News & Views
News & Views
News & Views
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.
Pivotal Price Action Over The Next Week
After two days of heavy selling, energy prices are trying to bounce to start Friday’s session. A break in the risk-off selling seems to be at hand as U.S. equity futures are also pointing higher this morning after a rough week. The price action over the next week looks like it could be pivotal long term as refined product futures are testing the bullish trend lines on their weekly charts, and a break lower will make today’s rally look like a dead cat bounce with another 20 cents of downside to come, while a hold above current levels leaves the door open to testing new highs for the year in June.
More reports that Iran was close to an agreement to lift sanctions (which IF true could bring another 500,000-2 million barrels/day of oil back onto the world market within the year) earned some of the credit for the latest wave of selling Thursday. That announcement was not confirmed by U.S. officials however, and coincidentally came around the same time that a ceasefire in Gaza was announced, which so far has put a stop to the rockets Iran helped build from being fired into Israel.
Hurricane season doesn’t officially start for another week, but already there are two potential storm systems being tracked. The first near Bermuda (which would be named Ana) is unlikely to threaten the U.S., but the second in the Gulf of Mexico could briefly reach tropical storm strength and bring more heavy rain and wind to the Gulf Coast that’s been battered by storms all week, causing several refinery units to be knocked offline.
NOAA is predicting another above-average year for storm activity in the Atlantic basin, with 13-20 named storms, 3-5 of which could be major hurricanes. Given the recent increase in storm activity, the agency is also increasing the “average” number of storms in a year from 12 to 14. That’s not as many as the record setting season we saw last year, but of course it only takes one to cause a major supply disruption since half of the country’s refining capacity sits on the gulf coast, and the region is more vulnerable now due to the saturation that’s occurred this week.
RIN prices joined the selloff in fuel and grain prices Thursday, with reports that the EPA was planning to hold renewable obligations for 2021 and 2022 unchanged due to the COVID-inspired drop in total fuel demand adding to the negative sentiment. As the chart below shows however, the nickel drop in prices this week barely registers on the chart after a 60 cent rally in the past month, and buyers still seem eager to step in whenever there’s a dip.
Who is running the show? On the same day the president made an executive order instructing government agencies to review climate change impacts, a partisan feud between FERC commissioners is leaving pipeline project approvals in the lurch. The FERC situation is eerily similar to the strange reaction by the FTC commissioner last week, when they tried to claim the Speedway sale might be illegal, after it had already gone through.
A new bill proposed in congress Thursday would create a blenders tax credit of $1.50-$2/gallon for sustainable aviation fuel (SAF). The bill is widely supported by the industry, with over 60 organizations showing support for the bill. One interesting note on the bill is that it specifically excludes fuels made from palm fatty acids, which have become a highly controversial “renewable” fuel since they arguably do more harm to the environment than traditional fuels, which is an argument the ethanol lobby will not enjoy if it spreads to other programs as well.
Numerous Commodities Have Major Selloff
Risk off seems to be the theme this week as numerous commodities and equity contracts had a major selloff Wednesday and have continued moving lower through the overnight session. Minutes from the FED meeting that suggested the endless pile of money being pumped into the economy might someday end got much of the blame for the selling, and is likely to remain a key driving force in price action for months to come.
The PADD 1 vs. PADD 3 gasoline charts below show the impact of Colonial’s shutdown on supply, while the implied demand chart shows how much extra fuel was pumped into Rubbermaid containers last week.
Despite the jump in total gasoline demand, ethanol inventories ticked slightly higher on the week as output surged to a 14-month-high. This is another example of how the best cure for high prices is high prices, as the producers who were forced to shut their doors when prices collapsed last year are now ramping back up. That situation seems to be a microcosm of the global economy, as the supply chain tries to ramp back up to meet the surge in demand as the world reopens.
U.S. diesel inventories declined for a sixth consecutive week, and are now at their lowest level since April of last year. Unless we see diesel supplies start to climb over the summer, we could be in for a tight supply situation this fall when ag demand kicks in, since traditional diesel demand sources such as mass transit are still not back to pre-COVID levels, and yet total demand is already at average levels, and inventories are near the bottom end of their seasonal range.
Refinery runs held steady in PADDS 2-5 last week, but ticked higher in PADD 1 as East Coast refiners were (finally) able to increase run rates at a profitable level due to the disruption. It will be interesting to watch if those PADD 1 rates drop back over the next couple of weeks as the high RIN values hit margins all over, and the short term disruption is no longer offering additional margin. There have been numerous reports of refinery blips due to the severe weather blanketing the gulf coast this week, but so far all of the disruptions seem to be fairly minor and are not interfering with supplies being shipped to other markets.
RIN values did see some modest selling during Wednesday’s session, but the moves were small compared to what we saw in grain, fuel and equity markets. A federal court sided with the new EPA’s request to vacate three small refinery exemptions Wednesday, which could explain the relative strength while everything else was moving sharply lower. With the selling pressure already underway again this morning, this could be the biggest test yet for the runaway rally that’s added 60 cents to RIN values in just over a month.
Week 20 US DOE Inventory Recap
Bulls Temporarily Lose Control of Energy Market
The bulls have lost control of the energy market (temporarily at least) after failing to break through technical resistance during an early week rally. Today’s selling has a “risk off” feel to it, as it coincides with a big move lower in U.S. equities.
After a strong start to Tuesday’s trade that had petroleum futures on the cusp of new multi-year highs, a sharp and sudden selloff knocked oil prices down $2/barrel and refined products 4-5 cents/gallon in just a few minutes after “reports” via Twitter - which were lost in translation - of a breakthrough in negotiations between Iran and the U.S. Those comments were later walked back and the market erased those losses later in the session in a glaring example of the volatility risk when headline reading algorithms can trade on their own. To be fair, it’s not like human traders are proving to be much more intelligent this week: confusing a furniture retailer for a cryptocurrency.
At least four different Gulf Coast refiners had to curb run rates due to the severe weather sweeping the region this week. So far cash markets shrugged off that news and supply allocations didn’t change suggesting minor impacts. There are two more days ahead of severe weather, and even if no more damage is done this time, these storms are saturating the ground ahead of hurricane season, which officially starts in less than two weeks and is forecast to be busy.
Suppliers still scrambling to resupply across the Southeast had a few nervous hours Tuesday after an announcement that Colonial Pipeline’s scheduling system was taken offline. Fortunately that situation was only caused by the upgrades being made to protect their system against future hacks (how’s that for closing the barn door after the horse has escaped?) did not impact shipments, and only lasted a few hours. Terminals across the region continue to face short term outages, but the situation continues to improve every day.
While refined product prices have pulled back this week, RIN values continue to set new records, with D4 values trading north of the $2 mark Tuesday. That surge in values is adding a new level of pain to U.S. refiners that were just starting to recover from one of their worst years ever, as the RVO now takes nearly $10/barrel off of their gross margin.
While the RFS subsidy for biofuels continues to trade at record highs, a new bill aiming to extend the $1/gallon biodiesel blenders tax credit subsidy for biofuels was introduced Tuesday, more than 18 months ahead of the current expiration of the BTC. That’s a novel concept given that for much of the past decade that credit was only approved retroactively.
Meanwhile, read here about the boom in production of natural gas made from manure, thanks primarily to the subsidies paid by California’s LCFS program. Biomethane (AKA RNG) is the fastest growing category of fuel in the LCFS program, and now accounts for almost as much volume as biodiesel. That rapid increase in supply could help explain why LCFS credits are trading down on the year, while CCA credits used in the California/Quebec Cap & Trade program have been steadily moving higher.
Bulls Back In The Driver’s Seat
The bulls are back in the driver’s seat this week, and are threatening a test of multi-year highs for energy contracts.
Brent crude briefly traded above $70 overnight, for the first time since an attack on Saudi oil facilities in early March briefly stirred up the futures market. This time, it appears to be demand optimism rather than supply fears driving the action, although the inflation trade seems to be alive and well, and could keep buyers interesting in commodities of all varieties. Dangerous storm systems are sweeping through refinery country this week, bringing flooding, tornadoes and power outages to the region and causing several refiners to have to restart units.
The supply situation is getting better daily across the southeastern U.S. as Colonial’s restart is progressing well, although some spot outages remain and will likely continue for a few more days.
While the supply crunch is quickly being put to rest, the race to not let this crisis go to waste is just heating up. Already the TX governor announced he was signing a law to force local governments to keep up with cybersecurity training, while others are realizing that the multi-trillion dollar spending plans to boost infrastructure should probably at least contemplate the use of pipelines.
Although gasoline futures have not yet breached new highs for the year, an EIA report this morning notes that average retail prices across the U.S. have moved north of $3.00/gallon this week for the first time since the price crash of 2014. While the Colonial pipeline shutdown played a large part in the most recent retail run-up, prices had already doubled prior to that event as the country started reopening, and there were fewer refineries operating to meet that increase in demand.
Meanwhile, the product pipeline that runs from El Paso to Phoenix was forced to shut for a day to investigate an issue following a power outage. That line was restarted Monday afternoon, alleviating concerns of shortages in Arizona and excess supply needing to find a home in West Texas.
Today’s interesting read: Why the great global restart is leaving supply chains short on just about everything.
Today’s less interesting read: the IEA released its “roadmap” for the global energy system to reach net zero carbon emissions by 2050. The plan says investment must stop for new oil and gas projects immediately in order to meet climate goals. Good luck with that. A note from the Financial Times offers an insight into how challenging the climate transformation is, and why business pledges to reduce emissions are easier said than done.
Click here to download a PDF of today's TACenergy Market Talk.
Pipeline Fears Ending As Inflation Fears Spread
Energy and equity futures are both pointing modestly lower to start a new week, as pipeline fears are ending, and inflation fears are spreading.
Colonial’s restart continues to progress on schedule, with scheduling systems now back online, in addition to the operating systems that start up last week.
While it will still take several more days to fully alleviate the crunch, improvement is seen all across the region with allocation percentages increasing and outages decreasing from Louisiana to Pennsylvania. Now that the shortage is in the rearview mirror, the focus will turn to what will come next as this situation was a rude awakening of the threats posed to infrastructure, even as the hackers responsible are fleeing to try and avoid the weight of the U.S. coming down on them. New reporting requirements for pipeline systems seems to be a popular prediction for a way that the industry will be forced to change, and will likely come with unintended consequences that will make operating those pipeline systems more challenging.
One painful little detail for renewable fuel proponents who wasted no time last week suggesting that ethanol could help alleviate the supply crunch if the EPA would only allow E15 blends: several supply terminals across multiple states cited a shortage of ethanol for compounding the product shortages as railcar shipments simply couldn’t keep up with the rapidly shifting demand patterns across the region.
Money managers continue to have mixed feelings about energy contracts, with WTI, Brent and RBOB all seeing a drop in the net length held by large speculators last week via new short positions and liquidating old long positions, while ULSD and Gasoil contracts saw their net length increase. The fact that RBOB length didn’t increase as of last Tuesday – when the outcome of the Colonial shutdown was still very much in doubt – suggests the bandwagon jumpers in the hedge fund community are either cautious about gasoline prices, or have lost interest as other commodities seem to be an easier trade as long as inflation is making headlines.
Eight more oil drilling rigs were put to work last week according to Baker Hughes weekly report, the largest gain in nearly two months. The location of those drilling rigs is a bit of a mystery as four of the eight rigs come in the “other” category since they weren’t in the 14 largest basins tracked in the report, and the state by state count is offset by a drop in the natural gas rig count. The fact that the build is coming outside of the Permian (which accounts for more than half of all drilling activity) or one of the other well-known basins, suggests the price environment is good enough to encourage some companies to reach further in their operations.
As predicted last week, the EPA has ordered the St. Croix (island, not river) refinery to cease operations after a string of mishaps rained oil and other chemicals on the local community. Keeping that plant offline will make other Atlantic basin producers breathe a small sigh of relief as it will keep some of the excess capacity out of that market, and perhaps extend the operational life of another facility that would have had to close otherwise.
Speaking of refinery closures, Australia’s government is committing more than $2 billion to keep its last two refineries operating, citing national security concerns if the country is forced to import all of its fuel. This is a dilemma being faced around the world as country’s have suddenly found themselves with traditional refineries closing due to weak economics and public perception, but without a solution to keep their economies rolling without them, other than being forced to buy fuel from countries that may not like them much.
Entire Pipeline System Operational Again
Colonial pipeline initiated a full restart Wednesday afternoon, and Thursday confirmed that its entire pipeline system was operational again and all markets were receiving product. The pipeline is running 5.5 days behind on average. After numerous reports guessing that Colonial did not pay the hacker’s a ransom, new reports Thursday said they did, and that the ransom was relatively low because the hackers realized they’d outkicked their coverage on this deal.
It will take another week or two to put the physical supply disruption that started a week ago today in the rear view mirror, but the futures market seems to have already moved on to other things after giving back all of the price gains it had accumulated since the shutdown during Thursday’s trading.
While most of the focus this week has been on the East Coast, the real price action has been in the West Coast, as basis values have been hammered lower, bringing spot differentials for gasoline in LA to their lowest levels in a year. Rising gasoline production in Southern California may deserve some of the credit for the move, but inventories remain near the low end of the seasonal ranges, so it doesn’t appear to be the whole story.
The Mississippi river is to U.S. grain products as the Colonial pipeline is to refined fuels. The temporary shutdown of river traffic to address damage to the I-40 bridge in Memphis, which has stranded hundreds of barges, sparked a limit-down move in several grain contracts Wednesday. Similar to the Colonial shutdown, the impacts of this shutdown are expected to be short lived, but based on what we saw earlier this week that may not be enough to prevent hoarding of bourbon and frosted flakes. The shut down of river traffic could also cause some refined product tightness for the handful of terminals north of Memphis that are fed via barge from origin points south of the closure.
RIN values did see some relatively modest selling pressure as grain and fuel prices were both taking big steps lower, but given the 60 cent increases in the past month, a drop of a few cents hardly moves the needle. Given the dramatic increases, we won’t need to wait long to see if this selling is the start of the end for the upward trend, or if it’s just a speedbump on the move towards $2/RIN.
For the second time in 10 years, an attempt by Platts to buy OPIS has been rejected by regulators that don’t want to allow more pricing index manipulation monopolization by the companies.
Today’s interesting read: Why a review of the TX property tax code over the next 2 years may make refining expansion projects a challenge down the road.
Another change coming to the refining landscape: Soybeans are becoming the new crude oil.
Colonial Pipeline System Restart and Operational Update
From the TACenergy Trading Desk - The Latest From Colonial Pipeline:
Colonial Pipeline has made substantial progress in safely restarting our pipeline system and can report that product delivery has commenced in a majority of the markets we service. By mid-day today, we project that each market we service will be receiving product from our system. The green segments on this map are operational, meaning product delivery has commenced. Blue lines will be operational later today.
This would not have been possible without the commitment and dedication of the many Colonial team members across the pipeline who worked safely and tirelessly through the night to get our lines up and running. We are grateful for their dedicated service and professionalism during these extraordinary times.
Inflation Reaches A 13-Year High
Colonial pipeline began restarting operations Wednesday night, and products futures dropped a nickel. Now that the headlines will move on to other stories, traders can no longer shrug off the big selloff in equity markets this week as inflation has reached a 13 year high, and will also consider the looming drop in demand as consumers will (hopefully) stop filling plastic bags with gasoline. Although the media attention will quickly fade once there are no longer lines of cars outside of gas stations to take pictures of, this situation may have changed perception of the refined fuel industry that many were prepared to cancel just a few weeks ago.
While it may take another couple of weeks for the supply network to truly get back to “normal” as long as product starts flowing again the outages will quickly start to fade. Colonial had not been running at capacity for more than a year prior to this shutdown, so there’s room for extra supply to start moving up the line as operations ramp back up. Values for space on the main gasoline line (Line 1) went positive this week for the first time in over a year as shippers of all varieties wait in the starting blocks to begin the resupply race.
Just as we turn the page on one transportation bottleneck, another one showed up as the I-40 bridge in Memphis was forced to shut after a crack was discovered, disrupting a busy trucking corridor and promising to make an already tight freight market even worse. No word yet if consumers are lining up around Graceland to hoard Elvis memorabilia due to this temporary outage. The good news is that trucks heading to the Valero refinery in Memphis to help supplement supplies across the Southeast during the Colonial downtime don’t have to cross that bridge, but Arkansas suppliers will struggle with this situation.
The DOE’s weekly report Wednesday gave a dose of reality to those expecting demand to hit pre-COVID levels this summer. Total petroleum demand had its biggest weekly drop since stay at home orders smashed all records last year. While gasoline and diesel estimates did see minor declines, most of the huge drop came in the “other oils” category and doesn’t reflect a drop in consumer activity.
U.S. refining capacity dropped another 50mb/day last week, as the permanent closures announced last year continue to make their way into the official numbers. The drop from 19 million barrels/day two years ago to 18 million today is the worst decline in capacity in nearly 40 years.
Adding fuel to the 200 proof fire: U.S. ethanol inventories dropped to a four-year-low last week, even though ethanol production ticked up by 25mb/day. There’s still another 50mb/day or so of production that hasn’t returned since the pandemic started.
RIN Values continue their parabolic move. D6 ethanol RINS were trading around $.36/RIN this time last year, hit $.80 to start 2021, were at $1.31 a month ago and then shot to $1.90 yesterday. D4 values are approaching the $2 mark. With ethanol, grain and refined products appearing to be topping out and the demand for imports looking like it will subside thanks to the Colonial restart, the stage is set for a pullback, but the big question is will it be of the collapse variety that the wild RIN market has seen in years’ past or a more modest correction since the refiner obligation for the year is still unknown?
The best cure for high prices is high prices: Eight companies – Tesla being one of them – have petitioned to be allowed to generate RINs via their electric vehicle production. While it could be years before congress can even get around to reviewing those proposals, and more years before they’d be implemented if signed into law, it’s a good reminder that at $2/RIN there will be no shortage of new producers trying to take advantage of the RFS program.
The last straw? The refinery FKA as Hovensa was forced to shut again this week after yet another disruption that rained oil on the surrounding neighborhoods. With the EPA already investigating the facility for permit violations, it seems like the efforts to restart this facility that was closed in 2012 may ultimately fall flat.
Week 19 - US DOE Inventory Recap
Nation Nervously Awaits News On Colonial Pipeline Shutdown
Energy futures continue to tick modestly higher, even as equity markets are moving lower for a third day, as the nation nervously awaits news on the Colonial pipeline shutdown. The EPA has extended RVP waivers through the end of May, and a partial Jones Act waiver is still being considered to help alleviate the supply crunch, but as everyone is learning this week, there just is no good way to replace 100 million gallons/day of supply.
We should find out later today if Colonial is still on track to restart its main lines by the weekend, at least according to the U.S. Energy Secretary, who joined the long list of bureaucrats jumping in front of the camera this week to make it seem like they’re helping the situation. Many drivers in the Southeast aren’t waiting to find out as panic buying is reported across several states, which can create shortages even when the supply network is fully functional. A poll on how many people are filling up even though they’re working from home would be interesting.
Colonial’s website was offline for much of the day Tuesday, and even though the company reported that had nothing to do with last week’s cyber-attack, it didn’t seem to provide confidence that things were improving. The site is up and running today, with an added layer of “I’m not a robot” security. You can see their media updates here: https://www.colpipe.com/news/press-releases/media-statement-colonial-pipeline-system-disruption
Important details from the latest update are that the manual operations are allowing batches already in the line to get to the terminal level where trucks can load it, but since they’re not yet taking in any new batches of fuel at the Gulf Coast origin points, refiners are left without a key outlet for their production, forcing many to cut back on run rates, which will start backing up crude supplies as well, in a less dramatic version of what we witnessed last spring when everyone stayed home for two months.
While we wait to find out if there’s a go/no go for restart, there’s plenty to read as we have monthly reports from the EIA and OPEC, and a new IEA report on the CPL issue all published in the past 24 hours, in addition to the weekly inventory reports.
The API showed a draw in crude oil and diesel stocks last week of 2.5 million and 872,000 barrels respectively, while gasoline stocks had a large increase of 5.6 million barrels. That news didn’t seem to move prices as the data is now considered obsolete since it was collected pre-Colonial shutdown. The EIA report is due out at its normal time today, and is likely to be shrugged off as well. With numerous gulf coast refineries cutting rates this week due to the shutdown, we could see large builds in crude, and large declines in refined product inventories in next week’s report.
The EIA’s monthly forecast increased estimates for gasoline demand this summer, although totals are still expected to be below what we saw in 2019. The monthly report also finally acknowledged the influence record high ethanol and RIN prices are having on refiners and their product prices. Distillate demand increased to its highest level since November 2019 in April, “likely” driven by high freight demand. Here too the agency expects that strength to continue this summer.
OPEC’s monthly report showed the cartel’s output held steady for the month, with increases from Iran, Nigeria and Saudi Arabia offsetting declines in Libya and Venezuela. The report held its global demand estimates steady for the year, and highlighted the return of US drilling operations that will drive non-OPEC production gains for the next year.
The IEA released a note on the Colonial situation, and calling for greater focus on cyber resilience. That report highlighted the unique situation the East Coast (PADD 1) is in as the largest “importer” of refined products in the world that continues to see a drop in supply options thanks to the shutdown of numerous refineries over the past decade. Perhaps it’s even more remarkable how well supplied these markets are most of the time given the huge amounts of fuel needing to be transported every day to meet that demand.
As a result, if considered on its own, PADD 1 is the largest net importer of refined products in the world, ahead of all of Africa and the Southern Asia Pacific (Australia, Indonesia, Singapore and New Zealand combined).
Energy Futures Are Selling Off Tuesday
Energy futures are selling off Tuesday, pulling back from the multi-year highs set Sunday night in the wake of the Colonial shutdown chaos. Signs that the pipeline closure will likely be resolved later this week and a pullback in global equity markets both seem to be contributing to the selling, but don’t expect product prices to decline too much until more definitive proof of the pipeline restart is given.
Colonial said late Monday night that one of its smaller lines had restarted using manual operations, and that it continued to execute a plan that should allow most operations to resume by the end of the week. The statement also detailed that the scheduling systems shippers rely on
Read the official Colonial media statements here: https://www.colpipe.com/news/press-releases/media-statement-colonial-pipeline-system-disruption
Ripple effects of the Colonial shutdown:
Several Gulf Coast refiners were reported to cut back their run rates Monday to avoid containment issues since their main outlet is closed. Others were scrambling for ships to offload products, and seeking waivers to the Jones Act to bring that product to the East Coast.
Explorer pipeline froze nominations on its line as shippers scrambled to use that Gulf Coast-Midwest outlet as a plan B for their excess production.
RIN values spiked (again) in early trading as expectations for a surge in imported products (which require RINs be purchased to comply with the RFS) but pulled back later in the day following Colonial’s report that it should be operating again by the weekend. There’s a rounding top pattern potentially forming on the Corn charts that could end up popping the RIN bubble if those prices make a return to normal levels.
What’s next? Suddenly the country seems to view pipeline capacity in a whole new light, which could put pressure on the administration to re-think its ant-pipeline stance. The spike in RINs could also have some calling for an emergency waiver to the RFS, as the reality sets in that alternative energy sources aren’t yet a viable alternative.
The hackers seem to realize (or are pretending) they’ve bitten off more than they can chew, stating that they didn’t intend to create problems for society, they just wanted to hold people’s data hostage. How noble. Several US government agencies have pinned the blame on the DarkSide group, and said the attack originated in Russia but also said there’s no evidence of Russian government involvement.
Most Important Refined Fuel Pipeline In US Knocked Offline
The most important refined fuel pipeline in the US, and arguably the world, was knocked offline by a ransom ware attack Friday, and most of that system was still offline Monday morning causing supply allocations to be locked down across the East Coast, and double digit price increases by suppliers from Florida to New England.
Gasoline futures are up 8 cents since the news started to break Friday morning, which is only about half of the increase we saw when Colonial was forced to shut its mainline in 2016 due to a leak. One of the big differences this year is that the pipeline wasn’t operating at capacity prior to the event, so there’s a little more supply cushion available than there was in prior years. So far the relatively muted response in both futures and basis markets suggest that the big traders don’t believe this will be a long term event.
You can read plenty of guesses as to when operations will be restored on the numerous articles written about this situation over the weekend, but at this point, no one outside of the hackers probably can say for sure. The bad news about the widespread media coverage of this event is that it’s more likely to encourage people to fill up tanks with fuel they don’t need, which can create shortages even if the pipeline was operating at normal rates.
Here’s a good estimate for the likely scenarios of how this situation will play out https://www.cnbc.com/2021/05/10/largest-us-fuel-pipeline-colonial-still-mostly-shut-impact-and-reopening.html
To help minimize the shortage, Driver hour waivers have already been granted. RVP waivers and a Jones Act waiver will also be discussed this week, but have not yet been approved. No matter what measures are taken, it’s impossible to replace more than 100 million gallons of fuel delivery capacity in a short period of time, so these measures will just help ease the shortages if the downtime is extended, not eliminate them.
Closing the barn door after the horse has escaped? The White house has created a task force to deal with the hack.
Insider trading? Money managers increased their net length in refined products last week ahead of the pipeline shutdown. While it’s extremely unlikely that any hedge funds that make up the bulk of those positions knew this was coming, it’s possible the hackers would try to make money off of this situation, and could provide another avenue to tracking down the culprits. Given that the net length held by large speculators in both WTI and Brent was also up on the week, the positioning ahead of the shutdown was more likely due to optimism for economic recovery than anything sinister.
In other news that no one will care about until the Colonial situation is resolved: Baker Hughes reported an increase of 2 oil rigs last week, snapping a 2 week decline. Ethanol and RIN values continued their spike on Friday, but some early selling in grain markets this morning could mean a pull-back is in the cards.
A Volatile Week For Energy Prices
It’s been a volatile week for energy prices that reached new multi-year highs Wednesday, only to see prices pull back the past two days. Despite the selling since Wednesday morning, most contracts are still up for the week, keeping the bullish trends intact, even as the shorter term indicators are suggesting prices have topped out.
The April payroll report showed far fewer jobs added in April than many expected (+266k vs estimates north of 1 million) while the March estimate was revised lower. The official unemployment rate ticked up slightly to 6.1%, while the U6 rate ticked lower to 10.4%.
Stock futures jumped (and treasury yields dropped) following the report as the “bad-news is good-news” trade appears to be alive and well when free money is the drug of choice in the market. Concerns that an overheating economy and inflation of several varieties will force the FED to start raising rates (or stop other asset purchases) earlier than expected were soothed by the fact that fewer Americans found jobs last month. Energy prices did briefly follow stocks with some buying immediately after the report, but have since resumed their selling.
The national numbers seem to contradict a Dallas Fed study released earlier in the week that showed that economic activity (and hiring) is surging across the state, which is creating another layer of inflation as companies are already seeing wage inflation. (charts below)
The runaway RIN & ethanol markets continues to smash records this week. 6 months ago, D6 ethanol RINs reached a multi-year high at $.70/RIN, and then yesterday they set (another) all time high north of $1.70/RIN, while D4 RINs broke north of $1.80 for the first time ever. Gasoline prices are now trading 50 cents or more below spot ethanol prices, but after adjusting for the RIN value, there’s still more than a $1/gallon positive spread between gasoline and its alcoholic blending companion.
Here’s an interesting read on why rice prices haven’t followed other grains in the historic rally over the past few months. Cliff notes version: it’s because they don’t use rice to make fuel or feed pigs.
Another sign of economic recovery: The Association of American Railroads report showed a 3rd straight week of increased traffic, and a 3rd straight week of levels above those in the same week in 2019, and almost all categories have now returned to pre-COVID levels.
Read here for more details over the Clean Energy/Amazon partnership to use more renewable natural gas by the rapidly growing fleet of delivery vehicles.
Refined Product Prices Knocked Back From Multi-Year Highs
The DOE’s weekly status report threw some cold water on the energy price rally Wednesday, knocking refined product prices back from multi-year highs. Disappointing demand estimates seemed to be the driver behind the selling that took place following the report, while a large draw in crude oil stocks looks temporary due to a surge in exports (that reached a 13 month high) and a large drop in imports that accounted for more than 20 million barrels of crude not hitting US stockpiles last week.
Although the momentum may have been lost, the pullback in prices has been minor, which suggests that we’re just seeing a round of profit taking rather than a change in trend.
Ethanol prices in the Chicago trading hub broke above $2/gallon 3 weeks ago, and then broke $2.50 yesterday as the grain-fueled rally has gone parabolic, adding 20 cents in just 3 days so far this week. China continues to buy record amounts of US ethanol, which is adding to the bullish frenzy in the market that’s becoming akin to the run-up in prices in 2008 when supply for diesel and crude oil struggled to keep up with export demand. As this rapid run-up in prices makes its way beyond the limited scope of wholesale fuel prices and into your grocery store, expect the debate of food vs fuel to heat up again, along with concerns about inflation across all aspects of the global supply chain. Ethanol production ticked up last week, helping US ethanol inventories to rise for the first time in 6 weeks according to the DOE report.
RIN prices are following closely on the heels of ethanol prices, casually adding another 3-4 cents to their all-time highs Wednesday and bringing the weekly gains to 15 cents. At this point, there seems to be little standing in the way of prices continuing to run higher, but the extreme nature of these moves suggests that the drop will be spectacular whenever it finally happens. One warning sign for the bio-bulls: time spreads on crops are expanding their backwardation, suggesting this supply squeeze will end with the new crop.
The Marathon refinery in Texas City leaked hydrofluoric acid Tuesday, which sent two workers to the hospital, and is sure to drum up more debate about the use of controversial use of those dangerous chemicals in refinery operations. The plant, which is one of the largest in the country and has been struggling to return to normal operations since the polar plunge in February, is no stranger to controversy, as it faced one of the deadliest explosions in the history of the industry when it was known as the BP Texas City refinery back in 2005.
A power outage in the panhandle of TX knocked the P66 Borger refinery offline Wednesday, which promises to keep racks in the region tight, just as they’ve been for the past two months.
Week 18 - US DOE Inventory Recap
Big Deal For U.S. Refiners Announced Tuesday
The rally continues for energy prices as gasoline futures have reached their highest level since July 2018 overnight, and ULSD has broken above $2 for the first time since COVID started wreaking havoc on the world. With the breakout to the upside this week, charts suggest that ULSD should now make a run at the January 2020 highs of $2.1195, while RBOB may test the May 2018 highs of $2.2855.
The API report Tuesday added some fundamental support to an already bullish technical landscape, with large draws for oil and refined products estimated last week. The EIA’s weekly report is due out at its normal time this morning. Last week the government’s demand estimates for gasoline were lower than anecdotal evidence suggested it should be, so if there’s a correction to the upside in consumption estimates this week the stage is set for this rally to snowball later today.
If you ever needed some evidence that low interest rates are the biggest driver of stock prices (and occasionally energy prices) Tuesday’s price action could be exhibit A.
After a morning temper tantrum when the U.S. treasury secretary (and former FED Chair) Janet Yellen suggested the FED may need to raise rates to keep the U.S. economy from overheating, stock markets recovered later in the day when she walked those statements back. While energy prices were up throughout the day, they did pull back some with the early stock selling, and rallied later in the day as optimism for free money returned.
Ethanol and RIN prices continued their big rally on Tuesday, with both D6 and D4 RINs reaching new all-time highs. Unless there’s a pullback in grain prices, it seems there’s little standing in the way of further advances in the coming weeks until the Supreme Court makes its ruling on small refinery waivers.
A big deal for U.S. refiners was announced Tuesday.
HollyFrontier announced plans to purchase the Shell refinery in Anacortes Washington Tuesday afternoon, and published a slide deck this morning giving the rationale for the purchase. With a price of less than 2X EBITDA for the facility (not to mention the other refineries its closed or sold recently) Shell’s lack of confidence in refining is clear, while Holly makes the case that demand in the PNW region is growing, and the other refinery closures should make this asset attractive. One other benefit of this refinery: deep water port access. That’s something the other Holly facilities in New Mexico, Oklahoma, Kansas, Wyoming and Utah probably won’t have anytime soon.
Holly also reported first quarter earnings, showing another rough stretch for refinery operations which lost $66 million, but were offset by a write-up of $200 million in inventory values, and a $51 gain from a tariff settlement. The company’s CEO said, “A record earnings quarter in our Lubricants and Specialties business, as well as steady performance from HEP, helped offset the impacts of heavy planned maintenance and winter storm Uri on our refining segment during the quarter. As we enter the summer, our focus remains on safely completing the build-out of our Renewables business on schedule.”
Speaking of getting renewable businesses on schedule: CVR announced it was delaying the start of its renewable diesel plant at the Wynnewood refinery in Oklahoma due to the effects of February’s winter storm, and delays in equipment deliveries.
Largest Remaining East Coast Plant Forced To Shut A Unit
ULSD futures reached a 16-month-high overnight while gasoline contracts are just a penny away from fresh multi-year highs of their own as technical and fundamental factors combine to push the energy complex higher. The stage was set for a rally on the charts when buyers erased losses early in Monday’s session, keeping the upward momentum set last week intact. Then reports overnight that the P66 refinery in Bayway, NJ (the largest remaining plant on the East Coast) was forced to shut a unit unexpectedly sent prices sharply higher.
If ULSD can break (and hold) above $2, and RBOB can do the same at $2.17, there’s room on the charts for another 11-12 cents of gains in the near future.
It seems like the only headwind for the bulls this morning is a pullback in U.S. equity markets, with some indices pointing towards their lowest levels in two weeks at the open. The correlation between daily price moves in the S&P 500 and energy futures has strengthened significantly in the past couple of weeks, after having gone dormant for the past couple of months.
RIN values reached new record highs Monday, adding a nickel or more depending on the contract, and are pointed higher again to start Tuesday’s session. The new EPA administration asked a Federal Court to vacate three small refinery exemptions granted in the last days of the old EPA administration. One thing to watch, grain prices have started to see large intraday swings, with big early gains turning into afternoon losses, which could add more volatility to the notoriously volatile RIN market.
More environmental challenges for refiners this week. Colorado’s only refinery faced tough challenges in the hearing about renewing their air permits, while the plant formerly known as Hovensa received a violation notice from the EPA that could eventually halt production at that facility.
An EIA report this morning highlighted the growth in bio-mass-based diesel imports into the U.S. last year, even as total diesel consumption dropped sharply due to COVID lockdowns. Renewable diesel accounted for 60% of those imports, with all of that product coming from Singapore. Exports of biodiesel – most of which go to Canada – were also up in 2020, and there’s likely to be increased competition from buyers as Canada’s clean fuels program goes into effect next year.
Discussion On Environmental Pressure Businesses Face
It’s a quiet start to the week as oil and refined products trading modestly lower this morning, after moving modestly higher overnight. A weak finish on Friday took away the upward momentum in what was an otherwise strong week that suggests from a technical perspective, energy contracts are poised to make an attempt at new highs for the year.
Money managers are looking more bullish after adding to net length in most of the petroleum contracts last week through a combination of new long positions, and covering old shorts. As has been the case for the past several months however, the size of the position changes was minimal on the week, suggesting that the large speculators aren’t ready to make big wagers in either direction at this point. Both the U.S. and European diesel contracts saw heavy short covering as prices approached new highs for the year last week, and the Gasoil contract reached its highest net length held by money managers since September 2019.
Baker Hughes reported one less oil rig was operating in the U.S. last week, marking a second straight single-rig decline in their weekly count after six-months of steady increases. The Permian basin dropped three rigs last week, while other shale plays added a net of two.
The Berkshire Hathaway annual meeting this weekend named an eventual successor to the Oracle of Omaha, and included plenty of discussion on the mounting environmental pressure faced by businesses today. When asked about the companies large stake in Chevron, Buffet responded by saying (in part), “I do think the world is moving away from hydrocarbons….I will not be uncomfortable about being in the oil business…[the world is going to] need a lot of hydrocarbons for a long time”, and that he was glad that “we've got them. I think Chevron has benefitted societies in all kinds of ways, and I think it will continue to."