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Refined Product Futures Attempting A Recovery Rally After Monday Sell-Off
Refined product futures are attempting a recovery rally this morning after a big Monday sell-off pushed prices to 3-week lows. A few cash markets for gasoline around the U.S. ticked down to their lowest levels of the year during Monday’s rout as the big physical players are backing off purchases ahead of winter. Today is expiration day for November RBOB and ULSD contracts, so if your cash market hasn’t already transitioned, make sure you’re watching the HOZ and RBZ contracts for direction.
Oil prices are now trading lower than they did when the war broke out 3.5 weeks ago as there continue to be no signs of supply disruption beyond the war zone. Charts continue to favor lower prices in the weeks ahead, with the downward trend lines that started at the end of summer still intact and a bearish wedge pattern is forming that threatens a big move lower should the October lows break.
The Dallas FED’s manufacturing survey showed “tepid” growth for a 2nd month in October, following several months of contraction. Chemical manufacturers noted the uncertainty surrounding the Middle East war, and how it could help prices, but also could hurt the world economy.
Flint Hills reported another upset at its Corpus Christi West refinery over the weekend that affected operations at an FCC unit. It’s unclear what caused this upset, or if it was related to last week’s power-loss-induced shutdown. There have been a rash of issues at the Corpus-area refineries the past couple of months, but so far there have not been major impacts on supply in the San Antonio/Austin/DFW corridor they serve.
A storm brewing in the Caribbean will bear watching for the next few days. The system is now given 70% odds of being named, and while the European forecasting model has it plowing into Central America, the US GFS model suggests it may just brush Central America before hooking north and east back towards Florida. It still seems like a long shot this will be a threat to the Gulf of Mexico oil production and refining zones, but with the wide range of forecasts – not to mention the huge forecasting error last week with Hurricane Otis, anything seems possible at this point.
Marathon reported another strong quarter with average refining margins north of $26/barrel and 94% utilization. The company did not break out the earnings for its renewables segment but did note it was on pace to increase output at the Martinez renewable refinery to roughly 47mb/day by the end of the year.
BP also had strong results from its refining group during the quarter, but its stock is pointing lower this morning as its results continue to lag behind expectations, and the company had to write off more than $500 million on a failed wind project in New York. A WSJ article this morning suggests the terrible results this quarter for EV and Wind producers will lead to the next round of government bailouts to avoid their grand plans from going bust.
Energy Futures Are Seeing A Modest Sell-Off To Start The Week
Energy futures are seeing a modest sell-off to start the week, keeping the downward trend-line intact for refined products despite a bounce in prices to end last week. While the ground war in Gaza advances, there are still no signs of disruption to global supply flows, easing concerns that the war’s escalation will impact prices.
Money managers had another conflicting week, making small reductions in net length for WTI, Brent and ULSD, while adding to their bets for higher prices in RBOB and Gasoil contracts.
Perhaps the most notable change in the large speculator positions on the week were the large increases in short positions, suggesting some funds saw the price spike when the war broke out as a good selling opportunity.
Baker Hughes reported an increase of 2 oil rigs drilling in the US last week, a 3rd straight week of increases after declining steadily the first 9 months of the year. There has been much speculation on how Exxon’s purchase of Pioneer may impact drilling activity in the Permian basin, which accounts for roughly 60% of the rig count and production in the US. Some analysts believe the redundancy between the two systems will lead to a lower rig count, while others think the combined entity will be able to drill new parts of the Permian that have yet to be developed.
We’re just about down to the last month of the Atlantic Hurricane season, and the NHC is tracking two more potential systems. One is approaching the Bahamas but is given only 20% odds of developing and early models suggest another favorable pattern will push this storm out to sea. The other is given 50% odds of being named but so far appears like a threat to Central America, not the US.
Diesel Bulls: A Major Cold Front is About To Sweep Across The Country, Which Will Certainly Stir Up Some Heating Demand
While the bulls have the early momentum, this latest in a series of rallies tied to fears of supply disruptions seems to be lacking the enthusiasm of earlier versions, and we’ll need to see another 8-10 cents of gains from refined products to break the downward trend on the weekly charts.
What a difference a week makes: If you needed ULSD in the Group 3 market last Friday, you needed to pay $1.05-$1.15/gallon premium over the November Futures contract to hit an offer. Today, those same barrels are being offered for a $.01 discount. While much less dramatic, we have seen steady selling in most other regional basis markets as well as physical traders are having to offer lower differentials to overcome the backwardation in futures. One hope for the diesel bulls: A major cold front is about to sweep across the country with 30-40 degree temperature drops forecast, which will certainly stir up some heating demand.
We continue so see stronger values for space on Colonial pipeline as Gulf Coast refiners seem to be having a hard time moving their excess supply. Both Line 1 and 2 values reached their highest levels of the year this week, as lower basis values for both gasoline and diesel along the Gulf Coast opens up the arbitrage window to ship barrels to New York. It’s not uncommon to see stronger line space values throughout the winter months as the weak demand season puts downward pressure on Gulf Coast values. This year the added element of major turnarounds at 2 East Coast refineries is likely contributing to the early strength as well.
Ethanol prices were already coming under pressure this week following weakness in the corn market, and that selling accelerated after the DOE’s weekly report showed a jump in ethanol inventory and production. Values are once again hovering near 2-year lows as we head into what are traditionally the weaker months for demand which could put more downside pressure on alcohol prices.
Q3 earnings releases have been a mixed bag so far, with a general theme of healthy profits that are a far cry from last year’s record setting figures.
Valero beat estimates as its refineries ran at 95% of capacity for the quarter and were able to capitalize on downtime at other facilities. The company’s renewable diesel operations saw nearly a 25% increase in volume from year ago levels, but profits were nearly cut in half as the drop in RIN and LCFS credits took a bite out of earnings. On the flip side, their ethanol earnings surged to nearly $200 million in the quarter from break even a year ago.
Exxon noted $2.4 billion in refining-related earnings for the quarter, up substantially from Q2 as its new Beaumont units helped the company hit record throughput rates along with strengthening crack spreads. An interesting bullet point in the Exxon earnings release was a negative mark-to-market impact on its trading operations, which will raise questions as the company’s relatively new strategy to leverage its trading expertise appears to be disappointing so far.
Diesel Has Held Above Its 5-Year Seasonal Average For A 2nd Straight Week
After a wild Wednesday session that saw heavy morning losses turn into afternoon gains, energy contracts are selling off again to start Thursday’s session.
The war in the Middle East continues to contribute to some whipsaw action in prices with energy futures selling off sharply at one point Wednesday after reports that Israel was postponing its ground invasion of Gaza, only to quickly rally once the trading algorithms got past the headlines to see that the delays were only to allow US military forces more time to prepare for expected confrontations with neighboring countries.
When supply fears aren’t driving the action, demand fears seem to be taking hold as signs of weakness from the US and Europe continue to keep traders and refiners on edge about what’s ahead this winter.
Want to know why Colonial line 1 values have spiked north of 7 cents/gallon this week? Take a look at PADD 3 gasoline inventories and you’ll get a feel for the struggle Gulf Coast refiners seem to be having finding a home for their barrels. More concerning for those producers is we are just starting the seasonal demand slowdown, and refinery runs are currently reduced, so things could get worse in the coming months. The EIA’s gasoline demand estimate remained below the 5-year average for a 7th straight week.
Diesel demand meanwhile held above its 5-year seasonal average for a 2nd straight week, keeping inventory levels in most regions near the bottom of their seasonal range. The exception is in PADD 5 where inventories have surged in the past 2 weeks to the top end of their seasonal range in another example of the cure for high prices being high prices, as 60 cent basis premiums attracted barrels from far and wide leading to the inevitable collapse in values over the past two weeks.
It looks like the US is dodging yet another hurricane bullet this week as Tammy turns back out to sea without threatening land. Mexico is not as fortunate as Acapulco saw a tropical storm turn into a category 5 hurricane in less than a day before making a direct hit on the city. That record-setting intensification is exactly what many were afraid would happen in the Gulf of Mexico this year given the record warm water, but now we’re just a few weeks away from getting to put those concerns on the back burner until next summer.
Week 43 - US DOE Inventory Recap
The Drop In Diesel Prices Is Being Blamed On The Economic Slowdown In Europe
ULSD futures are trading lower for a 4th straight day with early losses around 3 cents for the November contract, marking a 20 cent drop from Friday’s highs. RBOB gasoline futures are heading the opposite direction in the early going, with 2.5 cent gains taking back some of yesterday’s big losses.
Much of the drop in diesel prices is being blamed on the economic slowdown in Europe, which was highlighted this week by weak manufacturing and spending data from Germany and France. The diesel weakness isn’t limited to futures trading, with basis markets across the country moving lower this week, and most regional cash markets trading now trading at a discount to futures.
Headlines continue to suggest that de-escalation of the war in Gaza is the reason prices have pulled back, even though attacks on US and Israeli targets from Iran-backed groups has surged in recent days. Perhaps more important than the diplomacy hopes is that Saudi-Arabia’s long time opponent Yemen fired cruise missiles that were intercepted by a US naval ship and Saudi defenses, which is a sure sign that the world’s biggest oil exporter is unlikely to join forces with the Iranians as they did 50 years ago.
The API reported inventory declines across the board last week with gasoline stocks down 4.2 million barrels, diesel down 2.3 million and crude oil down 2.7 million barrels. The EIA’s weekly report is due out at its normal time today, but the agency has given notice that its reports two weeks from now will be delayed to complete a system upgrade.
China is reining in the rampant refinery expansions we’ve seen the past couple of years, by setting a national capacity cap and minimum size limits on new facilities. It appears that these new regulations won’t impact the new facilities under construction, so near term, the country is still poised to control the refined product trade flows to and from Asia, depending of course on what the Politburo allows those facilities to do.
A Bloomberg opinion piece this week highlights the recent challenges for gasoline margins at the refining level, and notes how the Middle East flare up makes the rationalization process for refining more complicated. For those that prefer the cliff notes version: “The economically rational response would be to close less competitive refineries, leaving room for the largest, most advanced plants to run profitably. But 50 years on from an attack on Israel that sparked the first oil crisis, and with the Middle East in turmoil once more, economic rationality counts for only so much in a world where energy security is again in focus. Pressure on gasoline margins will challenge governments as much as it will refiners themselves.”
Valero reported an upset at its Three Rivers refinery in South Texas Thursday, with unplanned flaring expected to last 24 hours. This comes a day after a power loss impacted multiple facilities in the Corpus Christi area.