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Market TalkWednesday, May 31 2023

The Slide Continues This Morning With Fuel Futures Down Another 2% And Oil Down 3%

Energy futures settled down around 4% across the board yesterday. RBOB and HO prompt month contracts lost just shy of 11 and 9 cents, respectively, and WTI and Brent dropped $3.21 and $3.38 on the day. The slide continues this morning with fuel futures down another 2% and oil down 3%, following a report showing a decline in the Chinese manufacturing purchasing managers index. The uncertain economic situation has resulted in reduced expectations for oil demand and downward pressure on oil prices. Attention is now turned to the upcoming June 4 OPEC+ meeting to determine whether further production cuts will be implemented.

Southern Rock Energy Partners is proposing the construction of a large-scale oil refinery in Cushing, Oklahoma, the oil hub which sets the WTI benchmark. If successful, it would be the first refinery built in the US in 50 years and could potentially lower gasoline and diesel prices. The refinery, with a projected capacity of 250,000 barrels per day, would exclusively process US-produced oil. However, analysts remain doubtful about the project's viability due to the complexities involved in obtaining permits, securing financing, and navigating the volatile nature of the industry.

Equitrans Midstream, the energy company with the largest stake in the 303-mile MVP Pipeline, saw a boost in its stock price yesterday following the inclusion of favorable provisions in the tentatively supported debt ceiling agreement in the House of Representatives. The agreement's provisions, which limit judicial review and accelerate federal permits, increase the likelihood of approval for the MVP Pipeline. However, the debt ceiling deal still requires congressional approval, and potential legal challenges outside the agreement's parameters may arise. Despite optimism, the pipeline's approval is not guaranteed.

Following a partial restart in April, the Cenovus Toledo Refinery in Ohio, formerly owned by BP, is set to restart its larger 115,000 b/d crude unit this week after being shut down since an explosion took the lives of two workers back in September last year. The company expects to resume planned run rates after the restart.

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Market TalkTuesday, May 30 2023

Energy Futures Are Sinking Lower So Far In This Week’s First Full Trading Session

Energy futures are sinking lower so far in this week’s first full trading session. The gasoline contract is leading the complex lower, shaving off 5 cents per gallon for a 2% loss to start the day. Heating and crude oil prices are following suit, trading 3 cents per gallon and $1.25 per barrel lower so far this morning.

The market excitement of an imminent debt deal reached by the White House and Congress seen in Monday’s trading has given way this morning. The agreement to suspend the US debt limit for the next two years agreed upon by President Biden and Speaker McCarthy originally had prices drifting higher, until uncertainties surrounding yet another rate hike by the Fed in June threw a wet blanket on bullish sentiment.

While not exactly taking credit for this morning’s selling action, the rise in tension between OPEC and its ‘+’ is certainly being considered by futures traders. Despite sundry sanctions, Moscow continues to peddle cheap crude, undermining Saudi Arabia’s/OPEC’s designs on “stabilizing” global oil prices. Last week, the Kingdom’s energy ministers issued a warning to those short selling oil futures, claiming that further production cuts are being considered.

Money manager’s net length in WTI futures continued to drop last week, with yet another refreshed round of bearish bets on the American crude oil benchmark. Speculation on European crude oil bounced in the bullish direction however, with an increase of more than 16,000 long positions. Covering shorts seems to be the stance taken on RBOB last week with only 705 new short positions while 10,607 bets were placed on higher prices.

Open interest in the NYMEX HO contracts continued to rise last week, while managers continued to shift to a hands-off approach on WTI futures following the aforementioned warning from Saudi Arabia on what will happen to short sellers.  

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Market TalkFriday, May 26 2023

Memorial Day Gasoline And Diesel Prices Down From Last Years Record Setting Levels

Energy prices are ticking modestly higher after a big Thursday sell-off wiped out most of the gains made earlier in the week as a pair of disagreements continues to keep traders guessing. 

Drivers heading out for Memorial Day weekend are enjoying retail gasoline prices that are more than $1.20/gallon less than last year’s record setting levels on average, thanks to the world’s supply network adjusting to the Russian supply shock. The year-on-year price drop is even more dramatic for diesel prices that are down $1.65/gallon on average, thanks to the “freight recession” pushing demand sharply lower.

Deal or no deal?  The political theatre continues in Washington with both sides preparing to declare victory in the debt debate, while dragging out the negotiations to the last minute in an effort to boost ratings.

Saudi Arabia and Russia are sending mixed messages on oil production quotas a week before the next OPEC & Friends meeting. This isn’t exactly new as Russia has been violating its official quotas for some time (which isn’t too surprising considering these are the same people that invaded Ukraine twice in the past decade) but the big question is whether or not the Saudi’s decide to teach them a lesson and turn this into another price war as they did in 2014 and 2020.   

NOAA predicted a “near normal” hurricane season in the Atlantic this year, with an El Nino pattern developing which will act as a counterbalance to the high-water temps in the Atlantic to some degree.  The forecast does warn that conditions for tropical waves forming off of the coast of Africa are favorable, which is where several of the biggest storms of all time have formed.  The outlook ends with its annual warning that despite the prediction for less activity this year than we’ve seen the past 3 years, it still only takes 1 storm to cause major disruptions. 

Pemex auditors are apparently admitting that the new 340,000 barrel/day refinery that had a grand opening last year was still not ready to produce refined products, and that the most recent target of July 2023 “was not feasible”. 

The Dallas FED published a look at the rapid growth at the busiest energy export port in the US this week, and it’s not the one you think it is

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Market TalkThursday, May 25 2023

Gasoline Futures Plunge, Saudi-Russo Discord Dampens Rally

So much for the Memorial Day rally? Gasoline futures are dropping nearly 7 cents/gallon in the early going this morning, leading the energy complex lower, and wiping out the strong gains we saw Wednesday. Diesel prices are down 4 cents so far and are now just a penny away from wiping out their gains for the week. Prices did recover some of their early losses following the Q1 GDP estimate that came in slightly above earlier guesses, and showed the US economy continues to see modest growth despite all of the recession warnings. 

A day after the Saudi Oil minister threatened speculators shorting oil prices, a Russian official downplayed the chances of OPEC & friends agreeing to another output cut at its meeting next week, which seems to have sent some of the bullish bandwagon jumpers back to the sidelines. 

The DOE reported a surge in the estimated demand for gasoline and diesel last week, which pushed inventories to new lows for the year, with gasoline stocks now at their lowest seasonal level in more than 6 years. While the weekly demand estimates are notoriously volatile (aka unreliable) the diesel reading touched its 2nd highest level of the year and offered hope for producers who have been languishing under some of the worst seasonal consumption that we’ve seen in decades.

What a difference a year makes: This time last year distillate cracks were spiking north of $70/barrel, some $25/barrel more than gasoline, incenting refiners to maximize diesel output. This year, gasoline cracks are rallying to a 10-month high and are trading $8/barrel over diesel values. The forward curve still favors diesel output long term and shows profitable run-rates for refiners for the next 2 years, albeit at much more modest levels than the records we’ve seen set over the prior 12 months.

Oil inventories saw a huge decline of more than 12 million barrels last week, despite another SPR release of 1.5 million barrels. The EIA’s adjustment factor was at play again, with a reduction in the fudge factor accounting for 8 million barrels of the drop, while a big decrease in imports accounted for another 7-million-barrel decline last week, while exports held strong north of 4-million barrels/day.

Refinery runs ticked slightly higher for a 2nd week, and continue to hold near year-ago levels, and should continue to ramp up as a busy spring maintenance season comes to an end. The main impediment to seeing refiners reach maximum run rates in June appears to be the rash of fires that have been breaking out lately. It’s not just US refiners that are struggling with fires, multiple refineries in Mexico have had multiple issues in the past week, further complicating the issues we saw back in February when 3 fires broke out on the same day.  

Game change or pipe dream? Plans to build a 250mb/day oil refinery near the WTI delivery hub in Cushing OK were announced this week, with the facility claiming to operate on Hydrogen and Oxygen fuel sources that managers claim will reduce emissions by 95%. IF the project moves forward, construction is scheduled to start in 2024, with the first potential for supply starting in 2027.

The US Treasury published a progress report on the Russian Oil price cap last week, taking a page out of the DOE’s SPR playbook and patting itself on the back for a job well done. A Bloomberg article this morning details how India and China are the main beneficiaries of that plan. 

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Market TalkWednesday, May 24 2023

Week 21 - US DOE Inventory Recap

Market TalkWednesday, May 24 2023

Bullish Headlines Push Energy Prices Higher, Refinery Upsets Persist

Energy markets finally got something to talk about besides the debt debate Tuesday, with a pair of bullish headlines helping to push prices modestly higher once again. The move is relatively tame so far however, as shaky stock markets seem to be keeping optimism for a real rally at bay for now.

The API reported large declines in oil and gasoline inventories last week of more than 6 million barrels each, while distillates declined by 1.8 million barrels. The market jumped immediately following that report as it suggests that the demand doldrums that have plagued the industry for the past 6 months may finally be in the rear-view mirror. The EIA’s weekly report is due out at its normal time this morning and will be delayed next week due to Memorial Day. 

The Saudi oil minister issued another warning to oil speculators who have been shorting prices this year, once again using the threat of “ouching” which seems somewhat comical considering his country’s reputation regarding human rights. The market took those comments to mean that there’s a chance that the de-facto leader of OPEC & Friends would be pushing for more output cuts, and prices rallied following those statements. 

A week after suffering a deadly fire, the 3rd largest refinery in the country had another operational upset Monday, this time in a hydro-treating unit, according to a filing yesterday with the TCEQ. Gulf coast basis values continue to shrug off these reports, with little movement seen over the past week.

The Group 3 market did see a bit of a buying spree Tuesday after a fire broke out at the CVR refinery in Wynnewood OK, injuring two employees. Group 3 values had already been trading at healthy premiums to the Gulf Coast for most of the past 2 months as inventories dropped well below their seasonal range, and this latest tick higher should encourage more barrels to head north, particularly since the draw to ship barrels west is rapidly diminishing. 

Speaking of which, rack prices across the Southwestern US continue their return to earth as local refineries ramp up after spring maintenance, alleviating the severe product shortages, and sending premiums for prompt barrels plummeting 70 cents/gallon or more in the past 2 weeks.

A Reuters article Tuesday suggested the EPA was backpedaling on plans to introduce eRINs to the RFS program and was officially recommending delaying that move in the final ruling for 2023-2025 that’s due in 3 weeks. The more heavily traded D6 (ethanol) and D4 (bio) RIN values were little changed following the news, while the lightly traded D3 (cellulosic) RINs continued to recover after the initial plan sent their values sharply lower this year.

Click here to download a PDF of today's TACenergy Market Talk.