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Week 13 - US DOE Inventory Recap
March Madness Winds Down With A Whimper
March madness is winding down with a whimper after several volatile weeks of trading. Energy prices are not doing much this morning as traders either stayed up too late watching basketball the past two nights, or are just waiting to see what the OPEC & friends monitoring committee meeting tomorrow brings. A reduction in the cartel’s demand forecast has many in the market believing they’ll roll over their output cuts, but the Saudi’s have been good at not following the script the past several months.
It’s the last trading day for the April RBOB and ULSD contracts so watch the May contracts (RBK & HOK) for price direction today. Futures and spot markets will be completely closed for Good Friday so rack prices should carry through from Thursday night’s posting all the way until Monday, unlike some recent partial holidays that saw big moves in futures and suppliers changing rack prices.
RIN prices continued to sell off heavily this week, assisted by another big mover lower in soybean oil prices, after they surged to eight year highs earlier in March. Here are a few interesting reads on that subject:
And here’s why they should keep falling
Soybeans might be in your tires, in addition to your fuel tank (not to mention on your plate)
Another potential influencer of the recent RIN rollercoaster? Big swings in ethanol production. An EIA note this morning shows that it wasn’t just oil refiners that suffered from February’s polar plunge. The report shows a dramatic drop in ethanol production due to surging natural gas prices followed by a rapid increase in output as producers took advantage of surging prices for both ethanol and their RINs.
Speaking of ethanol production, a facility in California that uses cow waste to produce ethanol received approval from the ARB of a new fuel pathway with a carbon intensity (CI) score of negative 426, compared to traditional ethanol with a score of positive 66. What does that mean? The new pathway has a negative carbon footprint, and thus generates .06 LCFS credits per gallon, which at current prices around $187 per MT, the producers can generate nearly $12/gallon worth of credits under California’s LCFS program.
There have been numerous stories in the past year about China’s growing refinery output, which has now outpaced the U.S. A Bloomberg note this morning shows how those new plants are hammering margins and squeezing out other Asian producers. On the other hand, it does not appear that China has a program paying $12/gallon for fuel made from manure.
Rollercoaster Ride Continues For Energy Prices
The rollercoaster ride continues for energy prices, although it seems to be a pared down version so far compared to the huge swings we saw last week. An OPEC meeting, new COVID restrictions, the Suez Canal and equity market drama are all getting some credit for the recent run-up in volatility.
The great refinery restart seems to be entering its final phase, as more units return to operation, and markets across Texas have seen their supply levels get closer to normal. It will probably take another week or two for those supplies to make their way through the Colonial system, but we’re already seeing spot and rack spreads from the southwest to the southeast collapsing as the risk of runouts diminish.
The Suez Canal was cleared on Monday and more than 100 ships are estimated to have transited the waterway in both directions since the ship was finally floated, thanks in large part to the moon. It will take several more days to clear the backlog of ships, but it seems like the market has already put this situation in the rearview mirror.
A new 25 year agreement between China and Iran looks like it will be bearish for oil prices, as it will allow Iran to circumvent U.S. sanctions and bring more of its oil to market.
The EIA this morning published a look at U.S. retail gasoline prices, which are up $1/gallon from a year ago, after seeing their longest streak of weekly increases in 25 years.
Today’s interesting read: How the big Ag companies are positioning themselves to benefit from the Renewable Diesel production boom. The spike in soybean oil prices caused by this phenomenon is getting much of the credit for the recent run up in RIN prices, although they’ve seen a big pullback in the past week as bean oil prices pulled back from 9 year highs.
There were plenty of stories about a sketchy hedge fund blowing up and creating unprecedented margin calls that forced huge stock sales over the past couple of days. It appears that there was not any direct connection to this situation and energy companies or commodities in general, so it’s unlikely it contributed to the wild price swings we saw last week, or the junior version of them we’re seeing so far this week. That said, when fear starts to drive the price action, the correlation between energy and equity markets often gets stronger, so there could be an influence if the unrest starts to spread.
Weaker Equity Markets Give Traders Reason To Pause
RBOB gasoline futures are trying to lead the rest of the energy complex higher to start the week, but oil and diesel contracts seem to be reluctant participants so far as weaker equity markets give traders reason to pause. Last week’s rollercoaster ride left energy contracts stuck in technical no-man’s land with just three trading days left in the month.
Progress was made overnight in the Suez Canal as the ship that’s been stuck was partially refloated overnight and could be completely freed later in the day. It could still take days to complete the operation and restart the shipping lanes, but the progress suggests the disruption will be counted in days and not weeks. This situation has also highlighted other challenges with shipping logistics during the pandemic as ports on the West Coast have become back logged, and hundreds of thousands of sailors remain stranded at sea.
Money managers cut back their length across the board following what looks like it might be a seasonal top in prices set two weeks ago. WTI and Brent contracts also saw a substantial increase in new short positions, and a large drop in open interest, suggesting the large speculators are ready to bet that the rally is over. The COT report data is compiled as of Tuesday so those new shorts were put to the test right away with the rollercoaster ride in the back half of the week.
Meanwhile, there’s a new competitor to the WTI and Brent crude contracts as Abu Dhabi launches trading in Murban oil futures today. The contract aims to shake up the benchmarking of middle eastern prices, and is backed by substantial physical delivery capabilities.
Baker Hughes reported six more oil rigs were put to work last week, five in the Permian and one in the Williston basin. The count is now at the highest level since May of 2020, but is still 300 rigs short of where we were just one year ago, a reminder of how dramatic the shutdown was last April.
Lots of headlines about a major oil refinery fire in Indonesia overnight. The photos and videos are no doubt dramatic, but the plant is relatively small (125mb/day) and the operating units reportedly escaped damage so it should not have an impact on prices in other regions.
Volatility Returns To The Energy Arena
March madness is not disappointing this year as volatility returns to the energy arena, making 5% price swings a common occurrence. This week’s action has been a rollercoaster with huge selloffs Tuesday and Thursday surrounded by strong rallies Monday, Wednesday and Friday that have kept the selling that started last week from snowballing into an outright price collapse.
When this type of wild back and forth action happens, it helps to look at the weekly charts to get a sense for the bigger picture, and to see that despite multiple days of 8 cent or greater moves, ULSD futures are only down 2 cents on the week, while RBOB prices are up 1.5, and those small net moves have done little to change the technical outlook going forward. That said, this type of manic price movement is often seen at the end of a trend, so there’s still a strong case to be made that after a huge rally from November-March, lower prices are coming, and could be here soon if chart support breaks next week.
The Suez canal blockage continues to be a major story this week, with new estimates suggesting it may take weeks not days to clear the stranded ship. While that continues to be an easy headline to pin the blame on a rally, it doesn’t explain why oil and product prices 6 months forward are rallying about the same amount this morning.
On the flip side, European COVID lockdowns are the easy smoking gun for the days when prices collapse, even though it would be hard to justify prices 1 year forward dropping due to those temporary measures. The drop in European demand should also help limit the fallout from the Suez canal blockage that’s keeping some 3 million barrels/day of oil and refined products stranded at sea.
There does seem to be a “risk on” vs. “risk off” feel to the wild back and forth this week, even though the correlation between daily price moves between equity, currency and energy markets is almost non-existent.
Today’s refining lesson: Don’t rain oil on your neighbors. The EPA announced it was pulling an expansion permit for the Limetree Bay (FKS Hovensa) refinery in St. Croix after multiple lawsuits filed to challenge its restart. It’s important to note that decision will not halt operations at the refinery, but will make expansion a challenge, and given the events of the past two months feels like just the start of the regulatory changes coming. For those that were around when Hovensa was operating, its location and ability to import barrels all along the U.S. East Coast often gave its operations an outsized influence on (NY Harbor based) RBOB and ULSD prices.
The Dallas Fed’s energy survey for March showed a strong recovery in oil and gas operations as producers that had been on the brink for much of the past year took advantage of the rally in prices. Continued expansion is predicted in the survey results, and the chart of break evens shows that we should see operations continue to increase with just about all basins securely in the black at current price levels.
Los Angeles has revealed a study that would allow it to use 100% renewable energy sources to power its electric grid by 2035, even as it remains one of the only coal burning municipalities left in the state. The plan is simple: “Build solar farms, wind turbines and batteries as fast as possible.” The plan to pay for it is: not part of the study.
Fuel Prices And Renewable Credits Face Whiplash
It’s been a busy month worth of trading this week as fuel prices and renewable credits all face a bout of whiplash. Gasoline and diesel contract managed to wipe out Tuesday’s big losses that approached 10 cents in many markets with even larger gains Wednesday, only to start Thursday’s session dropping back 5-6 cents.
The blockage of the Suez canal got way too much credit for Wednesday’s big price rally, as the issue is expected to be cleared by the weekend, and should not have any long term impacts. If the event was the main driver of the price action during the rally, we would have seen time spreads strengthen, reflecting the short term supply crunch, which just didn’t happen as prices were up big across the forward curve. Want another reason why that probably wasn’t why prices rallied yesterday? The ship is still stuck this morning and prices are down 3%.
The DOE’s weekly report showed that the great refinery recovery continues, but Gulf Coast (PADD 3) runs are still 800mb/day below where they were prior to the polar plunge. Plants in other regions are taking advantage of the disruption, with East & West Coast refiners increasing rates to their highest levels in a year to capitalize on the (recently) rare window to make healthy margins caused by the widespread outages and slow recovery.
Gasoline imports remain nearly 2X normal levels for this time of year as replacement barrels for those lost from downed refineries are arriving. That phenomenon may help explain some of the strength in RIN pricing over the past month as those imported barrels require purchasing a full slate of RIN codes to comply with the RFS.
Demand estimates from the DOE were sluggish last week – and certainly didn’t help explain the big price jump following the report – with distillate consumption dropping sharply over the past two weeks while gasoline has stagnated.
An EIA report this morning highlights the vastly different refining landscape in the U.S. – which for decades has been the world leader in refining – and China, which surpassed U.S. output for most of 2020.