, causing a sharp drawdown in inventories in the U.S., and leaving the supply chain vulnerable over the coming months. The report also noted that diesel crack spreads have reached their highest levels since December 2019, but failed to mention that renewable volume obligations (RVO) eat up roughly $10/barrel of those gross margins.
Another day, another record set for RIN prices with both D6 and D4 values moving steadily higher even as corn and soybean prices pulled back from recent highs. That increase in RINs pushed the RVO cost for each gallon of gasoline or diesel produced or imported north of 23 cents/gallon. Remember that the next time someone asks you why gasoline prices are suddenly so high.
Around the world and across industries, we’re witnessing the challenges faced by supply chains that are built for extremely large scale and efficiency struggling to meet the rapid pace of demand change. In the refined fuels world, that recovery has been hampered by two of the largest supply shocks ever, February’s Polar Plunge that disrupted just about every refinery in PADD 3 and the Colonial Pipeline hack that took half of the East Coast’s supply offline for a week. While things have calmed down considerably over the past several weeks, the fallout from both events is still being felt. Several refineries continue to struggle to bring units back online that were damaged in the freeze, and the FMCSA extended HOS waivers again for truckers are suppliers still struggle to catch up even though Colonial has been fully operational for three weeks.
Soybean Oil Prices Reach Record High Levels
Energy futures are moving modestly lower for a second day after reaching two year highs Sunday night. The pullback so far has been minor, and has come on low volume, so it’s too soon to say that the upward momentum has been lost. As long as WTI can hold above $66, ULSD $2.03 and RBOB $2.12, the weekly charts continue to favor more upside.
RINs surged to new record highs Monday, even though corn and soybean prices reversed course during the day turning big early gains into losses later in the session. Soybean Oil prices have reached record high levels as consumers around the world compete for food, feed, and fuel.
It’s not just grains that are caught up in the clean energy commodity surge, Copper and other metals are seeing huge gains as the world realizes that it’s going to take a lot of those commodities to de-carbonize energy supplies, just in time for miners to be less willing to invest in new projects due to climate concerns of their own.
It’s that time of year again: The Atlantic Hurricane season is officially underway. There’s one system in the Caribbean given a 30% chance of developing over the next week, but it looks like it will probably hit Central America, not North America. With U.S. refining capacity dropping substantially in the past year, and demand getting back closer to normal, the supply chain is more vulnerable than it’s been in a decade if a hurricane happens to hit the heart of U.S. refining along the Gulf Coast. That could mean prices react with $1/gallon+ moves like they did following the hurricanes in 2005 and 2008, rather than the minor moves we saw in 2017 with Harvey and during last year’s record setting parade of storms.
If you want to see a smaller example of what that type of disruption could look like, take a look at rack prices in Colorado this week as the state’s only refinery goes through maintenance, and the refineries that would normally resupply it from Wyoming aren’t operating.
Set For New Record Highs?
Energy futures are hovering around two year highs this morning, despite minor losses in the early going. WTI reached a high of $70 overnight, its highest trade since October 2018.
Set for new record highs? RIN prices have been trading in a narrow range since setting record highs in May. Corn and Soybean futures are both starting the week with strong gains however, which may encourage buyers to push RIN values to make another test of the $2 mark. They may need some help from ethanol markets which have pulled back nearly 30 cents from their May highs. Meanwhile, the industry seems to have abandoned the CBOT ethanol futures contract based on the (lack of) volume chart below, making getting a read on forward values more challenging.
Tug of war: While China is attempting to battle the commodity price boom, and push prices lower, Iran’s shadow war seems to be coming out of the shadows and adding a risk premium to oil prices. Both of these stories may continue influencing prices daily through the summer, although it doesn’t seem that either one will change the global supply/demand balance longer term.
It was another mixed week for large speculators in energy contracts. The CFTC showed that the money manager class of trader increased the net length held in WTI, Brent and gasoil contracts, while reducing length in ULSD and RBOB. The drop in ULSD snapped an eight week streak of consecutive increases. It’s worth noting that the profit taking in ULSD happened at the same time that its European counterpart gasoil saw its net length jump to another two year high after a small decline last week.
Baker Hughes reported that the U.S. oil rig count held steady last week. The Granite Wash basin did see a decline of two rigs, while the Eagle Ford and Woodford basins each added one on the week.
The IEA’s World Energy Investment report forecasts a recovery in spending that will largely offset the impacts of the pandemic this year. The charts below from that report show how that investment is broken out, with renewable electricity investments expected to outpace dollars spent in oil production for this first time this year. The report also notes that while the pressure to consolidate refining activities is strong across much of the world, new investment in Asia and the Middle East will increase global refining capacity by roughly five million barrels/day over the next five years.
Larger-Than-Expected 5.1 Million Barrel Draw
The larger-than-expected 5.1 million barrel draw in crude oil inventories reported by the Department of Energy failed to impress yesterday leaving WTI futures with a modest five cent per barrel gain. Gasoline and diesel futures were up slightly as well, despite the seemingly bearish trifecta of rising stockpiles, increased refinery runs, and dropping demand.
Without any news from OPEC+, Iran, or on demand recovery, energy futures seem content to drift higher this morning, looking to end the week with gains. Even if Washington and Tehran come to a surprise agreement, there is much debate on whether that would be bullish or bearish for oil prices.
Using some very fancy maths the EIA has calculated the total U.S. energy consumption for last year has dropped 7% from 2019. While this may not shock anyone who had to dust off their steering wheels in the past few months, the interesting note was the only energy source that saw an increase in demand were renewables. Prompt month corn and soy oil futures are up over 100% YOY.
The Bureau of Labor Statistics reported the U.S. added 560k jobs in May, dropping the unemployment rate to 5.8%, the lowest it’s been since everything shut down in March 2020. While the jobs number was slightly below economists’ estimates, the generally positive news bumped equities futures this morning; it seems we are heading in the right direction.
Week 22 - US DOE Inventory Recap
Oil Prices Hit Highest Level In Over Two Years
Energy futures are off to a slow start this morning with each of the main benchmarks trading just on the green side of unchanged. The bulls are likely taking a breather after pushing oil prices to their highest level in over two years yesterday. Credit for this week’s rally is being placed in multiple places from demand optimism and OPEC projections to technical trading play.
As if scared to not be in the news, Iran reported a fire has broken out at its 220,000 bpd Tondgooyan refinery yesterday, located just south of Tehran. American and European crude oil futures seem apathetic trading just .15% higher this morning as efforts to extinguish the fire have extended into today.
The American Petroleum Institute’s estimate of a ~5.5 million barrel draw in American crude oil inventories surely isn’t hurting the bullish case for higher prices. The API also reported a build in gas and diesel stocks last week of 2.5 million barrels and 1.6 million barrels respectively. The Department of Energy will weigh in on the matter this morning at 10 a.m. CDT.
The EIA published an article yesterday looking back at the furious rally in RIN prices over the past few months, leading the price of compliance to all-time highs. The Administration highlighted that while rising RFS targets may pump RIN prices higher, the year-long rally in biofuel feedstock (corn and soybeans/soy oil) are the main drivers right now.
Volatility Drops To Lowest Levels Of The Year
Energy futures are holding close to two year highs this morning, but are still below the levels we saw early in Tuesday’s session. As prices have climbed, volatility has dropped to its lowest levels of the year for both equity and energy contracts as investors seem to be optimistic that the reopening trajectory will keep prices moving higher. While the bulls still have control, they need to keep the momentum up this week, or risk forming a double top in ULSD just below $2.12, which was the high from January 2020, that could spark a large corrective selloff this summer.
OPEC & Friends agreed to stick with their plan to boost output now that global demand is returning. If you’re a bull, you see this as good news that the Saudis feel confident enough in the demand outlook to unwind their output cuts, and that Russia didn’t get too greedy with forcing a faster pace of production. For the bears, this is seen simply as more supply coming back onto the market just as the supply/demand equation was back to where it was BC (before Covid).
A vote today in California could seal the fate of two of the last standing Bay-Area refineries. The issue at hand is whether or not to require the Chevron Richmond and PBF Martinez to install wet gas scrubbers to reduce pollution from their FCC units. Given the state of refinery economics in general, and in particular in the state of California, a ruling requiring that investment is likely to mean that one or both of the plants would either idle, or go the way of their neighbors and convert to renewable diesel production.
Speaking of refinery margins, as the chart below shows, gross margins for Gulf Coast refiners are approaching their highest levels in two years. Unfortunately for those plants, once you back out the $9-10 /barrel cost of their renewable obligations with RIN values holding near record highs, they’re right back down close to break-even levels.
Oil And Diesel Prices Trading At Multi-Year Highs
Oil and diesel prices are trading at multi-year highs as June trading gets underway, with the charts favoring additional upside if this early rally can hold. Gasoline prices are also rallying, but are still two cents below their highs for the year. There’s not much fundamental news to pin the 3% rally on this morning. Equities are pointing higher and the dollar is pointing lower, both of which can encourage the energy bulls, and of course there are the usual suspects of demand optimism, shrinking global inventories and a lack of a deal with Iran that can take blame for any rally.
Money managers added to their long bets in WTI and ULSD last week, while cutting back on RBOB and Brent positions. A large round of short covering pushed ULSD’s net length to its highest level in 2.5 years, but unlike recent weeks, its European counterpart Gasoil did not increase in tandem.
Baker Hughes reported a net increase of three oil rigs working in the U.S. last week, two of which were in the Permian basin. That brings the Permian and Total U.S. counts to fresh one year highs, but the totals are still just over half of what they were prior to the pandemic, even as oil prices are approaching three year highs.
ExxonMobil’s pipeline company reported a gasoline leak in Harris County over the weekend and shut the line as investigations and repairs get underway. It’s not yet clear which if the company’s numerous pipeline segments in the area is impacted by that shutdown, and what terminal(s) may feel a supply crunch as a result, but there’s a good chance since it was gasoline that spilled it was the line running to DFW that is offline.
Today’s Interesting read from the WSJ: Why the Californication of fuel programs will make $5 gasoline a reality.
The IEA published a look this morning at the types and sources of biofuels that will help achieve a net zero by 2050 scenario, with organic waste streams expected to take the largest piece of the supply chain, followed by short rotation woody crops.