Bulls Temporarily Lose Control of Energy Market

Market TalkWednesday, May 19 2021
Pivotal Week For Price Action

The bulls have lost control of the energy market (temporarily at least) after failing to break through technical resistance during an early week rally. Today’s selling has a “risk off” feel to it, as it coincides with a big move lower in U.S. equities

After a strong start to Tuesday’s trade that had petroleum futures on the cusp of new multi-year highs, a sharp and sudden selloff knocked oil prices down $2/barrel and refined products 4-5 cents/gallon in just a few minutes after “reports” via Twitter - which were lost in translation - of a breakthrough in negotiations between Iran and the U.S. Those comments were later walked back and the market erased those losses later in the session in a glaring example of the volatility risk when headline reading algorithms can trade on their own. To be fair, it’s not like human traders are proving to be much more intelligent this week: confusing a furniture retailer for a cryptocurrency.

At least four different Gulf Coast refiners had to curb run rates due to the severe weather sweeping the region this week. So far cash markets shrugged off that news and supply allocations didn’t change suggesting minor impacts. There are two more days ahead of severe weather, and even if no more damage is done this time, these storms are saturating the ground ahead of hurricane season, which officially starts in less than two weeks and is forecast to be busy.

Suppliers still scrambling to resupply across the Southeast had a few nervous hours Tuesday after an announcement that Colonial Pipeline’s scheduling system was taken offline. Fortunately that situation was only caused by the upgrades being made to protect their system against future hacks (how’s that for closing the barn door after the horse has escaped?) did not impact shipments, and only lasted a few hours. Terminals across the region continue to face short term outages, but the situation continues to improve every day. 

While refined product prices have pulled back this week, RIN values continue to set new records, with D4 values trading north of the $2 mark Tuesday. That surge in values is adding a new level of pain to U.S. refiners that were just starting to recover from one of their worst years ever, as the RVO now takes nearly $10/barrel off of their gross margin.  

While the RFS subsidy for biofuels continues to trade at record highs, a new bill aiming to extend the $1/gallon biodiesel blenders tax credit subsidy for biofuels was introduced Tuesday, more than 18 months ahead of the current expiration of the BTC. That’s a novel concept given that for much of the past decade that credit was only approved retroactively.   

Meanwhile, read here about the boom in production of natural gas made from manure, thanks primarily to the subsidies paid by California’s LCFS program. Biomethane (AKA RNG) is the fastest growing category of fuel in the LCFS program, and now accounts for almost as much volume as biodiesel. That rapid increase in supply could help explain why LCFS credits are trading down on the year, while CCA credits used in the California/Quebec Cap & Trade program have been steadily moving higher. 

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

TACenergy MarketTalk 051921

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Market TalkFriday, May 17 2024

The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

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

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Market TalkThursday, May 16 2024

Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

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

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Week 19 - US DOE Inventory Recap