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Refinery Issues Over The Past 2 Weeks Showed Up In The DOE’s Figures With 4 Of The 5 PADDs Seeing Lower Run Rates
The weekly trend line that pushed diesel prices up nearly $1/gallon over the past 2 months broke Wednesday and sent ULSD futures tumbling. The September futures contract, which expires today, is down 22 cents for the week so far, making it highly likely that the record-setting streak of 9 straight weekly increases is about to end, and the charts now suggest we’ll at least see an attempt to push prices back below the $3 mark soon.
While the diesel bubble has popped, oil and gasoline prices are recovering nicely with WTI actually moving higher for the week following a big decline in inventories while RBOB futures have bounced 8 cents off of their lows. Today is the last trading day for the summer-spec September RBOB contract, so there will be a big drop of around 22 cents when October takes the prompt position tomorrow. Most cash markets around the country have already rolled to trading vs the October futures, but those that haven’t are seeing differentials jump 20+ cents to offset that spread between the winter and summer grades.
The numerous refinery issues over the past 2 weeks showed up in the DOE’s figures with 4 of the 5 PADDs seeing lower run rates. PADD 2 was the exception to that rule as Midwestern refiners set a new record for run rates averaging more than 4.2 million barrels/day last week, which is more than 100% of their nameplate capacity. Those strong run rates help explain why PADD 2 is also the only region in the US with above average diesel inventories, while all others are closer to the low end of their 5-year range. Limited options to move those excess barrels also explains why ULSD in the Chicago region is trading 10-30 cents below neighboring markets.
Idalia has moved offshore as a tropical storm this morning, and it looks like the energy supply network dodged a bullet as terminal operations in the region appear to be unscathed and the EPA has issued another RVP waiver to allow higher than 9lb blends to come into the state to help with resupply. Tropical storm Jose formed overnight over the central Atlantic and the NHC is tracking 2 other systems, but none of them look to be a threat to the US so we’ll get to catch our breath for a couple of days before the peak of the season.
Week 35 - US DOE Inventory Recap
West Coast Diesel Differentials Continue To Surge This Week
Oil prices are seeing modest gains to start Wednesday’s session following a big decline in inventories, while refined products are seeing modest losses in the early going with a pair of bearish fundamental notes having ULSD lead the move lower once again.
Adding to the downward pressure on distillates - that are currently trading down about 13 cents for the week - are reports that China will increase export quotas next month, allowing the country’s newly minted refineries to crank up their sales overseas. The $3.20 range still looks pivotal for ULSD futures as both Monday and Tuesday saw intraday trading below the weekly trend-line near that level, only to settle above. If that recovery trend continues, there’s a good chance of a big rebound in the back half of the week, but it will have to happen soon as we’ll see a 4 cent drop in values when October takes the prompt spot Friday.
The API reported a huge draw in crude oil inventories of more than 11 million barrels, while gasoline stocks increased by 1.4 million barrels and diesel stocks increased by 2.5 million. The EIA’s weekly report is due out at its normal time this morning and will offer the first glimpse at the actual impact of the numerous refinery issues over the past week that have stirred up both futures and some cash markets.
West Coast diesel differentials continue to surge this week, with San Francisco, LA and PNW markets all trading at or above 50 cent premiums to futures. Gasoline premiums have been holding at high differentials of 60-70 cents over October RBOB futures as the region moves through its last month of summer-grade product with last year’s spike to $2/gallon premiums still fresh on many minds.
Hurricane Idalia reached category 4 status overnight before making landfall in Florida near the Big Bend Wildlife Management Area this morning as a major Category 3 storm. The landfall was roughly 160 miles north of Tampa Bay, which seems to be far enough to have avoided major damage as at least one Tampa Bay terminal has already resumed loading operations this morning. Meanwhile, other terminals across Florida such as Orlando, Jacksonville, Niceville and Pensacola all seem to be operating so far despite the threats of heavy rain and potential power outages. More potential good news is that the latest projected path has the storm turning east faster than earlier projections which should lessen the time spent over the flood-prone Carolinas.
We’re still 2 weeks away from the typical peak of hurricane activity, and the NHC is tracking 4 other storms in the Atlantic, though fortunately none of them looks to be a threat to make landfall in the US.
Gasoline Prices Don’t Look As Bullish On The Charts With Only 3 Trading Days Left, Hurricane Franklin Reached Category 4 Status
Refined product prices came back to earth Monday after the tank fire at the Garyville LA refinery that sent prices soaring on Friday was finally extinguished with reports suggesting that no damage was done to operating units at the refinery.
The 10-cent drop puts ULSD at risk of snapping its record-setting 9 consecutive weeks of gains, even though the trend line that’s seen prices rally nearly $1/gallon during that time is still intact at the moment. If we see a sustained move below $3.20 for ULSD, the charts suggest we could see another 10-20 cents of downside soon as a natural correction of this big rally, but if the $3.20 range support layers hold, the door is still open to rally north of $3.50 as we head into fall.
Gasoline prices meanwhile don’t look nearly as bullish on the charts, and there are only 3 trading days left before the last summer-spec futures contract of the year goes off the board and we start the winter gasoline season. Both the technical and seasonal factors suggest that outside of a major supply disruption, it’s more likely we’ll see RBOB trading at $2.40 soon than it is we’ll see a run at $3.
Idalia is currently a category 1 hurricane and is expected to reach category 3 status before making landfall in Florida’s big bend region overnight. Port Tampa Bay is still at risk of flooding from storm surge which is expected to be 4-7 feet in that area, but the latest path keeps the worst parts of the storm well away from major population centers and ports, which means the impacts on supply should be localized despite the dangerous nature of this storm. Numerous ports in Florida and further east in the Gulf Coast have begun to limit operations as the storm passes and terminals in the area are expected to close around noon today. Non-essential personnel are being moved off of oil platforms in the Gulf of Mexico, but the storm is far enough east that it shouldn’t do any damage to production or refining assets.
The other type of storm in Tampa that’s been causing all sorts of headaches for suppliers attempting to top off tanks ahead of Idalia may require an EPA waiver to allow the contaminated product to be re-loaded onto ships and sent back to a refinery rather than attempting to truck out millions of gallons of transmix, which could take months given the location and looming demand for trucks in the wake of the hurricane.
Hurricane Franklin has reached Category 4 status in a reminder of what record warm water temperatures can produce as it moves north roughly 500 miles east of Jacksonville FL this morning but is hooking east and will stay far off shore. The NHC is tracking 2 other systems in the Atlantic, both given 50% odds of being named, but both looking like they’ll also stay out to sea.
The EPA issued a waiver for El Paso’s boutique 7.0lb RVP gasoline Monday, citing unplanned outages at the Alon Big Spring and Marathon El Paso refineries that have caused fuel shortages in recent weeks. The waiver allows for 9lb RVP gasoline, or 10lb RVP if blended with ethanol, through the end of the summer-grade season ending September 16.
Concerns Over Refinery Issues Seemed To Be The Major Theme That Sparked The Rush Of Panic Buying Friday
Energy prices are coming back to reality this morning after a runaway Friday rally got a bit out of control. ULSD futures led the way in both directions, adding 15 cents Friday to hit a new 7 month high at $3.3355, before pulling back by 7 cents this morning as cooler heads seem to be prevailing. Despite that pullback, the strong finish last week keeps the door open for a rally towards the 2023 high of $3.58 as long as prices can sustain their move north of $3.20 this week.
Concerns over refinery issues seemed to be the major theme that sparked the rush of panic buying Friday, although the forecast of a Hurricane reaching the Gulf of Mexico probably didn’t hurt even though it’s not a threat to most energy infrastructure.
The big story was a tank fire at Marathon’s 596mb/day plant in Garyville LA, which is the 3rd largest refinery in the country. Even though the fire was in a storage tank, and not an operating unit, the reports that operations were temporarily suspended as a precaution created a flurry of buying activity just before the settlement Friday. Terminal operations at the plant resumed Friday evening which suggests the fire will not have a lasting impact on operations, which goes a long way to explain the pullback in prices this morning.
Meanwhile, two of the TCEQ frequent flyers both reported upsets Friday. The Valero Mckee refinery reported flaring after a power loss Friday afternoon, which occurred as the facility was attempting to finalize repairs after an upset earlier this month. Marathon’s Galveston Bay facility continues to struggle to go even 1 week without some sort of mishap, this time reporting a fuel oil leak inside a containment dike. Exxon reported an upset at an FCC unit in its Beaumont TX facility overnight that caused brief flaring, but no reported unit shutdowns.
While the headlines were focused on Gulf Coast activities, the biggest price moves Friday were on the West Coast. Both LA and SF diesel basis saw big increases that pushed differentials and outright prices to their highest levels of the year even though the other US spot markets shrugged off the refinery news.
Tropical Storm Idalia formed off the Yucatan peninsula over the weekend and is expected to become a major hurricane before making landfall near Florida’s big bend early Wednesday morning. The storm is far enough east as it moves quickly through the Gulf of Mexico that it’s not a major threat to oil production and refining assets, although we can expect precautionary shutdowns of some offshore wells the next 2 days.
Unlike last year’s Hurricane Ian, which spared the Tampa Bay area with a late shift in its path, this storm looks like it will keep Tampa on the eastern side meaning it will be pushing water inland which could be trouble for the terminals around the bay which are right on the water’s edge. Unfortunately, another type of storm at a local terminal has complicated efforts to fill up customer tanks ahead of this system.
Hurricane Franklin has reached Major hurricane status this morning but is staying roughly 500 miles off of the East Coast as it makes its way north and does not appear to be a direct threat to land, although its high winds and waves could cause some challenges for vessels in the area. There’s another storm system given 50% odds of developing this week by the NHC off the West Coast of Africa, but it looks like it will be far enough north that it should stay out to sea.
Money managers reduced their speculative length (bets on higher prices) on most energy contracts last week with WTI, Brent, RBOB and Gasoil contracts all seeing declines. ULSD prices were the exception with new length added and old shorts reduced, pushing net length up by 17% on the week to a 22-month high. Open interest in refined products continues to increase with ULSD positions now at their highest level in 18-months.
Baker Hughes reported another large decline in the US drilling rig count with a net decrease of 8 oil rigs and 2 natural gas rigs last week. That decline brings the total count to a fresh 18 month low.
The Bulls Look Like They’ve Regained Control Of The Energy Markets Temporarily
The bulls look like they’ve regained control of the energy markets temporarily, with ULSD once again leading the push higher for what will be a 9th straight week of gains if prices can hold above $3.16 today. June 23rd marked the last week when ULSD finished lower, settling at $2.4071 that Friday, vs $3.2005 this morning. Anyone looking for a reason that this might finally be the end of diesel’s summer rally may point to the fact that despite the higher weekly settlements, ULSD prices have not yet broken the high trade of $3.2310 set August 10th.
RBOB futures are up almost a dime from Wednesday’s low but still need to add a couple more cents if they’re to avoid their 2nd straight weekly decline. There are just 5 trading days left in the September RBOB contract which marks the last summer grade spec contract of the year and with October RBOB trading 20 cents lower, this may be the bulls last chance to stage a meaningful run at $3 this year.
The strength in energy futures came despite a big reversal lower in US equity markets Thursday just in time for the FED Chairman’s speech this morning that many think will show that the central bank is still not done with its inflation fighting rate increases. After moving in lockstep earlier this summer, the correlation between daily price moves in energy and equity markets has gone negative in the past 2 weeks.
The NHC is still tracking 4 storm systems in the Atlantic this week, although none look to be a direct threat to the US. Tropical Storm Franklin is expected to reach Category 2 hurricane status next week as it moves north a few hundred miles off the East Coast, which will create some high seas and dangerous currents, but should not be a major factor on supply or demand. The other 3 systems are all given low (20-30%) odds of being named.
Startup troubles: The Cenovus (FKA Husky) refinery in Superior Wisconsin was evacuated for a 2nd straight day Thursday after a leak. No injuries or damage to the recently rebuilt facility were reported but it’s not helping the facilities reputation after it blew up 5 years ago and forced much of the town into an emergency evacuation to avoid toxic fumes.
Haven’t changed their mind: Despite selling multiple refineries in the US in the past few years, just before US refineries had record profits, Shell seems committed to its plans to reduce traditional refining capacity with reports that it will soon be offloading its 237,000 barrel/day plant in Singapore. With numerous new refineries trying to take control of the Asian markets, and a military looking to flex its muscle in the South China Sea, Sinopec’s interest in the facility will no doubt be a topic of much debate in the weeks to come.