A February Futures Flop Is The Theme In Energy Markets After A Big Mid-Day Reversal Thursday Sent Prices Sharply Lower To Start The Month

Market TalkFriday, Feb 2 2024
Pivotal Week For Price Action

A February futures flop is the theme in energy markets after a big mid-day reversal Thursday sent prices sharply lower to start the month. The big slide Thursday was a head-scratcher for many, with the only guess for a cause circulating being fake reports of a cease-fire in Gaza.  While prices did rebound from the lows of the day, they still ended with heavy losses and continued to sell off overnight, suggesting there’s more to the liquidation than just a bit of fake news.

Futures and cash markets continue to see the world differently most days in 2024, with a solid January rally in futures coming despite many physical markets showing weakness, only to see February selling in futures as cash markets are rallying.

The big story in physical markets Thursday was a 30-cent rally in Chicago basis values following news that BP’s Whiting IN refinery was evacuating and shutting down following a power outage. The evacuation of more than 200 employees created some nervous moments as the company has become somewhat notorious for deadly explosions over the past 2 decades, but fortunately no injuries are being reported. 

The Chicago-metroplex refinery is the largest in the Midwest (PADD 2) and the 8th largest in the country and has a reputation for creating outsized influence on cash markets when it’s had issues in the past. The entire Midwest has been drowning in product throughout the winter as high run rates and soft demand push inventories to levels we haven’t seen since the COVID lockdowns 4 years ago. The panicked reaction in both cash prices, and terminal allocations across the region suggest that this may soon change. Drone footage of the scene is noteworthy in that it shows significant flaring as would be expected from an unplanned shutdown, but most likely no other damage. It’s also a good reminder of how big and complicated these facilities are. One other piece of good news is that unlike an unfortunate incident at that refinery in 2012, no monkeys were reported to be injured. 

Meanwhile, Ukrainian drone attacks on Russian refineries appear to be having a material impact on Russia’s refined product exports, although those impacts don’t appear to be influencing prices in the US or Europe as those regions haven’t been buyers for the past 2 years.  

Exxon and Chevron rounded out the earnings season this morning confirming the theme we’ve seen from just about everyone else: 2023 wasn’t the best year ever for petroleum producers and refiners, it was the 2nd best, trailing only 2022, which helps explain the buying spree we’ve seen in recent months.   Improving efficiency in on-shore fracking operations (wells are producing more than ever despite a big decline in rigs) and some major off-shore successes continue to drive the upstream growth, while refined product markets are finally losing the tailwinds, they enjoyed for nearly 2 years following Russia’s invasion of Ukraine.

One of Chevron’s 2023 business highlights was completing a conversion of its El Segundo CA hydro treater so it can now process either 100 percent renewable or traditional feedstocks, which is certainly going to have others who chose to convert refineries instead of co-process wishing they’d thought of that.

Exxon has been quiet on the Renewable Fuels front ever since its partner in California failed last year, but did highlight the launching of its new lithium business, which will leverage the company’s extensive geology expertise to produce new supply from deposits in southwest Arkansas. 

Good news is bad news for stocks: The January payroll report showed an increase of 353,000 jobs during the month, more than double most estimates, and unlike almost every month last year, the report also increased the job increases for both December and November. Hourly earnings were also up more than the “official” predictions, adding to the concerns about sticky inflation. Combined, that report should give the FED more than enough justification to hold off on cutting rates quickly, something the market has been struggling to come to terms with. Refined products dipped further following the report, although the moves were minor and continue to suggest that energy and equity prices will do their own thing more often than not.

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

Market Talk Update 2.22.24

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Pivotal Week For Price Action
Market TalkFriday, Feb 23 2024

The DOE Report Sparked A Solid Rally In Energy Futures Thursday, But That Upward Momentum Proved Short-Lived

The DOE report sparked a solid rally in energy futures Thursday, but that upward momentum proved short-lived as prices gave back those gains overnight, despite US equity markets surging to all-time highs.

The weekly inventory report showed US refiners are struggling to come back online from a busy maintenance season that was further complicated by January’s cold snap and the unexpected shut down at BP Whiting. Refinery utilization held near 80% on the week, which helped pull gasoline inventories lower despite sluggish demand and a surge in imports along the East Coast. Diesel demand showed a big recovery from last week’s ugly estimate, and when you factor in the missing 4-5% that doesn’t show up due to RD not being included in the reports, actual consumption looks much healthier than the report suggests.

Based on reports of restarts at several major refineries this week, we should see those utilization numbers pick up in next week’s report.

The EPA Thursday approved year-round E15 sales in 8 corn-growing states, despite the fact that the extra ethanol blends have been shown more to pollute more in the warm times of the year. The effective date was pushed back a year however in a show of election-year tight rope walking, which the EPA couched as ensuring that the move wouldn’t lead to a spike in fuel prices this summer.

Of course, the law of unintended consequences may soon be at play in a region that tends to be long gasoline supply for large parts of the year. Removing 5% of the gasoline demand could be another nail in some of the smaller/less complex refineries’ coffins, which would of course make fuel supply less secure, which contradicts one of the main arguments for making more 198 proof grain alcohol and selling it as fuel. Ethanol prices meanwhile continue to slump to multi-year lows this week as low corn prices continue to push unusually high production, and the delayed effective date of this ruling won’t help that.

While Nvidia’s chip mania is getting much of the credit for the surge in equity prices this week, there was also good news for many more companies in reports that the SEC was planning to drop its requirements on Scope 3 emissions reporting which is particularly useful since most people still can’t figure out what exactly scope 3 emissions really are.

In today’s segment of you can’t make this stuff up: The case of chivalry gone wrong with the BP/TA acquisition, and a ketchup caddy company caught spoofing electric capacity.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

Week 7 - US DOE Inventory Recap

Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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