Big Reversal Underway In Energy Futures

Market TalkMonday, Mar 8 2021
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A big reversal is underway in energy futures that are trading lower this morning after an overnight price spike. So far, the selling is relatively minor, and hasn’t threatened the upward-sloping trend lines that have held this rally for more than four months. While a pullback is warranted given the markets’ overbought condition, we saw multiple similar selloffs fail to pick up steam in last week’s big rally, and we’ll need to see product prices dip another nickel or more before we can say this time is different.

News that the Houthi rebels had launched another coordinated missile and drone attack on Saudi Arabian oil assets Sunday had the market spiking overnight, with oil prices up $2/barrel and products up more than 4 cents/gallon. All contracts reached new 12+ month highs in the overnight session, with WTI trading at its highest level since October 2018 and RBOB reaching its highest since April of 2019. The gains proved short lived however as the Saudi facilities are reportedly continuing to operate with minimal disruption, giving buyers reason to doubt the sustainability of current prices after the furious rally in recent weeks.

The great refinery recovery is progressing, with multiple units reported to be initiating restart over the past few days, but supplies remain tight across the gulf coast, causing some slowdowns in pipeline batches that is causing more markets across the country to feel the impact of February’s polar plunge. Rare shipments of gasoline from Europe to the U.S. Gulf Coast are in route, and should help keep the runouts contained.

Money managers are starting to build short positions in WTI and RBOB, cutting the net length held in those contracts modestly on the week. ULSD is a different story with a large increase in new length added last week, betting on higher prices even though diesel values have already nearly doubled in the past four months. The CFTC’s report data is compiled on Tuesday, which means the new shorts got a rude welcome from the huge rally in the back half of the week while the diesel buyers were rewarded.

Baker Hughes reported a net increase of one oil rig drilling in the U.S. last week, with the Permian basin adding three rigs, the Barnett adding one (its only active oil rig) while Williston declined by one and other smaller basins declined by two. The total U.S. count at 310, is at its highest level since the first week of May 2020, but remains 540 rigs lower than where it was 2 years ago, even as oil prices are 10% higher today than they were then.

The Dallas FED released a study last week with projections for Permian production following the anticipated restrictions on Federal lands. The report projects that total output will likely decline by 230mb-490mb per day, most of which will hit New Mexico drillers since all of Texas’ fields are on private or state land.

The EIA this morning reported on the growing role of U.S. Propane exports, which surpassed total diesel exports in 2020. Most of the propane exports are heading to Asia to meet growing demand for heating and petrochemicals, a reminder that the expected growth in petroleum in the coming decades is not likely to be from transportation. 

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Energy Markets Are Ticking Modestly Higher Heading Into The Easter Weekend With Crude Oil Prices Leading The Way Up About $1.25/Barrel Early Thursday Morning

Energy markets are ticking modestly higher heading into the Easter Weekend with crude oil prices leading the way up about $1.25/barrel early Thursday morning, while gasoline prices are up around 2.5 cents and ULSD futures are about a penny.

Today is the last trading day for April HO and RBOB futures, an unusually early expiration due to the month ending on a holiday weekend. None of the pricing agencies will be active tomorrow since the NYMEX and ICE contracts are completely shut, so most rack prices published tonight will carry through Monday.

Gasoline inventories broke from tradition and snapped a 7 week decline as Gulf Coast supplies increased, more than offsetting the declines in PADDs 1, 2 and 5. With gulf coast refiners returning from maintenance and cranking out summer grade gasoline, the race is now officially on to move their excess through the rest of the country before the terminal and retail deadlines in the next two months. While PADD 3 run rates recover, PADD 2 is expected to see rates decline in the coming weeks with 2 Chicago-area refineries scheduled for planned maintenance, just a couple of weeks after BP returned from 7 weeks of unplanned repairs.

Although terminal supplies appear to be ample around the Baltimore area, we have seen linespace values for shipping gasoline on Colonial tick higher in the wake of the tragic bridge collapse as some traders seem to be making a small bet that the lack of supplemental barge resupply may keep inventories tight until the barge traffic can move once again. The only notable threat to refined product supplies is from ethanol barge traffic which will need to be replaced by truck and rail options, but so far that doesn’t seem to be impacting availability at the rack. Colonial did announce that they would delay the closure of its underutilized Baltimore north line segment that was scheduled for April 1 to May 1 out of an “abundance of caution”.

Ethanol inventories reached a 1-year high last week as output continues to hold above the seasonal range as ethanol distillers seem to be betting that expanded use of E15 blends will be enough to offset sluggish gasoline demand. A Bloomberg article this morning also highlights why soybeans are beginning to displace corn in the subsidized food to fuel race.

Flint Hills reported a Tuesday fire at its Corpus Christi West facility Wednesday, although it’s unclear if that event will have a material impact on output after an FCC unit was “stabilized” during the fire. While that facility isn’t connected to Colonial, and thus doesn’t tend to have an impact on USGC spot pricing, it is a key supplier to the San Antonio, Austin and DFW markets, so any downtime may be felt at those racks.

Meanwhile, P66 reported ongoing flaring at its Borger TX refinery due to an unknown cause. That facility narrowly avoided the worst wildfires in state history a few weeks ago but is one of the frequent fliers on the TCEQ program with upsets fairly common in recent years.

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

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Most Energy Contracts Are Ticking Lower For A 2nd Day After A Trickle Of Selling Picked Up Steam Tuesday

Most energy contracts are ticking lower for a 2nd day after a trickle of selling picked up steam Tuesday. ULSD futures are down a dime from Monday’s highs and RBOB futures are down 7 cents.

Diesel prices continue to look like the weak link in the energy chain, with futures coming within 1 point of their March lows overnight, setting up a test of the December lows around $2.48 if that resistance breaks down. Despite yesterday’s slide, RBOB futures still look bullish on the weekly charts, with a run towards the $3 mark still looking like a strong possibility in the next month or so.

The API reported crude stocks increased by more than 9 million barrels last week, while distillates were up 531,000 and gasoline stocks continued their seasonal decline falling by 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning.

RIN values have recovered to their highest levels in 2 months around $.59/RIN for D4 and D6 RINs, even though the recovery rally in corn and soybean prices that had helped lift prices off of the 4 year lows set in February has stalled out. Expectations for more biofuel production to be shut in due to weak economics with lower subsidy values seems to be encouraging the tick higher in recent weeks, although prices are still about $1/RIN lower than this time last year.

Reminder that Friday is one of only 3 annual holidays in which the Nymex is completely shut, so no prices will be published, but it’s not a federal holiday in the US so banks will be open.

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