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Have The Bulls Regained Control?
Have the bulls regained control? Most energy contracts are poised to end the week with solid gains despite some choppy, back and forth action. The bounce after testing trend support leaves the door open to a challenge of the year’s highs as we roll into June.
It’s the last trading day in May, so watch the July (RBN and HON) contracts for price direction today. It’s also the Friday before a holiday weekend so expect liquidity to dry up early as traders hit the road. Rack prices published tonight are expected to carry through until Tuesday, futures will trade in an abbreviated session Monday, so suppliers will reserve the right to make changes in case of price swings.
What a difference a year makes. Last year, retail gasoline prices were below $2/gallon heading into Memorial Day weekend as most Americans were forced to stay home. This year, the EIA reports that prices are at their highest levels since 2014, which was when oil was still going for more than $100/barrel. The report highlights growing gasoline demand, reduced refinery output, and the Colonial disruption as factors in that retail price increase, but fails to note the 22 cent/gallon cost of complying with the renewable fuel standard.
A tale of two products in on city: LA spot basis for CARBOB spec gasoline reached its highest level of this year Thursday, while CARB diesel basis reached its lowest levels in more than a year. You can look at the state’s inventory levels and make an argument for this divergence in values, as gasoline stocks in the state have reached a 12 month low, while diesel inventories are at the top of the range. A closer look at the weekly charts provided by the state’s version of the EIA however shows that the tight gasoline supplies are focused in the northern half of the state. A gasoline making unit in the LA market was forced to shut earlier this week, turning that refiner into a buyer, which seems to be the driving force behind this rally.
It’s been a huge week for climate change voting at oil producing companies. Chevron was the latest oil major to have investors vote against management in climate-related policy this week, not long after the Oracle of Omaha reportedly cut his stake in the company by half, which may well have changed the outcome of that vote. Total meanwhile went a different route, and offered shareholders a plan to rebrand as Total Energies and shift focus towards more renewables, which was approved by more than 90% of votes.
After facing selling pressure earlier in the week, RIN values were back on the move higher Thursday following a big bounce in corn prices.
Diesel Supplies Decline For Seventh Straight Week
The choppy back and forth action continues with a Wednesday’s price rally largely wiped out in the early going Thursday. The pattern seems to be that if prices are going up, we’ll chalk it up to stronger demand, if they’re down, it will be blamed on a possible new deal with Iran.
While the market seems to be going nowhere, it’s been a huge week on the climate front with two potentially landmark events both happening Wednesday.
A Dutch court ordered Shell (aka Royal Dutch Shell) to cut its carbon emissions by 45% by 2030 in a ruling announced Wednesday. The ruling didn’t say how Shell was supposed to accomplish that, but apparently the company believes fire-selling its refineries is an option. After selling off its Anacortes and Deer Park facilities in the past few weeks, the company announced Wednesday it would also be selling its Mobile AL refinery to specialty refiner Vertex.
Exxon Mobil meanwhile saw at least two, and possibly three, board of directors seats won by an activist investor group pushing for the company to rethink its climate change strategy. What does that mean? Maybe not much in terms of operational changes as the fund controls only .02% of the company’s shares, and the 2-3 board seats won’t be enough to create any majorities. That said, it’s a clear victory in terms of changing sentiment from investors, and quite possibly the loudest moment yet in the crescendo of the great energy transition.
Betting on a bailout? A Reuters report Wednesday said that Delta’s refinery arm has stopped buying RINs in a bet that the white house will offer relief as those credits have surged more than $1/RIN so far this year. We did see PES try a similar strategy a few years ago, and get its RIN obligation wiped out in Bankruptcy court, which seemed to work until they blew up their refinery. RINs were under selling pressure before this report moving 2-3 cents lower on the day, but rallied following its release of this report and wiped out most of those early losses.
In fundamental news from the weekly DOE Report: Diesel supplies declined for a seventh straight week. Considering we’re in the traditional seasonal doldrums for diesel demand, and yet days of supply is below 30, you might start being concerned with securing your diesel supply this fall if you haven’t already.
The DOE’s gasoline demand estimate reached a new post-COVID high, and actually surpassed the levels we saw this week in 2019. It is possible to write off that jump to restocking efforts in the wholesale fuel arena following the great Colonial Panic buying spree the prior week.
The PADD 1 & PADD 3 gasoline inventory charts didn’t change much last week, proving that fixing the near-week-long shutdown of Colonial will take much longer than one week. Outages are dwindling in the South East, but returning to normal supply will still take another few weeks.
While refiners are still operating below capacity, that reality of the time it takes to bring new supply to the consumer is a good warning as both gasoline and diesel days of supply are now back to average levels and demand is continued to climb this summer. The rash of refinery closures and conversions over the past month has left the U.S. refined product market with less of a capacity cushion than it’s had in a decade, and more regional shortages & price spikes could be coming as a result.
Week 21 - US DOE Inventory Recap
Petroleum Futures Going Essentially Nowhere
Don’t blink or you might fall asleep as petroleum futures markets are going essentially nowhere the past couple of sessions. It may be that traders are exhausted after a busy few months littered with supply disruptions, or if you believe the business news headlines, they’re probably just trading cryptocurrencies instead of fuel.
The action in grain and ethanol markets has been much more interesting this week, as a big selloff in corn prices has ethanol prices trading nearly 30 cents lower than where they were two weeks ago. RIN values have continued to hold steady in the face of that selling pressure however, and soy beans and bean oil prices are not following corn off the cliff just yet, making for an interesting showdown over the next several weeks. Several articles suggest that China may have popped the commodity bubble, and that more selling is coming after a record setting rally.
Inventory draws across the board weren’t enough to spur much buying overnight. The API was said to show a five million barrel decrease in diesel inventories, a two million barrel draw in gasoline while crude stocks dropped 439,000 barrels. The DOE’s report is due out at its normal time, and although evidence on the ground suggests there was a sharp drop off in gasoline demand last week – you know, since motorists needed to use up the fuel in their Rubbermaid containers - but that may not show up in the official government estimates due to timing of the reporting.
Today’s interesting read from the Financial Times: How economies around the world are preparing for the great energy transition.
Inflation Fears Put On Back Burner
After a two-day rally that wiped out most of last week’s losses, energy futures are trading modestly lower this morning, and it appears we may be stuck in another choppy sideways pattern.
Since technical support held during last week’s heavy selling, it looks like there’s still a good chance we’ll see prices attempt another rally heading into the holiday weekend, as expectation for strong driving demand will make headlines, and many traders have a tendency to avoid being short before taking time off.
Ethanol and RIN prices are holding relatively steady this week after a furious rally seemed to have ended last week, and are soon to face a critical test of trend support that may be the difference between a 30 cent price drop, and a rally to new record highs.
Inflation fears seem to be put on the back burner, and equity markets are pointing higher as several FED governors seem to be dismissing the chance that they’ll be forced to change their easy money policies due to rapidly increasing prices for just about everything.
Three weeks ago, Mexico’s president criticized the partnership between Pemex and Shell in the Deer Park TX Oil refinery. Yesterday, it was announced that Pemex had bought Shell’s interest in that plant, in a bid for Mexican energy independence as its home grown refineries struggle to operate.
Negotiations with Iran continue to be a daily story as the energy market has little other news to trade on, since we’ve gone a whole week without a major supply disruption. Iran extended a nuclear monitoring agreement for one month, buying some time for negotiators while its controversial presidential election is set to take place.
Drivers Fuel Up Ahead Of Memorial Day Weekend
Energy prices are moving higher for a second straight session, putting the risk of a technical breakdown in prices on hold, as we begin what is traditionally one of the busiest demand weeks of the year as driver fuel up ahead of Memorial Day weekend.
Four more oil rigs were put to work last week according to Baker Hughes’ rig count, marking a third straight week of increases. Most notable for the week was that the additional rigs all came in Oklahoma (which only has roughly 1/10th the active rigs as Texas) with gains recorded in three different shale plays in the greater Woodford basin.
Money managers reduced their net length in oil contracts for a second week, but added to their length in refined products. The large speculative class of trader is now holding more net length (betting more on higher prices) in diesel contracts (HO and Gasoil) than they have in 2.5 years. Fundamentally it’s hard to argue with those positions as diesel demand has already returned to pre-covid levels in the U.S., and more mass transit, rail and trucking demand is expected to come online over the next several months. On the other hand, when money manager positions get too far in either direction, it’s seen as a contrary indicator as the big money has already been spent and there’s less money to keep pushing prices higher.
It’s hard to know who or what to believe with the Iran negotiations, but it looks less likely this morning that a deal is going to get done that would allow sanctions to be lifted and more oil to be produced and exported.
New life for the Convent Refinery? A Baton Rouge firm has bid $1.25 billion to buy the shuttered refinery from Shell. Don’t get your hopes up just yet though as a $1.75 billion bid was already rejected by Shell last year, and the would-be buyer (American Clean Energy Refining) is an unknown name in the industry, which could mean this bid is more pipe-dream than reality. Speaking of which, a Bloomberg article highlights why the green hydrogen dream for refiners isn’t making much progress yet.
Tropical storm Ana formed over the weekend, but has since weakened and does not pose a threat to the U.S. That’s the seventh straight year a storm has been named before the official start of Hurricane season, which makes you wonder who picks the season. We are expected to see above normal storm activity this year, and the supply chain has already been battered year while demand is picking back up, leaving the system vulnerable to disruption should a storm hit the Gulf Coast.